Delaware’s college savings plan, commonly known as a 529 plan, offers families a structured way to prepare for the rising costs of higher education. With tuition and related expenses continuing to climb, understanding how these plans work can aid long-term financial planning. This article details Delaware’s specific rules, benefits, and considerations to help you make … Continued
Delaware’s college savings plan, commonly known as a 529 plan, offers families a structured way to prepare for the rising costs of higher education. With tuition and related expenses continuing to climb, understanding how these plans work can aid long-term financial planning.
This article details Delaware’s specific rules, benefits, and considerations to help you make informed decisions when saving for education.
Residency Requirements
Participation in Delaware’s 529 college savings plan, the DE529 Education Savings Plan managed by Fidelity Investments, offers flexible residency requirements for the account owner. U.S. citizens and resident aliens aged 18 or older can open an account, regardless of their state of residence, allowing individuals nationwide to utilize the Delaware plan.
While account owners need not be Delaware residents, beneficiary residency can be a factor for certain incentives. For example, the First State, First Steps program, providing a $100 contribution to new DE529 accounts, requires the beneficiary to be a Delaware resident, five years old or younger, when the account is opened with a minimum $100 contribution. This specific program is effective from January 1, 2025, through December 2025, and is subject to extension or discontinuation by the Delaware College Investment Plan Board.1Fidelity Investments. DE First State First Steps Program Rules Apart from such incentives, beneficiary residency is generally not a requirement for the DE529 plan.
Qualified Educational Expenses
Withdrawals from a DE529 Education Savings Plan are free from federal income tax if used for qualified higher education expenses (QHEEs), as defined by federal tax law, primarily Internal Revenue Code Section 529.2Legal Information Institute. 26 U.S. Code § 529 – Qualified Tuition Programs This federal definition applies to state-sponsored 529 plans nationwide, including Delaware’s.
Common QHEEs include tuition and mandatory fees for enrollment or attendance at an eligible educational institution. Expenses for required books, supplies, and equipment for courses also qualify. For students enrolled at least half-time, room and board costs are considered qualified, generally up to the amount published by the institution in its cost of attendance for financial aid purposes. This applies to on-campus housing charges and allowances for off-campus or at-home living.
Technology-related purchases such as computers, peripheral equipment, software, and internet access can be QHEEs if predominantly used by the beneficiary during enrollment. Software for sports, games, or hobbies typically does not qualify unless it is mainly educational or course-required.
Federal law permits up to $10,000 per beneficiary annually from a 529 plan for tuition at an elementary or secondary public, private, or religious school. Additionally, expenses for fees, books, supplies, and equipment for participation in apprenticeship programs registered under Section 1 of the National Apprenticeship Act are qualified.
DE529 plan funds can also be used to repay qualified student loans, with a lifetime maximum of $10,000 per beneficiary for principal or interest.3Internal Revenue Service. Publication 970, Tax Benefits for Education This $10,000 limit also applies independently to each of the beneficiary’s siblings. Expenses for certain services required by a special needs beneficiary in connection with their enrollment or attendance can also be QHEEs.
These expenditures qualify only if the beneficiary attends an eligible educational institution, as defined under section 481 of the Higher Education Act of 1965. This generally includes accredited colleges, universities, vocational schools, and other postsecondary institutions eligible for U.S. Department of Education student aid programs, including many international institutions.4Federal Student Aid. Institutional Eligibility | 2024-2025 Federal Student Aid Handbook
Contribution and Distribution Restrictions
There is no minimum amount to open a DE529 Education Savings Plan account, though automatic investment plans have a minimum of $15 per month or $45 per quarter. Contributions are accepted until the total balance of all DE529 accounts for the same beneficiary reaches $500,000.5Fidelity Investments. The DE529 Education Savings Plan While the IRS sets no annual contribution limits, contributions are considered gifts for federal tax purposes. In 2025, individuals can gift up to $19,000 per beneficiary ($38,000 for married couples filing jointly) without gift tax.6Ernst & Young. IRS Releases Standard Deductions and Exclusions for 2025, Including Estate and Gift Tax Superfunding allows a lump-sum contribution of up to five years’ worth of annual exclusions ($95,000 individual, $190,000 couple in 2025), treated as spread over five years. Exceeding these limits may trigger gift tax and require filing Form 709.7Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
Distributions can be made to the account owner, beneficiary, educational institution, or another third party, timed with incurred qualified expenses. The plan administrator issues IRS Form 1099-Q for distributions, reporting gross amounts and earnings, so maintaining records of expenses is advisable.
Account owners can change the beneficiary to another member of the family of the former beneficiary, such as a child, sibling, or parent, generally without federal income tax consequences. However, changing the beneficiary of a DE529 plan account established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) is not permitted.
The IRS allows one tax-free rollover from one 529 plan to another per beneficiary within a 12-month period. The SECURE 2.0 Act of 2022 also permits tax-free rollovers from a 529 plan to the beneficiary’s Roth IRA, effective 2024. This is subject to conditions: the 529 account must be open for at least 15 years, contributions and earnings from the last five years are ineligible, amounts are subject to annual Roth IRA limits, and there’s a $35,000 lifetime maximum per beneficiary. Delaware conforms to the tax-free nature of these rollovers.
A successor owner can be designated to manage the account if the original owner cannot. Withdrawals not used for qualified education expenses will have the earnings portion subject to federal income tax and a potential 10% federal penalty, though the penalty may be waived if the beneficiary receives a scholarship.
State Tax Implications
Delaware taxpayers may benefit from state tax advantages with the DE529 Education Savings Plan. Contributions can be deducted from Delaware taxable income: up to $1,000 annually for single filers and $2,000 for those married filing jointly. This deduction is unavailable to individuals with a federal adjusted gross income (AGI) over $100,000 ($200,000 for joint filers) or for contributions intended for K-12 tuition.8State of Delaware News. New Tax Deduction for Contributions to Savings Plans
Earnings in a DE529 account grow deferred from federal and Delaware state income taxes. Withdrawals for qualified higher education expenses are free from both federal and Delaware state income tax. This tax-free treatment applies to Delaware residents for qualified distributions from any state’s 529 plan. Delaware aligns with the federal definition of qualified education expenses.
Delaware also conforms to federal law regarding tax-free rollovers, including those from one 529 plan to another or to a beneficiary’s Roth IRA, under applicable federal rules. If DE529 plan withdrawals are not used for qualified education expenses, the earnings portion is subject to Delaware state income tax, in addition to federal income tax and potential penalties.
Noncompliance Penalties
Using DE529 Education Savings Plan funds for non-qualified expenses results in the earnings portion of the withdrawal being subject to federal income tax, plus a 10% federal penalty on those earnings. Contributions themselves, made with after-tax dollars, are not penalized.
The account owner or beneficiary is responsible for reporting withdrawals and substantiating their use for QHEEs. The plan administrator issues IRS Form 1099-Q, reporting the gross distribution and its earnings portion. If total withdrawals exceed adjusted qualified education expenses for the year, the earnings on the excess are taxable and may incur the penalty.
The 10% federal penalty may be waived in certain circumstances, though earnings generally remain taxable. Exceptions include withdrawals due to the beneficiary’s death or disability, or if the beneficiary receives tax-free scholarships or attends a U.S. military academy (up to the cost of attendance or scholarship amount). The penalty is also waived if expenses were used to claim education tax credits like the American Opportunity Tax Credit or Lifetime Learning Credit.
Delaware law, under Title 14, Section 3491, requires the Delaware College Investment Plan Board to align penalties for nonqualified withdrawals with relevant provisions of the Internal Revenue Code.9Delaware General Assembly. Delaware Code Online – Title 14, Chapter 34, Subchapter XII (Containing § 3491 Account Withdrawals; Penalties) Some 529 plans might impose their own fees for non-qualified distributions. Withdrawals should generally be taken in the same tax year expenses are incurred; accidental wrong-year withdrawals might be eligible for a tax-free rollover into a 529 plan within 60 days.