How a 529 plan works A 529 education savings plan is a tax-favored program operated by a state designed to help families save for future education costs. A “529” education savings plan is a tax-favored program operated by a state designed to help families save for future education costs. While the fees, expenses, and features of these plans will vary from state to state, as long as a plan satisfies the requirements of Section 529 of the Internal Revenue Codefootnote , federal tax law provides tax benefits for both the contributor and the beneficiary.Education Savings PlanA tax-advantaged account to save for education.Earnings accumulate tax deferred.Does not guarantee admission.If a beneficiary does not use funds, a new beneficiary can be designated.Tax-Free Withdrawals - Withdrawals For EducationWithdrawals for qualified expenses are generally tax-free.Qualified expenses generally include tuition, books, fees, supplies, equipment, and room and board.Taxable Withdrawals - Non-QualifiedAny part of a withdrawal that is not applied to a qualified expense is considered non-qualified.The earnings portion of non-qualified amounts is taxable and a 10% penalty is generally applied.return to reference Federal law does not allow income tax deductions for contributions to 529 plans, although growth inside a plan is tax-deferred and qualified distributions are tax-exempt. State or local tax law can vary widely. 529 plans involve investment risk, including possible loss of funds, and there is no guarantee an education-savings goal will be met.