My husband and I opened a 529 account for our son soon after his birth. Like many parents, we dream of him earning a full-ride college scholarship, but we’re realists at heart. Planning for his education means setting up a solid financial foundation now. That’s why we chose a 529 plan, drawn to its powerful tax benefits: tax-deferred growth and tax-free withdrawals for qualified expenses like tuition, books, and room and board.
We also explored prepaid tuition plans, which let you lock in today’s tuition rates for future attendance at select colleges—a smart option worth considering. Ultimately, we chose a 529 investment account for its unbeatable benefits: tax-deferred growth, tax-free withdrawals for qualified expenses like tuition and books, flexible investment choices, and versatile withdrawal options.
Why should you look into a 529 Plan?
With the rising costs of higher education and many Americans burdened by student debt, parents are increasingly using 529 savings plans, which offer tax benefits, to save for their children’s education. These plans, named after Section 529 of the Internal Revenue Code, were initially created to help cover college and other postsecondary education expenses.
Tax Advantages
- Investments in a 529 plan accumulate earnings without federal taxes (no taxes on gains or dividends) in the interim, enabling your savings to grow more rapidly through compounding since there’s no tax owed on ongoing investment returns or capital gains.
- Withdrawals remain federally tax-free when applied to eligible education costs—such as tuition, textbooks, classroom materials, and housing and meals—although using funds for K-12 schooling could incur state taxes in some cases (check your state policy).
- While contributions to a 529 are made with after-tax dollars so they’re not federally tax deductible, many states offer state income tax deductions on contributions or state tax exemptions on withdrawals if you invest in your own state’s 529 plan or if you live in a “tax parity state” (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio or Pennsylvania) that allows you to deduct contributions to out-of-state plans as well.
- In 2025, you can generally contribute up to $19,000 annually ($38,000 for couples) per beneficiary to one or more 529 college savings plans without triggering the federal gift tax. Alternatively, you can make a lump-sum contribution of up to $95,000 ($190,000 for couples) in a single year, treated as spread over five years for tax purposes, without incurring the federal gift tax.
The Beneficiary Can Be Your Child, Your Grandchild, or Yourself
- You can change the beneficiary to another child or family member if it turned out the original beneficiary doesn’t need the funds. As the account owner, you maintain control of the funds and have flexibility in how they are invested.
- You can even open up a 529 account for yourself before you have children and later change the beneficiary to your child/children. The longer you have money invested in that 529 account, the longer period of time the investment can grow tax free.
- Starting in 2024, you can roll over unused 529 funds into a Roth IRA tax- and penalty-free, but only to a Roth IRA owned by the same person who is the 529’s designated beneficiary. The 529 plan must also have been established for the beneficiary for at least 15 years before the transfer.
Things to Watch Out For:
- Don’t overfund your kids’ 529 plan(s). Withdrawals that are not for eligible education costs are subject to taxes plus a 10% penalty, with exceptions for certain circumstances, such as after death or disability. Utilize a compound interest calculator to project the growth and earnings of a 529 plan for a specific target year when college (or k-12) expenses are expected.
- While the current federal law allow tax-free 529 withdrawals for K-12 tuition and certain expanded expenses (up to $10,000 per beneficiary per year in 2025, increasing to $20,000 in 2026), there are 11 non-conforming states that treat K-12 withdrawals as non-qualified distributions and will tax on earnings for k-12 withdrawals or even impose penalties. Review your state’s 529 plan rules to optimize your savings strategy and determine the most effective approach for your needs.
Bottom Line:
A 529 plan is a great estate-planning tool that could be used to save for education expenses while offering tax advantages and flexibility. For your child’s next birthday party, consider requesting contributions to their 529 education fund in lieu of traditional gifts to support their future academic goals.
Have you started a 529 plan? Share your tips in the comments!
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