Using a 529 Plan to Fund Education Goals
A major goal for many parents is to help fund their children’s education. For those thinking ahead about how to prepare for future education costs, there are excellent options available that offer tax advantages and potential for substantial growth over time. One of the most powerful tools available is a 529 plan.
What Is a 529 Plan?
A 529 plan is a state-sponsored, tax-advantaged savings account for education expenses, including K–12 tuition, college, certain apprenticeships, and even student loan repayments.
In simple terms, this is an account that is owned by an individual, with a chosen beneficiary – typically a child or grandchild. The owner deposits funds into the account and selects investments based on the anticipated timeline to use the funds. The investments grow tax-free and can be distributed to the beneficiary tax-free, so long as the withdrawals are used for “qualified educational expenses.”
Many states offer a state income tax deduction or credit for contributions to their 529 plan, though the specifics may vary.
What Happens to Unused Funds?
A common concern with setting up a 529 plan is what will happen if the beneficiary doesn’t attend college or has unused funds. Fortunately, recent law changes have made 529 plans far more flexible.
With the SECURE Act 2.0, starting in 2024, 529 plan funds can be rolled into a Roth IRA for the beneficiary, under certain conditions:
• The 529 account must have been opened for at least 15 years.
• The rollover is subject to the annual Roth IRA contribution limit ($7,000 in 2025).
• A lifetime rollover cap of $35,000 per beneficiary applies.
• The funds must have been in the account for at least 5 years.
• The beneficiary must have earned income in the year of the rollover.
Alternatively, the owner can simply change the beneficiary on the account to another family member.
If the account owner decides that they would prefer not to use the 529 funds as originally intended, the owner can withdraw the funds from the account. However, the earnings portion of the account will be subject to a 10% penalty and income taxes, while the original contribution can always be withdrawn tax-free.
Considerations for 529 Plans
A 529 plan can be an excellent tool for families who want to help fund future education costs. This is particularly true for high-income households who can benefit from tax-deferred growth and potential state tax deductions.
That said, the ownership and structure matter. 529 plans can reduce financial aid for those who may otherwise be eligible. Parent-owned 529 plans are considered parental assets on FAFSA, but grandparent-owned 529 plans are not reported. This makes it particularly attractive for grandparents to open 529 plans on behalf of their grandchildren.
Each state offers its own 529 plan, each with differing investment options. You’re not required to use your home state’s plan, but usually your home state 529 plan will make the most sense, given the potential tax benefits.
Summary
A 529 plan remains one of the most tax-efficient ways to save for education goals. While other account types may offer more flexibility, few provide the distinct tax advantages that a 529 plan offers.
When determining how much to contribute, it’s helpful to estimate future education costs, especially as college costs have historically risen faster than inflation.
It is always recommended to discuss your options with a financial advisor to ensure that your strategy aligns with your long-term education goals.
– Bill Rautiola, RICP®, AIF®, PPC®
This material was prepared by Bill Rautiola. Source: www.irs.gov as of 10/2025. https://www.irs.gov/publications/p590a#en_US_2024_publink1000129982
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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