Navigating 529 Plans: 11 Features You Need To Know

Saving for education can feel overwhelming, but 529 plans can offer a powerful and flexible solution. Whether you’re a parent, grandparent, or planning for your own future, understanding how 529 plans work can help you take full advantage of their unique benefits. From tax savings to expanded usage options, these 11 must-know features can help you build a smarter education savings strategy.

1.  You can choose any state’s 529 plan and use those funds at any accredited institution

Forty-nine states offer 529 plans (Wyoming is the exception). You can invest in any plan regardless of where you live or the location of your desired school.

While Section 529 is part of the federal tax code, individual states administer their own plans, which are classified as municipal securities. Clients can choose from any state’s 529 plan and use those funds at approximately 6,200 accredited institutions listed on the federal student aid list, including over 400 international schools. For more information, visit the Federal Student Aid website to view the 2025-26 Federal School Code List of Participating Schools.

Choosing a 529 plan in your state of residency may be more beneficial than opting for a plan from another state. Many states provide tax deductions or credits for contributions made to their own 529 plans.

If you invest in an out-of-state plan, you could miss out on these benefits unless you reside in one of the nine “tax parity” states that provide deductions for contributions to any state’s plan. The tax parity states are Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania. More information on 529 plan tax benefits by state can be found here.

2.  529 plans aren’t just for four-year colleges

529 plans are much more versatile than when they were initially created. Funds can now be used for qualified expenses at 2-year and 4-year colleges, vocational schools, and apprenticeship programs.

Under federal law, families can withdraw up to $10,000 per year tax-free for private, public, or religious elementary and secondary school tuitions. However, not all states comply with this rule, and some may tax withdrawals or reclaim state tax benefits if withdrawals are used for K-12 expenses. See a detailed list of states that conform to the federal rule here.

3.  Use excess funds to jump-start your child’s retirement account or as a down payment on a home

The SECURE Act 2.0, passed in late 2022, introduced a provision that allowed 529 plan funds to be rolled over into a Roth IRA under certain conditions. Here are the key rules:

• Lifetime limit: You can roll over up to $35,000 per beneficiary from a 529 plan to a Roth IRA.
• Annual contribution limits apply: The rollover amount is subject to Roth IRA annual contribution limits, currently $7,000 per year, or $8,000 for those 50 and older.
• Account age requirement: The 529 plan must have been open for at least 15 years before funds are transferable.
• Recent contributions excluded: Contributions made within the last five years and their earnings cannot be rolled over.
• Beneficiary must have earned income: The Roth IRA must be in the name of the 529 plan beneficiary. They must have earned income at least equal to the amount being transferred.

The following tax caveats apply to the 529 to Roth rollover rule:

• For the 15-year rule, we do not know how the federal government will treat certain actions. These include a plan owner change, beneficiary change, or rollover from one state to another. It is possible that any of these could trigger a new 15-year period.
• Several states still have not ruled whether they will consider a 529 to Roth rollover as qualified or non-qualified. View the latest updates here.

4.  529 plans are a great tool for estate planning or maximizing tax benefits

529 plans are unique. They allow contributions of up to five times the annual gift tax exclusion amount in a single year, without using any of their lifetime gift exemption! The gift is considered a “completed gift” for estate tax purposes. However, the account owner retains control of the account.

If needed, the account owner and contributor could potentially withdraw the previously gifted funds. They would owe only ordinary income tax on the earnings and the 10% penalty, again only on the earnings. This makes the strategy more attractive for seniors who need that extra measure of safety.

5.  Contributions offer a triple tax advantage

529 plans can provide significant tax benefits to contributors. Most states allow a tax benefit to residents who contribute to the state’s 529 plan. Some states limit the tax benefit to the account owners contributing to their own 529 plans.

Triple tax-advantaged savings is quite rare in investment accounts these days. 529 plans can achieve these benefits through the state tax deduction or credit from the state of residence, federal tax-free growth, and tax-free withdrawals when funds are used for qualified expenses.

6.  Non-qualified distributions can be taken without a penalty and in some cases, with a reduced income tax

529 account withdrawals not used for qualified expenses are considered “non-qualified” and are subject to a 10% penalty and ordinary income tax. However, the account owner can withdraw funds directly to themselves, or they can distribute funds to the beneficiary. The beneficiary might be in a much lower income tax bracket, thereby which could potentially reduce the effect of overall taxes. Remember, the penalty and income taxes are only on the earnings amount.

7.  Grandparents can be a valuable resource

Grandparents often desire to see their grandchildren receive a higher education. They may also have the means to help finance it. The reluctance to discuss money may cause families to miss out on a financial planning opportunity. Planning should include grandparents’ funds for the children’s education.

The recently enacted FAFSA Simplification Act made grandparent-owned 529 accounts much more valuable. Before the act, all family assets for the beneficiary were counted or assessed for financial aid eligibility.

Now, only the parents’ 529 account for the specific child is counted. If the parents are likely to qualify for federal financial aid, there are strategies. One is changing the account owner from the parent to the grandparent. This should happen before filing the Free Application for Federal Student Aid (FAFSA®) form and helps avoid reporting the 529 assets under the parents’ names.

8.  Use crowdfunding to turbocharge your account

For 529 plans, the saying “It takes a village” could apply to Ugift®. This free service allows family and friends in 22 states plus the District of Columbia, to contribute to a student’s 529 college savings plan.

If the family and friends live in the same state as the beneficiary’s 529 plan, they can contribute through Ugift®. By doing this, they may be eligible for the state’s 529 deduction. More information about Ugift® can be found here.

9.  Pay for school with student loans

Thanks to the SECURE Act of 2019, distributions of up to $10,000 from a beneficiary’s 529 plan can be used to repay student loans. This means that parents can use the funds for the beneficiary and their siblings. That $10,000 is a lifetime limit per borrower, but not per plan.

A little-known fact is that parents can change the beneficiary of their child’s 529 plan to themselves. They can use that $10,000 to repay their education loan. Keep in mind that using 529 plan distributions might impact the parents’ eligibility to also deduct student loan interest. More information about student loan repayment can be found here.

10.  Having multiple 529 accounts is worthwhile

Often, clients ask why they should open multiple 529 plans, one for each child. Can they easily change beneficiaries later or move money between plans? This is a logical question. If the state allows a state tax benefit per beneficiary, parents could miss out on a greater benefit if they contribute only to a single account.

Also, when the future statements arrive in the mail, parents could lose a key opportunity with their children to reinforce that they are saving for higher education. This won’t be the case if the statement and the funds are all in the oldest child’s name!

While there is no limit to how much one can save in a 529 plan, each state sets contribution limits based on its cost of higher education. The contribution limit applies to a single beneficiary. Therefore, if multiple people have individual 529 plans for the same beneficiary, the state’s contribution limit applies to the sum of contributions for all plans. To get around this contribution limit, you can invest in multiple 529s in different states.

11.  Taking distributions: timing and record keeping

When taking distributions, making sure not to run afoul of the rules is a key concern. You must take distributions for the same tax year the expenses were paid. While this is not a statutory requirement, IRS guidance suggests otherwise.

Keep a log to help ensure records are complete if there’s a state or federal audit. Note the type of expense, date of the expense, expense amount, and the date of the 529 withdrawal. If you’d like a copy of our 529 plan expense tracking spreadsheet, contact your wealth advisor.

Qualified expenses include tuition and fees, room and board (provided the student is at least a half-time student), books and supplies, and computer and internet services. The key to determining if the expense is qualified is whether the school requires the expense. Expenses such as travel, sorority or fraternity fees, and student health insurance are never qualified.

What happens if a plan owner takes a distribution and does not use the funds for qualified expenses? The funds must roll over into the same or another 529 plan. To avoid taxes and penalties, the rollover must occur within 60 days of the distribution. Since the reinvestment could look like a new contribution, it is important to document this situation.

For more information or to request a copy of our 529 plan expense tracking spreadsheet, contact your wealth advisor. If you’re not a client and would like to learn more, let’s talk.

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