It's that time of year again - when caps fly, families cheer, and another class of graduates steps into the next chapter of life. Graduation season is a time to celebrate achievement, possibility, and the payoff of years of hard work. It’s also a powerful reminder of what education truly costs—and how planning ahead can make all the difference.
I remember when our youngest was born, the future estimates for a college education were running at about $200,000. I was skeptical, but now that she is quickly approaching college age, I decided it was time to take a closer look at the numbers. Fortunately, I started her 529 account when she was born and contributed to it consistently over the years—rain or shine. I invested aggressively, and I’m pleased to say the plan has worked better than I intended. Of course, costs are potentially even higher than I imagined, but having the savings certainly provides peace of mind.
That reflection got me thinking—how many parents and grandparents know what a 529 plan can really do, and how to use it wisely once the college bills start arriving? Whether you have yet to open an account or you’re approaching your first withdrawal, understanding how these plans work, why they can be a smart plan for children or grandchildren, how they interact with financial aid, and what qualifies as a tax-free expense can make a meaningful difference.
Why a 529?
For those planning ahead for education, a 529 plan remains one of the most effective and, unfortunately, largely underused financial tools available. These accounts offer powerful tax advantages, long-term growth potential, and a range of options for qualified education expenses. But understanding how they work, what qualifies as an eligible expense, and how they may impact financial aid is essential to getting the most out of them.
At its core, a 529 plan is a tax-advantaged investment account designed to help families save for future education costs. Named after Section 529 of the Internal Revenue Code, these plans allow your money to grow tax-free and be withdrawn tax-free when used for qualified education expenses. Most people are familiar with that primary benefit—but the 529 offers a number of additional advantages that make it one of the most versatile and powerful education planning tools available. Let’s take a look at each of the benefits, one by one.
Tax-Free Growth
To appreciate the value of a 529 plan, consider the impact of tax-free growth over time. Suppose you contribute $5,000 a year for 18 years and invest in a moderate-risk portfolio earning an average of 6% annually. Over that time, your total contributions would add up to $90,000. But thanks to compounding and tax-free growth, the account would grow to approximately $158,000 over 18 years. So by the time your child is ready for college, you could have $68,000 in tax-free earnings—monies completely free from federal tax if used for qualified education expenses. In a taxable account, where earnings are taxed each year at a 22% federal rate, the account would grow to about $136,535. So that’s $22,000 more – possibly a full year of room and board.
Of course, the more you earn, the more advantageous the tax-free compounding. Suppose you contribute $5,000 a year for 18 years and invested in a growth portfolio, earning 8% average return over 18 years. You would have over $200,000. That’s more than double your total contributions of $90,000—entirely free from federal tax when used for qualified education expenses. And it’s $44,144 more than a taxable account assuming a 22% federal tax bracket.
Incidentally, all 50 states recognize qualified withdrawals for higher education expenses as state income tax–free. That means both your earnings and withdrawals avoid not only federal taxes, but also state taxes—regardless of where you live. In high-tax states like California, that benefit becomes even more significant. Compared to a taxable investment account, where growth could be reduced by federal and state income taxes year after year, a 529 plan allows your savings to compound fully—without interruption—until you need the funds for education.
Wide range of qualified expenses
One of the most flexible features of a 529 plan is the broad range of expenses it can cover—far beyond just tuition. Qualified education expenses include tuition and mandatory fees at eligible colleges and universities, but also books, supplies, and even technology like a laptop or software, if required by the school. Room and board also qualify, as long as the student is enrolled at least half time. For off-campus housing, the amount is limited to the school’s published cost of attendance for room and board, but it still offers meaningful flexibility. Funds can also be used for trade school programs, registered apprenticeships, and private K–12 tuition (up to $10,000 per year). Recent changes have expanded the benefit further, allowing up to $10,000 in lifetime student loan repayment per beneficiary. Just keep in mind—not all states treat K–12 or student loan withdrawals as tax-free at the state level, so it’s important to check your state’s specific rules.
Parental or grandparental control
Unlike custodial accounts, where the child gains full control of the assets at the age of majority, a 529 plan remains fully controlled by the account owner—typically a parent or grandparent—regardless of the beneficiary’s age. This means you decide when and how the funds are used, ensuring that the money is applied toward legitimate educational expenses and not prematurely spent on something unrelated. Even if the beneficiary turns 18 or 21, they have no legal authority to direct or access the account. You also have the flexibility to change the beneficiary to another qualified family member at any time if the child doesn’t pursue higher education or doesn’t use all the funds.
That control can be especially helpful for grandparents who want to support multiple grandchildren or influence how educational gifts are used without handing over the reins too early. With a 529 plan, you maintain the power to manage investments, authorize withdrawals, and preserve the account’s purpose—all while retaining the option to redirect the funds if needed.
Flexible beneficiary changes
One of the most underappreciated benefits of a 529 plan is the ability to change the beneficiary without penalty—as long as the new beneficiary is a qualifying family member. This includes siblings, step-siblings, parents, children, nieces, nephews, cousins, aunts, uncles, in-laws, and even the original beneficiary’s spouse. That flexibility becomes especially valuable when education plans evolve. Maybe your child receives a scholarship, attends a lower-cost school, or chooses not to go to college at all. Rather than facing taxes and penalties on the unused funds, you can shift the account to another family member—perhaps a sibling, a future grandchild, or even yourself if you decide to pursue further education. There’s no limit to the number of times you can change the beneficiary, and no requirement that it be done in the same year as a withdrawal. Just keep in mind that the IRS considers the designated beneficiary at the time of the withdrawal—so if you're planning to reassign the funds, make sure the update is made before the money is taken out. With careful planning, this feature allows families to stretch the value of a single account across generations and educational paths.
Financial aid–friendly
529 plans are also considered relatively financial aid–friendly, especially when owned by a parent. On the FAFSA, parent-owned 529 accounts are counted as parental assets—not student assets—which means they’re assessed at a much lower rate. Typically, no more than 5.64% of the account’s value is factored into the Student Aid Index (SAI), formerly known as the Expected Family Contribution. By contrast, student-owned assets can be assessed at rates up to 20%, which can significantly reduce aid eligibility. Additionally, distributions from a parent-owned 529 are not counted as student income, which further protects the student’s eligibility for need-based aid.
Recent changes to the FAFSA rules have also made grandparent-owned 529s more appealing: as of the 2024–2025 academic year, qualified distributions from a grandparent’s plan are no longer considered untaxed income to the student. That change eliminates a longstanding concern and makes it easier for grandparents to contribute without jeopardizing aid. Of course, every college uses its own formula when awarding institutional aid, but from a federal standpoint, 529 plans—especially when owned by a parent—are one of the more efficient ways to save for education without disqualifying your student from financial help.
Estate planning benefits
Beyond education planning, 529 plans offer meaningful estate planning benefits that many families overlook. Contributions to a 529 plan are considered completed gifts for tax purposes, which means the assets are removed from your taxable estate—even though you, as the account owner, retain full control. That makes it a unique tool: you can reduce your estate’s value for estate tax purposes without relinquishing access or decision-making authority over the funds.
In addition, 529 plans allow for a special five-year gift tax averaging rule. This means you can contribute up to $85,000 per beneficiary—or $170,000 for a married couple—and treat it as though it were spread evenly over five years for gift tax purposes, without using any of your lifetime exemption. That can be an efficient way to shift wealth to younger generations while still directing how and when the money is used. For grandparents or high-net-worth families seeking to minimize estate tax exposure, a 529 plan offers an elegant solution: generous gifting potential, tax-deferred growth, and continued control.
I’ve had many clients use this strategy to fund their grandchildren’s future. In 2015, one couple contributed $140,000 to each of their five grandkids’ 529 plans—the maximum allowed under the five-year gift tax averaging rule at the time. Their goal was twofold: to remove the funds from their taxable estate and to extend the tax-free legacy to the next generation. Each grandchild could effectively designate any unused portion of their 529 to their own future children. Today, each account has grown to more than $500,000—a powerful example of how long-term, tax-free compounding can benefit a family for decades. Of course, past performance is not a guarantee of future results.
No income limits
One of the most inclusive features of 529 plans is that there are no income restrictions on who can open or contribute to an account. Whether you're a high-net-worth individual or just starting to save, you're eligible to take advantage of the tax benefits these plans offer. This contrasts with other education savings vehicles, like the Coverdell ESA, which imposes income limits on contributors. With a 529 plan, any U.S. citizen or resident alien with a valid Social Security number or taxpayer identification number can open an account, regardless of income level. This flexibility allows families across the income spectrum to plan and save for education expenses effectively.
State tax incentives
In addition to federal tax advantages, many states offer their own tax incentives for contributing to a 529 plan. More than 30 states—including the District of Columbia—provide either a tax deduction or a tax credit for residents who contribute to their state-sponsored 529 plan. In some cases, the deduction applies even if you contribute to another state’s plan. While the amount varies by state, the benefit can reduce your state taxable income by hundreds or even thousands of dollars each year, depending on how much you contribute. These incentives can be particularly valuable for families in high-tax states, where even a modest deduction creates meaningful annual savings. Just be aware that if you take the deduction and later roll the account over to a different state’s plan, your original state may “recapture” those benefits—meaning you might owe back the prior deduction as state income tax. Still, for most families, the state tax break is a compelling reason to consider starting with their own state’s 529 plan first.
Portability
Another advantage of a 529 plan is its portability. You’re not locked into using the funds in your home state or at a specific school. Once the account is funded, the money can be used at any eligible educational institution across the country—and even some abroad—that qualifies for federal student aid. That includes public and private colleges, universities, community colleges, vocational schools, and many accredited trade programs. This flexibility gives families the freedom to choose the best educational path without worrying about losing the tax benefits. And if your needs change, you can even roll your 529 plan into another state’s plan without federal tax consequences, as long as the rollover is completed within 60 days. Just keep in mind that some states may recapture previously claimed state tax deductions if you move the account out of their plan, so it’s worth reviewing your state’s rules before making a switch.
Roth IRA rollover option
Beginning in 2024, 529 plans gained an exciting new feature: the ability to roll over unused funds into a Roth IRA for the beneficiary—offering a powerful bridge between education planning and retirement savings. Under the SECURE 2.0 Act, you can transfer up to $35,000 over a beneficiary’s lifetime from a 529 plan to their Roth IRA, tax- and penalty-free, as long as certain conditions are met. The 529 must have been open for at least 15 years, and any contributions (and their earnings) made within the last five years are ineligible for rollover. Additionally, annual Roth IRA contribution limits still apply, meaning you can’t roll the full amount all at once unless it falls under that year’s limit. However, this feature offers families a way to repurpose leftover 529 balances without penalty, while giving young adults a valuable head start on retirement savings.
Of course, some have criticized the limit is too low but if you are 25 years old and have $35,000 converted to a Roth IRA growing tax free, that can add up to over $350,000 in value at age 65, assuming a growth portfolio compounding at 8%. Granted, this is not a replacement for careful planning, but it’s an excellent backstop for families concerned about overfunding or changing education plans.
Access to contributions without penalty
One of the lesser-known but valuable features of a 529 plan is the ability to access your original contributions at any time without incurring taxes or penalties. Since contributions are made with after-tax dollars, the principal portion of any withdrawal is always tax-free and penalty-free. However, it's important to note that each distribution from a 529 plan includes a proportional share of both contributions and earnings. This means you cannot withdraw only your contributions; any withdrawal will include a portion of earnings, which may be subject to taxes and penalties if not used for qualified education expenses. Therefore, while you have access to your contributions, careful planning is essential to avoid unintended tax consequences.
You can take it back
Here’s something many people don’t realize: you can even take the money back. Since the contributions you make to a 529 plan are after-tax dollars, you’re always allowed to withdraw your original contributions for any reason—no taxes, no penalties. The catch is that any earnings portion of the withdrawal that’s not used for qualified education expenses will be subject to ordinary income tax and a 10 percent penalty. That makes it less ideal for casual withdrawals, but it’s good to know that the funds aren’t locked up forever. If college plans change or you need the money for another purpose, the option to pull it out is always on the table—you just need to understand the tax consequences before doing so.
Simple to use
Finally, 529 plans are remarkably simple to use. There are no income limits, no annual contribution limits (aside from gift tax considerations), and accounts can be opened quickly online with low minimums. Contributions can be automated for your convenience, investment options can be adjusted over time, and distributions are straightforward as long as they’re properly documented. Compared to other tax-advantaged accounts, the 529 is relatively low-maintenance but high-impact—especially when started early.
What are Qualifying Expenses?
Qualified expenses under a 529 plan go far beyond just tuition. These include tuition and mandatory fees at eligible colleges, universities, and trade schools, as well as books, supplies, and equipment required for enrollment or attendance. Technology expenses like a laptop, printer, or software can also qualify if the school requires them. Room and board is eligible as well, but only if the student is enrolled at least half-time—and for students living off campus, the amount is capped at the school’s published cost of attendance. In recent years, qualified expenses have expanded to include up to $10,000 per year for K–12 private school tuition and up to $10,000 in student loan repayments per beneficiary 9 (although not all states recognize this as a tax-free withdrawal). Funds can also be used for registered apprenticeship programs that meet federal criteria. While the list is broad, not everything qualifies—transportation, health insurance, and optional fees are typically excluded—so it’s important to keep good records and understand the rules before withdrawing funds.
Higher Education the Focus
As the education landscape evolves, so do the ways families think about higher learning. While college has long been seen as the default path after high school, there’s a growing shift in certain industries. In fields like technology, skilled trades, and creative services, more employers are placing value on certifications, apprenticeships, and hands-on experience rather than traditional four-year degrees. That doesn’t mean college is becoming obsolete, but it does suggest that it makes sense to consider a broader view of education.
That said, traditional college still carries significant long-term value for many. And when you start to run the numbers, the cost of higher education can be staggering. According to the College Board, the average cost of a four-year degree at an in-state public university now exceeds $28,000 per year, including tuition, fees, room, and board. That number nearly doubles for out-of-state public universities. Private universities, on average, approach $60,000 per year, with some elite institutions charging significantly more. Over four years, that adds up to anywhere from $112,000 to $240,000 or more, depending on the path.
For families without the ability or willingness to cover the full cost, that’s a heavy financial burden. Even for those who can afford it, the question of value naturally comes into play. Is the degree worth it?
The data continues to say yes—at least over the long term. On average, college graduates earn significantly more over their lifetime than those with only a high school diploma. According to the U.S. Bureau of Labor Statistics, workers with a bachelor’s degree earn about 67 percent more per week than those with a high school diploma. Over a 40-year career, that difference can exceed a million dollars in additional income.
How to Take Withdrawals From a 529
When it comes time to use your 529 funds, timing and documentation are key. Withdrawals must be taken in the same calendar year that the qualified expenses are incurred. For example, if you pay spring tuition in December, the 529 withdrawal must also occur by December 31—even if classes don’t start until January. You can have the 529 plan pay the school directly, or you can reimburse yourself after paying out of pocket, but either way, keep detailed records of expenses. That includes invoices for tuition, receipts for books and supplies, and proof that the student was enrolled at least half time for room and board to qualify. Also be aware that every withdrawal is treated as a proportional mix of contributions and earnings—you can’t choose to withdraw only your original contributions. That matters, because while contributions are always tax- and penalty-free, the earnings portion is only tax-free if used for qualified education expenses. Non-qualified withdrawals are subject to income tax and a 10% penalty on the earnings. With proper documentation and a little planning, you can avoid those pitfalls and take full advantage of the tax-free benefits your 529 account provides.
What Happens if There is Money Leftover?
If your child doesn’t use all the money in their 529 plan—whether due to scholarships, a lower-cost education path, or a decision not to attend school—you still have options. You can change the beneficiary to another qualifying family member, or even yourself if you’re pursuing further education. You can also leave the funds invested, allowing them to grow tax-free for a future child or grandchild. Starting in 2024, you may be able to roll up to $35,000 from a 529 to a Roth IRA for the beneficiary, provided IRS conditions are met. And while you can always withdraw the money for non-qualified use, keep in mind that any earnings portion will be subject to ordinary income tax and a 10% penalty. Your original contributions, however, are never taxed or penalized. The flexibility to shift the funds or repurpose them later gives you confidence that the money won’t go to waste—even if plans change.
At the end of the day, 529 plans are not just college savings accounts. They are a flexible, tax-efficient way to invest in a loved one’s future—and they offer meaningful benefits for families who want to stay ahead of the rising cost of education. Used correctly, they can save thousands of dollars in taxes, support eligibility for financial aid, and provide a structured way to prepare for what’s ahead. But like any financial tool, they work best when paired with a clear understanding of the rules and a strategy that evolves as your family’s needs change.
If you haven’t reviewed your 529 plan lately, or if you’re just getting started, now is the time. Small contributions today can turn into substantial, tax-free resources tomorrow. Feel free to contact us with any questions.