Is a 529 college savings plan halal?

What a 529 plan is

A 529 plan is a US savings account for education costs, run by individual states. Money you put in grows without federal tax, and withdrawals for qualified costs like tuition, books and housing are tax-free. If you take money out for something else, you pay income tax plus a 10% penalty on the earnings.

Saving for your child's education is a good deed. Providing for your children and preparing them for life is part of a parent's duty in Islam. See Who has to provide for children in Islam?

The problem with most 529 investments

• Age-based portfolios: the default option moves into bonds and cash as your child gets older. Bonds pay interest, which is riba.
• Stable value or savings options: these pay interest directly.
• Equity index funds: better, but they still include banks, alcohol companies and others that fail a shariah screen. See Are index funds halal?

Very few state plans offer a shariah-screened fund. Some plans let you pick individual portfolios, so check your state's list and any plan you can join from another state.

Halal alternatives

• Coverdell ESA: a smaller education account (up to $2,000 a year per child) that is often self-directed, so you can buy shariah-compliant ETFs or mutual funds.
• A custodial or regular brokerage account in halal funds. You lose the tax break but keep full control.
• A Roth IRA in halal funds can also be tapped for education costs in some cases. See Is a Roth IRA halal?

If you already have a 529

Don't panic. Switch the investment to the most halal option your plan offers, or roll it over to another state's plan that has one. Many scholars say the interest portion of past growth should be estimated and given to charity, while you keep your own contributions and halal gains.