What Families Need to Know

Saving for education can feel overwhelming, but 529 Plans are among the most flexible and tax-smart tools available. Whether you’re a parent, grandparent, or CPA advising clients, understanding how these plans work can make a meaningful difference in financial planning. 

What Is a 529 Plan? 

A 529 Plan is a tax-advantaged savings account designed to help pay for education expenses. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified expenses. 

There are two main types:

College Savings Plans: Investment accounts that typically include mutual funds or ETFs. These are the most common type. 
Prepaid Tuition Plans: Allow you to lock in tuition at today’s rates. These are usually state-specific and more limited in availability. 

Why They Work 

Federal tax perks: Earnings grow tax-free, and withdrawals are tax-free when used for qualified expenses. 
Gift & estate planning: Contributions are considered completed gifts. In 2025, the annual gift exclusion is $19,000 per donor per beneficiary. Families can also “front-load” five years of contributions, up to $95,000 per donor or $190,000 for married couples. 
State benefits: Over 30 states (plus D.C.) offer deductions or credits. Some states, like Pennsylvania, allow deductions for contributions to any 529 plan, not just their own. 
Flexible uses: Funds can cover tuition, fees, books, computers, and room & board. They can also be used for up to $10,000 per year for K–12 tuition, $10,000 lifetime for student loans, and eligible apprenticeship costs. 
Beneficiary changes: If one child doesn’t use the funds, you can transfer the account to another family member—or even yourself. 

The New Roth IRA Rollover Option 

One of the biggest concerns with 529 Plans has been overfunding. Thanks to the SECURE 2.0 Act, starting in 2024, leftover 529 funds can be rolled into a Roth IRA for the beneficiary: 

Lifetime cap: $35,000. 
Account age requirement: The 529 account must be at least 15 years old. 
Exclusions: Contributions (and their earnings) made in the last five years are not eligible. 
Contribution limits: Subject to annual Roth IRA contribution limits ($7,000 in 2025). 

This provision provides families with a powerful “safety valve,” making 529 Plans more attractive than ever. 

Things to Watch 

Nonqualified withdrawals: These are subject to income tax on earnings plus a 10% penalty (exceptions apply for death, disability, or scholarships). 
Investment limitations: You can only adjust your investment strategy twice per year. 
State rules vary: Some states may “claw back” deductions if funds are used for non-college expenses. 
Financial aid impact: Parent-owned 529 Plans are counted as parent assets, which have a low impact on financial aid. Under updated FAFSA rules, grandparent-owned plans no longer penalize students. 

Planning Tips 

Start early: The earlier you save, the more time your money has to grow. 
Maximize state benefits: Take advantage of deductions and credits where available. 
Coordinate with tax credits: Avoid overlapping 529 withdrawals with the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit. 
Think multi-generational: Funds can benefit siblings, cousins, or even future grandchildren. 
Review annually: Adjust contributions, investments, and beneficiaries as circumstances change. 

Frequently Asked Questions 

What if my child doesn’t go to college? You can change the beneficiary to another family member or roll up to $35,000 into a Roth IRA for the original beneficiary. 
Can I use a 529 for graduate school? Yes, graduate, professional, and vocational programs qualify. 
Are K–12 expenses covered? Yes, up to $10,000 per year for K–12 tuition. 
Can I use it for student loans? Yes, up to $10,000 lifetime per beneficiary, plus an additional $10,000 for each sibling. 
How does it affect financial aid? Parent-owned 529 Plans count as parent assets, which receive favorable treatment. Grandparent-owned 529 distributions no longer count as student income under new FAFSA rules. 
Is there a contribution limit? There’s no annual cap, but contributions cannot exceed state plan maximums, which often range from $300,000 to $550,000 or more. 

Bottom Line 

529 Plans are one of the most effective ways to save for education while gaining tax advantages, planning flexibility, and even estate benefits. With the new Roth IRA rollover option, they’re more versatile than ever. For families and advisors alike, 529 Plans should be considered a cornerstone of long-term education and financial planning. 

Article contributed by Matt Kline

Disclaimer: Information presented should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change.

Information provided is general in nature and does not constitute personalized investment advice. A professional adviser should be consulted before implementing any investment decisions. Any tax and estate planning information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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