Most people think of 529 plans as a way to save for their children’s college education, but there is far more to them than that. With the passage of recent legislation, these plans can be used for a wider range of uses—and many people could benefit from understanding them.
When I meet with clients, they are often surprised to learn how flexible a 529 plan is and how many opportunities it creates for tax-reducing strategies. So this article helps clarify the rules and uses for 529 plans. But first, let’s establish the basics:
What Actually Is a 529 Plan?
A 529 plan is a tax-advantaged investment account that helps families save money for their children’s education. Also known as qualified tuition plans, 529 plans are state-sponsored, which means the rules can vary depending on where you live.
According to some estimates, 529 plans have saved more than $258 billion for over twelve million families. However, these plans may actually be underutilized—especially given the recent expansion of their applications.
9 Things Everyone Should Know About 529 Plans
Here are some of the lesser-known facts about 529 plans that could help you increase savings and lower your tax liability:
1. Anyone Can Start a 529 Account
Most 529 accounts are opened by parents who name their children as beneficiaries, but legally, anyone can open a 529 account and name anyone as a beneficiary. Accounts can be opened by grandparents, aunts, uncles, neighbors, or friends. There is no limit to the number of 529 accounts that can be opened to benefit a single beneficiary.
2. 529 Plans Can Be Used for More Than College Tuition
The list of qualified expenses has expanded, so now funds in a 529 account can be applied for many types of schooling, not just to pay tuition at a four-year college.
Qualified expenses include:
- Tuition and fees for elementary or secondary school (K-12 tuition)
- Funding for vocational schools
- Graduate school (such as Master’s and PhD programs)
You can even use 529 for study abroad programs—provided that the foreign institution is also approved for Title IV aid.
However, there is an annual limit of $10,000 per year for qualified K-12 tuition expenses. Distribution from a 529 account can also go towards student loans, off-campus housing, food and meal plans, books and supplies, computers, etc.
3. 529 Contributions Are Often Tax Deductible
One of the benefits of a 529 plan is that the growth is tax-deferred, and withdrawals are tax-free so long as they’re used for qualified expenses. In addition, 38 states offer either a state tax deduction or tax credits for contributions made to 529 accounts. The amount of the deduction varies by state and can change with the passage of new legislation, so it’s important to keep current. Unfortunately, there are no federal tax deductions for contributions to 529 accounts.
4. 529 Plans Can Affect Financial Aid for College
The good news first – when your child is the beneficiary of a 529 plan owned by anyone other than a parent, there is no impact on your child’s financial aid award. For parents who own a 529 account, the dollar amount is considered an asset and will count against you in the FAFSA calculation. But the impact is minor, with a maximum of 5.64% of parental assets counted. If you have a $50,000 balance in your 529 account, you might see a reduction in the financial aid award of less than $3,000.
5. Moving States Can Lead to Tax Deductions on 529 Rollover
Given that each state has its own 529 plan, it’s natural to wonder what happens when you move. The answer is it depends, but it can lead to tax deductions.
When you move, you can roll over an existing plan into an account in your new home state. Why? Because many states allow you to deduct the rollover amount from the taxes in your new state of residence.
To ensure you get the maximum deduction, it’s important to understand the rules for your state. For instance, if you have $30,000 in a 529 account and the state allows a maximum deduction of $10,000, you can roll $10,000 per year over a three-year period to gain the biggest benefit.
6. 529 Plans Can Be Transferred Between Beneficiaries
Many clients worry what will happen if their children take different paths—and end up requiring different amounts for college tuition. Should they allocate money evenly or will that mean they risk missing out on benefits?
Good news: Most states allow 529 account owners to transfer all or part of the balances between 529 accounts with different beneficiaries. If the account for your oldest child has money left over after they’ve completed their education, you can transfer the remaining funds into a 529 account for a younger child.
However, this will face you with tough choices, as transfers made after a child’s tuition is finished face a tax burden. It’s therefore important to plan ahead of time and understand the full range of options for transfers and withdrawals.
7. 529 Contributions Can Be Withdrawn Without Big Tax Penalties
If you need to withdraw money from a 529 account for a non-qualifying expense, there is a 10% tax penalty, but it only applies to the interest earned, not the contributions.
Let’s say you’ve contributed $40,000 to a 529 account that has earned $10,000 interest and now totals $50,000. If you needed to withdraw all $50,000, the 10% tax penalty would only apply to $10,000, the interest earned. So you would end up paying a $1,000 penalty.
However, any withdrawals would also be subject to income tax on the earnings.
8. Unspent 529 Plans Can Be Contributed to Roth IRAs
Worried about what will happen if your child doesn’t end up going to college?
No need to worry.
Thanks to the passage of the Secure Act 2.0, starting in 2024, unused funds in a 529 plan can be rolled over into a Roth IRA tax and penalty-free. However, the following stipulations apply:
- The 529 Plan has to have been established for 15 years.
- Any contributions you made to the plan for the prior five years won’t qualify for the rollover.
- You are limited to the typical Roth contribution of $6,500 per year.
- The aggregate lifetime contribution limit is $35,000
While there are a lot of conditions, for some families, this translates into a great opportunity to accumulate multi-generational wealth.
9. 529 Plan Can Be Super-Funded
529 plans offer opportunities to grandparents looking for tax-savvy strategies to pass along wealth to family members. The annual gift exemption is the amount of money one person can transfer to someone else without paying a gift tax.
Currently, the maximum allowed is $17,000, so a grandparent can contribute $17,000 to a grandchild’s 529 account without tax ramifications. If they want to make a bigger gift while still avoiding tax ramifications, they can “super-fund” their contribution.
In this scenario, the tax code allows them to contribute up to five years of the maximum gift exemption in a single year. With the current annual limit set at $17K, the grandparents could superfund a 529 plan with a one-time $85K contribution.
This can only be done once every five years, and the grandparents would need to fill out a gift tax return since they’re exceeding the annual gift tax exemption amount, but there are no tax liabilities.
Whenever the tax code comes into play, the devil is in the details. This is especially true with 529 plans, where the rules change from state to state.
That’s why many clients find it useful to talk to an experienced advisor. Not only will it help you understand your options, but we can also help craft a plan that adapts to your changing needs and helps you take advantage of the benefits of 529 plans.
Want tailored advice to help make saving decisions?
1 https://fortune.com/2025/07/28/new-529-plan-rules-trades-education-expense-limit/
2 https://www.collegesavings.org/history-of-529-plans
3 https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/paying-for-college-congress-just-made-529-plans-more-attractive
