The graduation caps have been tossed, summer heat has arrived, and graduate celebrations are winding down. But as reality sets in, you might notice a surprising line on your financial dashboard: unspent money in your child’s or grandchild’s 529 plan college savings account.

Roughly 10% of families may end up with surplus 529 funds, according to data from Consumer Reports, often thanks to unexpected scholarships or grants, or by choosing a more affordable school. Fortunately, thanks to the SECURE 2.0 Act, you may be allowed to roll those leftover education funds directly into a Roth IRA without paying federal income tax or a penalty.

Yet it isn't always as simple as moving money from point A to point B. The IRS has strict, fine-print rules regarding timelines, lifetime limits, and account history.

Take our 6-question quiz to find out if you can seamlessly pivot your beneficiary's college savings into a retirement head start — or whether a different tax strategy might make more sense for your family.

Explore More

• This is how much you can contribute to an IRA and 401(k) in 2026.
• Passing on a home? Here's why 40% of heirs say they can't afford the inheritance.
• Help your child get their paycheck right with these tax withholding basics.
• If you're hiring your kids, these are the tax benefits and IRS rules to follow.

When Congress established 529 plans in the 1990s, they were designed as a tax-advantaged tool to save for college.

Contributions to these investment accounts grow tax-deferred, and you can withdraw funds tax-free for qualified college expenses, such as tuition, room and board, computers, and books. Most states and Washington, D.C., also offer a tax deduction or credit for residents who contribute to their state's plan.

Over the years, tax-free uses for 529 funds have expanded to include some other educational costs, too, including apprenticeship programs and tuition for kindergarten through 12th-grade schooling. The One Big Beautiful Bill Act, signed into law over the summer, has further extended the ways you can use 529 money, including a wider range of postsecondary educational programs.

What's covered by 529 plans now

Under the new rules, you can now withdraw 529 funds tax-free for tuition, books and other fees associated with qualifying non-degree credential programs, including for plumbing, electrical work, HVAC and welding.

Programs listed under the Workforce Innovation and Opportunity Act generally qualify; you can look up your state's directory of WIOA-eligible programs on CareerOneStop, the U.S. Department of Labor's career, training and job-search website. You can also check for eligible programs in the Web Enabled Approval Management System (WEAMS), maintained by the Department of Veterans Affairs.

Additionally, withdrawals from a 529 are tax-free for certification and licensing expenses and for continuing education required to maintain those licenses. For example, you may use funds to prepare for and take exams required to practice law or become a certified public accountant. Professionals such as teachers, nurses and real estate agents may use 529 money for continuing education to retain their licenses or certification.

If you've been saving money in a 529 for your child, these new rules broaden the options for how they can spend the funds. Or, if you need to take continuing-education courses for your current job or want to learn new skills for a career pivot, you could benefit, too, says Mary Morris, CEO of Commonwealth Savers, Virginia's program for tax-advantaged education savings.

You can change a 529 plan's beneficiary to another member of the family. So if your child doesn't need all the money in their account — say, because their educational expenses were lower than expected — you could switch the beneficiary to yourself and use the funds for your own education.

Note that provisions in the Big Beautiful Bill Act also let families use up to $20,000 per year for elementary and secondary school tuition, course materials, tutoring, fees for standardized tests, and more. Previously, qualified withdrawals of 529 money for K-12 students were limited to tuition, up to $10,000 annually. (The $20,000 limit starts in 2026.)

Not all states have altered their rules to follow the federal government's expanded uses for 529s, so make sure to check your state's policies.

The Roth option for 529s

Keep in mind that thanks to the SECURE 2.0 Act, passed in 2022, there's another way to put leftover 529 money to good use. You can roll over the funds, up to a $35,000 lifetime maximum, into the 529 beneficiary's Roth IRA, tax- and penalty-free.

Rollovers must be within the annual Roth contribution limit, which was $7,000 in 2025 and is $7,500 for 2026. The 529 plan must have been maintained for the beneficiary for at least 15 years before you can do the rollover.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• 529 Plan Contribution Limits
• Use the 529 Grandparent Loophole to Maximize College Savings
• Best 529 Plans

Put down the pumpkin pie and get ready for tax planning: These retirement tax moves could help you prepare for 2026.

Retirees are in a unique planning position compared with other tax filers heading into the winter season. Not only are they faced with complex withdrawal rules on RMDs, but many have access to age-specific tax deductions, including the new $6,000 “senior bonus” deduction.

Whether you leverage this time by making strategic money moves or wait until the last second to act can affect your financial position next year (and potentially this year).

Here are 10 tax moves you can make before December 31 to optimize next year’s retirement income and potentially lower your 2025 tax bill.

Retirement tax plan in 2025 and 2026

Kiplinger only considered individual income returns for the retiree tax planning checklist. As such, business taxes were excluded, as well as educational expenses or tax breaks typically associated with self-employment.

The retirement tax moves listed might be affected by a taxpayer’s income level and filing status. State retirement tax treatment may differ.

Consult with a qualified tax professional for specific advice on your financial situation.

RMDs

1. Review your 2025 RMD (and 2026) tax strategy

As a retiree, you might already be familiar with the concept of required minimum distributions (RMDs). An RMD is money that must be withdrawn from a 401(k), 403(b) or other traditional IRA every year after you reach a certain age. If you don’t make the withdrawal, you could be subject to a 25% penalty on the amount not distributed.

Here are the current age requirements for RMD withdrawals:

• If you’re 73 or older, you must take an RMD from your retirement accounts by December 31.
• If you turned 73 in the current year, your first RMD is due by April 1 of the following year, but your second RMD is still due by December 31 of that same year.

If you’re subject to RMD rules and haven’t already withdrawn your RMD for 2025, you should do so now to avoid the penalty. But you’ll also want to look at 2026’s RMD withdrawal for retirement tax planning purposes. This might help you avoid common RMD tax traps:

• Preventing the “two RMD trap.” The IRS gives an extended deadline of April 1 to take your first RMD. However, all subsequent RMDs must be taken by December 31, meaning that if you delay until April, you’ll have to take two withdrawals in one year. That could push you into a higher tax bracket and increase your overall tax liability for that year.
• Reducing investment risk. RMDs are calculated in part using your RMD account balance from the prior year. If there’s a market downturn in, say, 2026, you’ll still have to withdraw the predetermined amount at the end of 2025 (which might have been higher). This could result in the forced selling of IRA investments at a lower value just to satisfy your RMD obligation.

By reviewing your RMD withdrawal strategy now, you can minimize the effect of market volatility on your portfolio. This often means strategically withdrawing cash or bonds during downturns.

Alternatively, during an economic upturn, you’d likely want to take your RMD earlier in the year, locking in investment gains by selling fewer shares to meet the RMD amount.

You can also take steps to lower your taxable income from other revenue streams, which helps to counteract the larger taxable income resulting from RMDs and keeps your overall tax bill more manageable in 2026.

For more information, see Required Minimum Distributions: Rules, Deadlines, and Key Points to Know.

IRA Conversion and Investment Timing

2. Take advantage of capital loss carryover: Tax-loss harvesting

Tax-loss harvesting is the strategic practice of selling taxable account investments (such as trusts or brokerage accounts) to maximize tax savings. Here’s how this strategy works:

• You have at least one capital asset (such as real estate, stock, etc.) that you sell for more than you paid for it, resulting in a capital gain.
• You sell at least one investment for less than you originally paid, resulting in a capital loss.
• Then you offset the total amount of capital losses against your capital gains, effectively leading to a 0% tax on any gains offset by losses.
• If your total capital losses are greater than your gains for the year, you can use the excess to deduct up to an additional $3,000 against your ordinary income. Any remaining losses that exceed this $3,000 limit are carried forward indefinitely to offset future capital gains.*

When would tax-loss harvesting be useful? Here are a few examples:

• If you’re subject to the highest tax rate on capital gains, you can avoid that tax through tax-loss harvesting, resulting in valuable savings. Those savings can be reinvested in securities or used to help rebalance your portfolio.
• By deducting up to $3,000 of capital losses against ordinary income, you can save on taxes typically levied on retirement plan distributions, pensions, and other ordinary income sources. An unlimited amount of capital loss might be carried forward to offset gains from real estate sales, mutual funds, ETFs, etc..

However, before you commit to tax-loss harvesting, look out for the “wash sale rule,” which says you can’t reinvest in similar securities 30 days before or after you sold the capital loss ones. If you do, your capital losses won’t count as an offset to your capital gains.

*Note: The deduction amount is $1,500 for taxpayers married filing separately.

For more information, see: Capital Losses: Rules to Know for Tax Loss Harvesting.

3. Perform a Roth conversion

If you have a traditional retirement savings account (such as a 401(k), 403(b) or traditional IRA), you might be wondering: Is now the right time to convert to a Roth IRA?

The trade-off is clear: With a traditional IRA, you pay taxes when you take a distribution; with a Roth account, you pay taxes now on the funds you contribute.

Consequently, converting from a traditional IRA to a Roth means you must pay the income tax in the year of conversion, but the potential long-term benefits of tax-free growth might be worth the upfront cost.

Reasons you might consider converting your traditional IRA to a Roth account:

• You expect your 2026 income tax rate (or later) to be higher. Often, there’s a “lull” for retirees in the years after they stop working and before they start receiving Social Security, where income is at its lowest. If you’re there now, you might consider converting to a Roth before the end of 2025, and your income (and/or federal tax rate) is higher.
• You want to avoid RMDs. Those yearly required withdrawals from your IRA disappear with a Roth conversion. Your money in a Roth account grows tax-free throughout your entire lifetime and gives you greater control of when and how much you withdraw each year, which might be ideal for those who want more flexibility with their retirement tax plan.
• You plan to leave money to your heirs. If you have a valuable estate, a Roth generally offers beneficiaries tax-free withdrawals. Comparatively, traditional IRA withdrawals are taxed as ordinary income for your heirs.

*Note: If you're 73 or older at the time of the conversion, you must first take your RMD from your traditional IRA for the year of the switch.

But the grass isn’t always greener on the Roth side of things. Here are a few reasons why you wouldn’t convert a traditional IRA to a Roth:

• You expect your 2026 income tax rate (or later) to be lower or the same. If your projected future tax rate is lower than your current rate, you might not want to convert a traditional IRA to a Roth, as you would be paying taxes at a higher rate vs later (in 2026) when your rate is lower.
• You have to use IRA funds just to pay the conversion tax bill. Converting a traditional IRA to a Roth requires you to pay the federal income tax owed upfront. If you're forced to use funds from the traditional IRA to pay off the conversion taxes, the conversion can incur early withdrawal penalties. Taking an early withdrawal not only diminishes your savings but also significantly lowers the primary benefit of the Roth account: Tax-free growth.
• You need to use the converted funds within five years. If you’re under 59½, you can’t use your funds for five years after a traditional IRA to Roth conversion. Otherwise, you could be subject to a 10% early withdrawal penalty. (However, if you’re older than 59½, you might withdraw the funds penalty-free before the five years are completed, though any earnings on those funds will be subject to income tax.)

Like other checklist items on this retirement tax planning list, you’ll want to consider your overall retirement tax strategy when deciding whether to convert your traditional IRA to a Roth account. However, the deadline to complete a 2025 conversion is December 31.

For more information, check out Kiplinger's report, 6 Tax Reasons to Convert Your IRA to a Roth (and When You Shouldn't).

4. Convert a 529 to a Roth (if you can)

While we’re on the topic of conversions, let’s review an exciting (and relatively new) tax law: The Secure Act 2.0. Among other things, this law enacted a provision that allows you to convert a 529 savings plan into a Roth account.

Here are the rules for a 529 savings account to Roth IRA conversion:

• The 529 plan must have been open for at least 15 years.
• Plan contributions must have been held in the account for at least five years before conversion.
• The beneficiary for both the 529 and the Roth must be the same, and the transfer must be direct: From one plan trustee to the other trustee.
• The beneficiary must have earned income at least equal to the amount of the rollover.
• You might roll over up to $35,000 of unused 529 funds into a Roth IRA (per beneficiary). That’s a lifetime limit, meaning you’ll need to total all transfers across all 529 plans that are rolling over into Roths.

The rollover is subject to the annual Roth IRA contribution limits. (You might want to spread a large conversion over several years.) But if you can roll over your 529 plan into a Roth, the federal tax benefits might be worthwhile.

Benefits of a 529 to Roth conversion. You won’t be taxed federally on the conversion. Plus, you’ll avoid penalties for withdrawing funds from a 529 for non-educational expenses, with the added benefit of jumpstarting the beneficiary’s retirement savings.

Itemized deduction timing

5. Organize your bunching strategy for tax deductions

The tax strategy of “bunching” means you pay two years’ worth of itemized expenses in the current tax year to push your total itemized deductions higher than the standard deduction amount.

If performed correctly, you’ll gain one year of high itemization followed by one year of the standard deduction, which maximizes your total tax savings for both years.

Bunching deductions typically relies on the fact that you:

1. Can claim the itemized deduction on your income tax return (at least for the year that you “bunch”)
2. Have the flexibility to pay for some of your expenses early

You should consider bunching your deductions in 2025 if you anticipate a higher federal income tax rate in 2026. Bunching deductions might also be beneficial if you expect your tax situation to be negatively impacted by new tax legislation in 2026, such as the new AGI floor for itemized charitable deductions (more on that later).

Here are a few ways you might “bunch” your deductions and acquire tax savings in 2025:

• Maximizing the state and local (SALT) deduction. Starting in 2025, you can deduct up to $40,000 in SALT on your federal income return (if you meet income requirements). By prepaying your fourth-quarter property taxes before December 31 (if your state allows it), you could reach higher tax savings before the AGI floor kicks in in 2026.
• Front-load charitable contributions. You can use a donor-advised fund to take advantage of more favorable tax rules in 2025 (more on that below).
• Pay high medical expenses early. Do you have significant medical expenses scheduled for early 2026? If those qualified procedures are near the 7.5% AGI threshold for the medical expense deduction, consider paying them before the end of 2025 to take advantage of bunching.*

*Any medical procedures completed “substantially beyond” 2025 might not qualify for the medical expense deduction in 2025.

6. Finish your charitable donations

If you itemize, be sure to finish making your charitable contributions before the December 31 deadline. Donations can be a powerful way to reduce your taxable income for the year. (Though adjusted gross income (AGI) limits apply.)

Starting in 2026, the rules for itemizing charitable giving will get tighter, making your contributions this year even more valuable.

That’s because the Trump/GOP 2025 spending bill, known to some as the “One Big Beautiful Bill,” provides an AGI floor for itemizers as well as a deduction cap for high-income earners in 2026. Here’s a table summarizing the new tax rules for charitable deductions going into effect next year:

For 2026, a charitable contribution "floor" will be introduced for itemizers, regardless of income level. Only total contributions above 0.5% of your AGI will be deductible. For example, if you had $200,000 AGI and donated $2,000, only $1,000 would be deductible.

Charitable contributions for high-income itemizers will also be subject to a cap in 2026. The new law imposes a 35% limit on the value of all itemized deductions for high earners, meaning taxpayers in the top bracket will receive a lower tax break compared to 2025.

Both of these provisions make “bunching” deductions more valuable than ever. You can achieve this by contributing to a donor-advised fund (DAF). A DAF allows you to claim an immediate tax deduction for your contributions this year (under the more favorable 2025 rules), while the fund awards the “bunched” money to your chosen charities over time. This might help you maximize your deduction before the 2026 limits take effect.

For more information, see our guide: The Charitable Donation Tax Deduction: What to Know.

Optimize Retirement Tax Efficiency

7. Consider making a qualified charitable distribution in 2025

A qualified charitable distribution (QCD) is a distribution from your IRA to a qualified charity of your choice. However, not everyone’s eligible to make one. Here are the eligibility requirements for 2025:

• You must be age 70½ or older.
• You can donate up to $108,000 (or $216,000 if married spouses) in a single tax year.
• The distribution must be made from a traditional IRA, an inherited IRA, or an inactive SEP/SIMPLE IRA.

QCDs require that you “give up” a portion of your annual IRA distribution to a charity, effectively going without your hard-earned cash. But making a QCD goes hand-in-hand with many of the retirement tax items we’ve already covered on our list. For example:

• Avoiding the taxability of RMDs. If you don’t need all the money from your RMD, you can donate a portion as a QCD. This has the double benefit of satisfying your RMD while paying no federal income tax on the portion you donate.
• Lowering your AGI. Remember that charitable deduction cap coming into effect in 2026 for high-income earners? If you make a QCD in 2026, you can effectively reduce your AGI, potentially lowering your federal income tax bracket next year and thereby avoiding the new AGI cap.
• Reducing high taxes on Social Security benefits and Medicare premiums. Because your QCD lowers your gross income, you might see a reduction in the amount of tax you pay on Social Security in the year you made the QCD, or your Medicare premium tax two years later.

That said, a QCD doesn’t qualify as an itemized “charitable deduction” on your income taxes, which might hamper your bunching strategy. You also can’t use a DAF to make a QCD, so it might make your approach to donating less flexible.

For more information, see: What is a Qualified Charitable Distribution?

8. Update your retirement income withholding

There are two primary methods for retirees to pay federal income taxes. The first is through estimated tax payments, which are due quarterly.

The second is through automatic withholding by filling out the appropriate form (e.g., pensions and annuities use Form W-4P, Social Security benefits use Form W-4V, etc). We’re going to discuss the withholding option.

You should review your retirement withholding form(s) annually for potential changes in your tax situation. This is particularly pertinent for 2026, when the withholding forms will be updated for new tax deductions such as:

• The car loan interest deduction. Worth up to $10,000 on qualifying new vehicles, some suggest the estimated annual tax savings could average around $400 to $500 per taxpayer in 2026.
• The bonus deduction for those age 65 or older. Worth up to $6,000 for eligible individuals with less than a certain income, the Tax Policy Center estimates that about half of eligible older adults will see some benefit.

The main benefit of updating your retirement withholding is that you can take advantage of the tax deductions throughout the year instead of just at year-end.

Not only does this give you more income month-to-month, but you can also invest those extra dollars into a savings account or other security and start accruing interest right away.

The IRS considers withholding to be paid “evenly throughout the year” regardless of when you actually withheld your taxes. If you accidentally underpay your taxes during one quarter, you can increase your withholding toward the end of the year and cover the shortfall. This is another reason you should review your retirement tax withholding before December 31.

Review Important Tax Documents

9. Review health care coverage: Open enrollment for Medicare

We’re in full swing of open enrollment season (which typically lasts until December 7 for Medicare, and until January 15 for Affordable Care Act (ACA) marketplace insurance). This is the time to ensure your health care coverage and plan costs still meet your needs and compare potential alternative plans.

Reviewing your medical plans might be more important than ever. If you’re currently using ACA subsidies, those are scheduled to expire at the end of 2025 (unless Congress acts). The expiration is expected to lead to significant premium increases and higher out-of-pocket costs for many enrollees in 2026.

• Medicare premiums and IRMMA are projected to increase. As reported by Kiplinger, Medicare Part B premiums and deductibles are expected to increase by about 12%, and Part D IRMMA surcharges might increase by as much as 6%.
• Prescription drug coverage will likely see a higher maximum deductible. Current estimates place the projected 2026 out-of-pocket cost cap at $2,100, compared to $2,000 in 2025.

What should you do? Review the Annual Notice of Change (ANOC) letter you received from your current insurer to understand the plan changes going into effect in 2026. The ANOC might inform you of income-related premium increases and if your doctor network is still covered.

By using previously discussed tax strategies like QCDs or Roth IRA conversions, you might be able to reduce high anticipated Medicare premiums.

However, keep in mind that Medicare premiums are calculated on modified adjusted gross income (MAGI) from two years prior. Any change you make in tax year 2025 will not impact your Medicare premiums until 2027.

Related: Health Insurance Tax Credits and the Government Shutdown: What to Know.

10. Review your estate planning goals

Lastly, now’s a good time to review your will, power of attorney documents, and beneficiary designations on all retirement accounts and insurance policies.

Reviewing those important documents each year helps ensure that your estate-planning goals still align with your current retirement goals, especially in light of new tax rules.

Here are a couple of things to know regarding your 2026 estate tax plan:

• The annual gift tax exclusion remains the same. For both the 2025 and 2026 tax years, the annual gift amount is $19,000 (single filers) or $38,000 (married filing jointly couple). Gifting money tax-free helps minimize estate tax liability for your heirs when you pass away.
• The estate tax exclusion amount increased. While the basic exclusion amount for individuals was $13.99 million in 2025, the exclusion was increased to $15 million in 2026. This allows individuals to transfer a larger amount of wealth estate tax-free, potentially offering heirs more post-tax funds.

While the estate exemption amount remains high in 2026, you might want to make large gifts in 2025 to “lock in” asset values if you think those assets could appreciate significantly. This effectively moves that future appreciation out of the estate, avoiding estate tax on future growth.

At the same time, assets in an estate are given to heirs at a “stepped up” basis, meaning the heir receives those assets at fair market value. This effectively eliminates the capital gains tax (should your heir later decide to sell the asset) and is one of the benefits of keeping assets in an estate.

Everyone’s estate tax liability looks different. Outsource your taxes to a qualified tax adviser when necessary.

Read More

• How the IRS Taxes Retirement Income
• The Rubber Duck Rule of Retirement Tax Planning
• New Tax Rules High-Income Earners Should Know Before Donating in 2025
• Test Your Retirement Tax IQ: How Much Do You Know?

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on transferring 529 plan money to a Roth IRA. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. General rules for 529 rollover to a Roth IRA

Question: We funded a 529 college savings plan for my granddaughter. She used the money in the account for college. She’s now done with school, and there are still unused funds in the account. I heard that we can transfer some of the money to a Roth IRA for her. What are the rules for this?

Joy Taylor: Starting in 2024, some excess 529 funds can be transferred tax-free to a Roth IRA for the beneficiary in a direct trustee-to-trustee transfer. This relief, enacted in the SECURE 2.0 legislation, is subject to important rules:

• The 529 account must have been open for at least 15 years, with the same beneficiary.
• 529 contributions made in the prior five years are ineligible for the transfer.
• Annual 529 distributions for this purpose can’t exceed the annual contribution limit for Roth IRAs, which is $7,000 in 2025.
• And there is a lifetime $35,000 cap.

2. Roth IRA contributions made by beneficiary

Question: My son already contributed the maximum amount of $7,000 to his Roth IRA this year. Can we also do a direct trustee-to-trustee transfer of $7,000 from his 529 account to his Roth IRA in 2025?

Joy Taylor: No. The annual transfer limit from the 529 to the Roth IRA can’t exceed the IRA contribution limit for the year of the rollover. Any actual contributions for the year made to any IRA (traditional or Roth) owned by the beneficiary count against this limit. For example, let’s say a 529 plan beneficiary contributes $3,000 to his traditional IRA in 2025. Only $4,000 of leftover 529 funds can be transferred to his Roth IRA in 2025. If the beneficiary has already maxed out IRA contributions in a year, then no 529 funds can be transferred to the Roth IRA that year.

3. Taxable compensation

Question: If the beneficiary of the 529 plan doesn’t have any taxable compensation for the year, can the 529 plan transfer funds to a Roth IRA in a direct trustee-to-trustee transfer?

Joy Taylor: No. Any transfer from the 529 plan to a Roth IRA must meet all the Roth IRA rules, which means the beneficiary must have taxable compensation equal to or greater than the 529 amount transferred to the Roth IRA.

4. Multiple 529 plans

Question: If a person is the beneficiary of two 529 plans, say one from a grandparent and another from a parent, can each 529 account transfer up to $35,000 to a Roth IRA owned by the beneficiary?

Joy Taylor: It doesn’t appear so. The statutory language says that the $35,000 aggregate limit on direct trustee-to-trustee transfers from a 529 account to a Roth IRA applies with respect to the designated beneficiary. Although the IRS hasn’t yet published any guidance on this, tax and financial experts believe that this means the $35,000 limit applies per person. If an individual is the beneficiary of two 529 accounts, $35,000 (and not $70,000) is the lifetime cap on direct trustee-to-trustee transfers to a Roth IRA.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication.
Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the OBBB and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• All Ask the Editor Q&As
• Ask the Editor: Reader Questions on QCDs
• Ask the Editor: Tax Questions on Roth IRA Conversions
• Ask the Editor: Reader Questions on 529 Plans
• Ask the Editor: Questions on Inherited IRAs
• Ask the Editor: Reader Questions on IRAs, RMDs and PTPs

Recently, President Donald Trump signed a key piece of legislation. The “Trump megabill,” also known as the “One Big Beautiful Bill” (OBBB), is expected to impact millions of taxpayers, like you, across the country.

Among the new law’s many provisions are benefits for parents, like a boosted federal child tax credit and an enhanced adoption tax credit. But what provisions specifically address your child’s finances?

Some may help your child better afford education, including tuition expenses or school choice. Still others introduce a new type of “kid savings account.”

Here are three ways the Trump megabill will impact your child’s finances.

Related: 10 Tax Breaks for Middle-Class Families Claiming the Standard Deduction

1. Trump accounts for children

Perhaps you’ve heard about the new type of savings accounts introduced in the OBBB: “Trump Accounts.” Supporters say these are designed to help save annually for a child’s future homeownership, educational, and even entrepreneurial needs.

According to the OBBB, Trump Accounts will:

• Allow parents, relatives, and others to contribute after-tax dollars (up to $5,000 per year) in a child’s name.
• Permit savings to grow tax-deferred until the child reaches 18.
• Give children born in the United States between 2025 and 2028 seed money from the federal government in the amount of $1,000 in their accounts.

Supporters of Trump Accounts say eligible children can have one opened for them as early as July 2026.

As Kiplinger reported, multiple companies may already be on board in terms of voicing support for Trump Accounts. CNBC reported that executives from Dell, Uber, and Goldman Sachs, to name a few, attended the Trump administration's "Invest America Roundtable” held at the White House last month.

While several companies reportedly expressed support for the newborn investment program, Dell reportedly pledged a $1,000 match for its employees' children into Trump Accounts under the new tax provision.

For more information, check out Kiplinger’s article, The GOP Wants to Auto-Enroll Your Child in a 'Trump Account' for Savings.

2. 529 education plan for school students

The OBBB also changed the rules around 529 plans for kids. Here’s a quick overview of some of those changes:

• Currently, parents can withdraw up to $10,000 annually, tax-free, for K-12 tuition expenses. Starting tax year 2026, under the OBBB, individuals will be able to withdraw up to $20,000 annually.
• Parents can also deduct more types of K-12 expenses. For instance, books and standardized test fees (like the SAT or ACT) are “qualified expenses” under the new law for 529 plans, as are online learning materials, certain tutoring fees, and dual enrollment fees for college courses taken in high school.
• More post-secondary expenses are included as qualified expenses under the new law. For example, the OBBB allows withdrawals for workforce credentials programs and continuing education courses.

The last point may be particularly advantageous if your child decides to change careers post-college or needs a certificate to enter the workforce.

But when it comes to education savings accounts, there’s more than just 529 plans or even Trump accounts. Coverdells may be used if you meet certain income limits. These special savings accounts allow you more control over your investment options compared to 529s.

Check out Kiplinger’s report for more details: Coverdell ESAs vs. 529 Plans: Which Should You Choose?

3. K12 expenes: Private school vouchers

Another change in the OBBB involving children is a provision dealing with private school voucher tax breaks. These voucher programs use publicly funded scholarships that allow students to attend private schools.

The OBBB provides a dollar-for-dollar tax credit for donations made to private K-12 voucher programs.

• The donation must go to a “Scholarship Granting Organization” (SGO) to count for the tax credit.
• SGOs are nonprofit organizations that distribute donations to students through scholarships, which can pay for private school tuition, books, and homeschooling costs.
• The tax credit is worth up to $1,700 of adjusted gross income.

While the new provision promotes private school choice, some states won’t get the tax credit.

According to the National Education Association, private school vouchers have appeared on state ballots 17 times and were rejected by voters. Colorado, Kentucky, and Nebraska are just a few of the recent states that did not approve.

For more information on who would qualify for the scholarships, check out Kiplinger’s report, 'Unprecedented' Private School Voucher Tax Credit in Trump's Megabill.

Read More

• Three Major 2025 Tax Changes for Parents in 'Big Beautiful Bill'
• Child Tax Credit: How Much Is It for 2025?
• 2025 Family Tax Credits: Four IRS Changes That Can Save You Money

Saving for your child or grandchild’s education is important, but it can be expensive. According to recent research by the Education Data Initiative, the average cost of a four-year college program has risen by 141% in the last 20 years.

And that’s not counting any K-12 expenses or tutoring help along the way.

Fortunately, two types of savings accounts may help fund a child’s education: 529 plans and Coverdell Education Savings Accounts (ESAs).

These tax-advantaged savings methods are designed to help you contribute after-tax dollars for qualified tax-free withdrawals. Plus, you may even use some funds in a 529 plan for retirement.

Here are the ins and outs of 529 plans and Coverdell ESAs.

In the news: The so-called "Big Beautiful Bill" introduces several key changes to 529 plans and creates a new type of "kid savings account." For more information, check out Kiplinger's report, Money for Your Kids? Three Key Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's Finances.

Coverdell vs. 529 plan account

Before we dive into the differences between Coverdells and 529 plans, let’s run through a list of similarities. Both plans:

• Help you save for education expenses through a tax-advantaged savings account.
• Allow you to contribute after-tax dollars for qualified tax-free withdrawals (including any accrued interest).
• Impose a 10% penalty and may charge income tax if you use funds for non-qualified expenses (more on “qualified vs. non-qualified” expense types below).
• Can limit the beneficiary’s financial aid in college.

The last bullet is important if your child or beneficiary wishes to apply for student financial aid.

Having a 529 or Coverdell could reduce the amount received. While the impact on student aid is typically minimal, you may want to consult with a tax professional to get an accurate number on how your child’s student loan could be affected.

Next, we’ll cover the differences between Coverdells and 529 plans, starting with 529 withdrawals.

529 plan withdrawals for education: Qualified expenses

529 plans typically have a narrower range of so-called “qualified expenses.”

A qualified expense is anything that can be paid for by the plan that allows you to use the plan’s funds tax-free.

Until recently, 529s were used primarily for higher education. However, tax policy changes have allowed some K-12 expenses to count toward tax-free withdrawals.

As such, below is a list of 529 qualified expense examples (but keep in mind that state laws may vary):

• Higher education tuition (K-12 may be eligible, but only up to $10,000).
• Books, school fees, supplies, and equipment for higher education.
• College room and board (for students attending at least half-time, though on-campus vs. off-campus rules differ).
• Computers, software, and internet access for higher education.
• Certain special needs services and equipment (college or K-12).
• Costs for registered apprenticeship programs (generally not covered by Coverdells).*
• Up to $10,000 may be used to pay down student loans (typically not covered by Coverdells).*

*Except for those expenses noted, Coverdell ESAs usually allow most higher education costs to count as “qualified” expenses. Additionally, Coverdells have a wide variety of qualifying K-12 expenses. We’ll go over those next.

Coverdell ESA qualified expenses

Coverdells generally cover a much broader range of qualified expenses compared to 529 plans.

For instance, unlike a 529, a Coverdell ESA may be used for many K-12 expenses. Plus, Coverdells can be used for alternative learning experiences, like homeschooling. (However, under the new proposed tax bill, you might soon be able to use 529 plans for homeschooled children and other K-12 expenses.)

Here are more examples of Coverdell ESA qualified expenses:

• Academic tutoring for K-12 and higher education.
• K-12 and higher education computers, equipment, and internet access.
• College and K-12 books, school supplies, and fees.
• Elementary and secondary school uniforms and transportation costs.

Coverdell ESA contribution and income limits

While Coverdells may allow a broader range of qualified educational expenses than 529 plans, these special savings accounts do come with a caveat: Annual contribution limits.

• The annual contribution limit per beneficiary is $2,000. This threshold applies to all Coverdells for that beneficiary.
• So, for example, if you have four contributors, each could only add a potential $500 total across all Coverdell ESAs for one beneficiary in a year (or risk a 6% excise tax, which applies to every year the extra contributions remain in the Coverdell account).
• Plus, the $2,000 contribution may be reduced, depending on a contributor’s modified adjusted gross income (MAGI).
• To contribute the full $2,000, the contributor’s MAGI must be less than $95,000 (single filers) or $190,000 (married filing joint couples).
• Once MAGI is above $110,000 (single) or $220,000 (married filing joint), then you cannot contribute to a Coverdell savings account.

Also, there are age limits that apply to Coverdells:

• Coverdell ESAs can only be contributed to until the beneficiary turns 18 (except for beneficiaries with special needs, then there are no contribution or withdrawal age limits).
• The funds must be utilized before the child reaches 30, or they could be subject to income taxes and a 10% penalty on the earnings portion.

Because of the Coverdell’s restrictive income limit, many families may be ineligible to use a Coverdell as a viable savings option.

Also, it’s important to note that, under a Coverdell ESA, the child (not the owner, like in the 529 plan) obtains control over the account once they turn 18 or 21 (depending on the state).

So if you’re looking to maintain control over the funds, Coverdells may not be the option for you and your family.

Who can contribute to a 529 plan?

While it’s possible to open a 529 plan through a private education organization, most 529 plans are state-sponsored. Fortunately, almost all states offer a 529 (Wyoming is the one exception).

But each state may have different rules and regulations governing the use of 529 savings accounts. You will need to check your state’s official 529 plan website or use the College Savings Plan Network search tool to find your state’s plan information.

The good news is that 529 plans do not have an annual contribution limit or income limit.

Although states typically enact a lifetime contribution threshold, the amount can be quite high, often several hundred thousand dollars.

But 529 plan contributions are subject to the federal gift tax exclusion, meaning you will need to report gift taxes if you contribute more than the 2025 amounts to a 529:

• Single filers up to $19,000.
• Married filing joint couples up to $38,000.

Yet more good news, though: 529 plans have no expiration, meaning that the funds remain no matter how old the child gets.

• This can be particularly useful if the beneficiary decides to attend school later in life, or for reusing the plan's funds for another beneficiary (more on that below).
• Having no age limit also means the 529’s owner will maintain control over the account (and not the child, as is the case with a Coverdell).

Coverdell ESA rollover to 529

Even with careful financial planning, you may not get around to spending every cent in a savings account by the time a child graduates. What then?

Well, whether you own a Coverdell ESA or a 529 plan, you may complete a rollover. This allows you to transfer funds from one account to another, even if the beneficiary is different.

For example, you can roll a Coverdell plan in the following ways:

• By rolling one beneficiary’s Coverdell into another beneficiary’s Coverdell (as long as both beneficiaries are in the same family and the new beneficiary is under 30).
• By rolling a Coverdell into a 529 plan (but only if both accounts have the same beneficiary).

You cannot roll funds from a 529 plan into a Coverdell ESA. However, you can roll a 529 plan in the following manner:

• By rolling over one child’s 529 plan into another child’s 529 plan, provided they’re in the same family.
• By rolling over funds from a 529 plan into a Roth IRA account for retirement savings (limits apply — see more details below).

Completing a rollover may extend your tax-free withdrawals while saving you from potentially paying penalties and taxes.

However, every rollover is subject to specific rules, so you’ll want to contact your plan administrator for the steps required and ask about any potential tax consequences that could result from an improper rollover.

529 rollover to Roth IRA

Thanks to the recently passed SECURE 2.0 Act, retirees can gain an added benefit from unused 529 funds: Retirement savings.

Not only can this help pay for a portion of your retirement, but rolling a 529 plan into a Roth account may also avoid taxable income and penalties associated with withdrawing funds for unqualified expenses.

However, there are specific rollover rules for converting a 529 plan to a Roth IRA:

• The 529 plan must have been open for at least 15 years.
• Plan contributions must have stopped at least five years ago.
• The beneficiary for both the 529 and the Roth must be the same, and the transfer must be direct: From one plan trustee to the other trustee.
• You may only roll over up to $35,000 of unused 529 funds into a Roth IRA (per beneficiary). This is a lifetime limit, meaning you’ll need to total all transfers if you have multiple 529s to roll over into Roth accounts.
• Additionally, these rollovers are subject to annual Roth IRA contribution limits.

Also, just because this rollover type is not federally taxed doesn’t mean you won’t pay state taxes. Your state may still consider this transaction a “non-qualified withdrawal” — so be sure to check your state’s 529 plan website or talk to your trusted tax advisor for details.

What is the best education savings account for kids?

Although there isn’t a “one size fits all” on whether you should start a 529 plan or a Coverdell ESA for your child (everyone’s financial situation is different), here are a handful of examples of when one account type might be more advantageous than the other:

• If you’re mostly saving for higher education expenses, like college or trade school, 529 plans potentially offer more savings and more time to spend them.
• However, if you want more control over investment options, you may choose a Coverdell ESA. 529s typically have pre-approved portfolios, while Coverdell ESAs allow you to use real estate, private equity, and sometimes cryptocurrencies to save for education.
• On the other hand, 529 plans don’t have income restrictions and offer larger contribution amounts. This can help if the beneficiary is attending a high-cost school. Additionally, some states offer a tax deduction or credit for 529 plan contributions, which can help offset higher contributions from a budgetary standpoint.
• Coverdells, meanwhile, allow you to save for K-12 tuition, tutoring, and even homeschooling. 529s offer comparatively few K-12 qualified expenses outside of tuition.

Of course, you could even use both plans simultaneously — a Coverdell for K-12, and a 529 plan for higher education purposes. But keep in mind that state tax rules may differ from federal guidelines, so be sure to consult with your tax professional to determine the best plan for your family’s future.

Read More

• New Roth 410(k) Changes You Should Know
• Homeschoolers: 529 Plan Savings Could Soon Work for You
• 12 Education Tax Credits and Deductions
• Here's How the Child Tax Credit Could Increase Under Trump

One of the primary concerns when raising children is their education. While many students attend public or private schools, some parents might choose to homeschool their children for an alternative learning experience.

According to the National Home Education Research Institute (HERI), homeschooling has increased 36% in recent years, with more than 3 million homeschool students currently enrolled in the U.S..

Despite homeschooling being on the rise, the IRS didn't used to consider this method of education a “school.”

The nonschool status has barred homeschooling educators from claiming popular federal tax breaks, such as 529 plans, which offer tax-advantaged savings for education, for many years.

However, that recently changed with President Donald Trump's "One Big Beautiful Bill" (OBBB). A provision in the mega-tax legislation stipulates that 529 plans can be used for homeschool expenses.

There might be more ways you can save on expenses as a homeschooling educator. Here’s more of what to know.

529 plan for kids: College, public and private school

Current federal law allows tax-advantaged accounts such as Coverdell Education Savings Accounts (ESAs) or 529 Savings plans to help pay for K-12 and higher education (and 529s might even be used for retirement, thanks to the SECURE 2.0 Act).

The benefit of contributing to these accounts is that they allow you to make tax-free withdrawals for qualified expenses, which include any interest the account accrues.

What’s a “qualifying expense?” Some common examples that might be allowed for 529 plans include:

(Note: Coverdells generally cover a broader range of qualified expenses).

• Tuition (up to $10,000 annually for eligible K-12 institutions)
• Books, school fees, supplies and equipment required for enrollment
• Room and board (for students attending at least half time; off-campus rules differ)
• Computers, software and internet access
• Special-needs services and costs for registered apprenticeship programs

Note: The OBBB increased the annual withdrawal threshold to $20,000 for tax year 2026. Additionally, more types of qualified expenses are allowable for K-12 costs in 2025. For more information, check out Kiplinger's report, Money for Your Kids? Three Key Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's Finances.

Although Coverdells can be used for homeschool expenses, their income limits could exclude many families from using these tax-advantaged savings accounts.

On the other hand, 529 plans have no income limits and can be used for public, private or religious schools. But before the OBBB, federal law didn't allow 529 plan distributions to be used for homeschooled students (state laws may vary).

However, that has now changed under the OBBB.

New homeschooling tax breaks?

Historically, the IRS hadn't provided federal tax breaks for homeschooled education.

While some states, such as Illinois and Minnesota, offer state-level tax credits, there was very little federal tax relief for parents homeschooling their children in most of the U.S..

But a provision in the OBBB tax bill allows tax-exempt distributions from 529 savings plans for “additional educational expenses.” This includes eligible costs for elementary, secondary and homeschooled students.

Qualifying educational expenses for these students include:

• Curriculum materials
• Books and other instructional materials
• Tutoring or educational classes outside the home
• Testing fees and fees for dual enrollment in a higher education institution
• Online education materials
• Educational therapies for students with disabilities

This tax provision is big news for those with K-12 children, especially those who homeschool.

Homeschool can be expensive

The average cost of homeschooling an elementary school student is $1,295 per year, according to a survey conducted by the Home School Legal Defense Association (HSLDA). Middle and high school student costs are even higher, at about $1,636 per year.*

Apart from Coverdell savings accounts, there were few tax breaks to cushion homeschool expenses before the OBBB introduced tax-free withdrawals for homeschooled students.

Although parents of homeschoolers don't send their children to public school, they still pay for public schools through property taxes. This has been a source of contention in the homeschool community for years, particularly because:

• Students who live in rural areas (and might have tougher access to schools) make up 41% of homeschoolers.
• About 15% of parents choose to homeschool due to their child’s physical or mental health challenges, according to the American Institutes for Research, a nonpartisan research organization.

A federal tax break, such as that offered through a 529 plan, provides homeschooling families with tax relief, particularly if the family pays into the public school system and/or homeschools out of necessity.

*The survey conducted by the Home School Legal Defense Association (HSLDA) sampled 4,000 homeschooling families from all 50 states, Washington, D.C., and Puerto Rico. The families who responded had an average of two homeschooled students.

Back-to-school savings for homeschoolers

In addition to 529 plans, here are several ways homeschool parents might save on K-12 education costs for the upcoming school year:

• See if your state offers financial assistance, tax credits or other options to help cover homeschooling expenses. You can visit your state’s Department of Revenue or Department of Education websites for details.
• Enroll your child in city or town-led extracurricular activities if available. Programs sponsored by the local government might be more cost-effective than privately led alternatives.
• Sites such as Easy Peasy Homeschooling offer free curriculum options and printable materials for homeschool educators. These resources might be used in conjunction with lesson plan materials.
• Retailers such as Barnes & Noble and Target sometimes offer promotional codes for homeschooling parents and educators. To use these discounts, you’ll need to sign up for an account and verify your teacher status with a homeschool ID or similar method of verification.

Read More

• Claiming the Standard Deduction? Here Are Ten Tax Breaks For Middle-Class Families in 2025
• New 'Trump Account' for Child Savings
• Three Major Changes for Parents in 'Big Beautiful Bill'
• Family Tax Credits That Can Save You Money

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at five questions on 529 college savings plans. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

Q1: Unused Funds

We funded a 529 college savings plan for my son. We used money in the account for his college. He is now done with school, and there are still unused funds in the 529 account. What can we do with this money without paying tax on it?

If you funded a 529 plan, and the beneficiary decides not to go to college, or he or she did go to college, and there are funds remaining at the end, there are several tax-free options for using the leftover money:

• Keep the funds in the account for the beneficiary’s grad school, etc.
• Use the 529 money to pay for certain apprentice programs for the beneficiary.
• Roll over leftover funds to a 529 plan for another family member’s education needs.
• Use up to $10,000 to help pay off the beneficiary’s college debt. It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty.
• Roll over funds from a beneficiary’s 529 plan to an ABLE account for a disabled beneficiary or the beneficiary’s disabled siblings.
• Some excess 529 funds can be transferred tax-free to a Roth IRA for the 529 beneficiary in a direct trustee-to-trustee transfer. There are key rules to meet: The 529 account must have been open for at least 15 years, with the same beneficiary. There is a $35,000 lifetime cap. 529 contributions made in the prior five years are ineligible for the transfer. And annual 529 distributions for this purpose can’t exceed the annual contribution limit for Roth IRAs, which is $7,000 in 2025.

Note that any actual contributions for the year made to any IRA owned by the beneficiary count against this limit. For example, let’s say a 529 plan beneficiary contributes $2,000 to his traditional IRA in 2025. Only $5,000 of leftover 529 funds can be transferred to his Roth IRA in 2025.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q2: Off-Campus Housing

My daughter is currently a sophomore in college. Next year, she and some friends are planning to live in an apartment off-campus. Can I use 529 funds to pay for her share of the rent, utilities and food?

Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers and internet access. 529 funds can be withdrawn tax-free to cover off-campus housing, food and utilities, but the distribution amount cannot exceed the room and board allowance that the college includes in the cost of attendance. You should be able to get this figure from the college’s website.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q3: Study Abroad

Can I use 529 funds to pay for a college student’s studies abroad?

In many cases, yes. A 529 plan can be used for any college that participates in the U.S. federal student aid program. If a student is enrolled in a U.S. college and chooses to study abroad through the school’s program for a semester or two, the study-abroad program will be 529-eligible, provided the U.S. college is eligible and the college accepts the study-abroad credits. If the child decides to enroll in a non-U.S. college for his or her full college education, then that foreign university must participate in the U.S. federal student aid program. Believe it or not, many foreign colleges do participate and would therefore qualify as eligible schools for 529 purposes.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q4: Funding a 529 Plan

I am currently taking required minimum distributions (RMDs) from my traditional IRA. Can I roll over part of that RMD tax-free to fund a 529 plan for my granddaughter?

Unfortunately, there is no tax-efficient way to use money in your IRA to fund a 529 plan. So, for example, if you want to use your RMD money to put into a 529 account for your granddaughter, you will be treated as first receiving the RMD, which would be all or partially taxable to you, and then making a post-tax contribution to the 529 plan.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q5: Refund from the University

I used 529 funds to pay for my son’s college tuition and board. My son received a check from the college refunding some of the amount that was paid. Is that amount taxable to me?

The tax laws give relief in this situation, provided you act in a timely manner. Tax legislation enacted in 2015 waives tax and penalties if, after a distribution is made from a 529 account, the student gets a refund from the college or university. To qualify for relief, you generally must redeposit the funds into the 529 account for the same beneficiary within 60 days. The recontribution is treated as principal.
— Joy Taylor, Editor The Kiplinger Tax Letter

We have already received many questions from readers on topics related to annuities, health savings accounts and much more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about a tax topic. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Read more

• Ask the Editor, April 18, 2025: Questions about amended returns
• Ask the Editor, April 11, 2025: Questions about IRAs, RMDs and PTPs.
• Ask the Editor, April 4, 2025: Questions about the new tax bill, estate tax, and muni bonds.
• Ask the Editor, March 28, 2025: Questions about filing tax returns, QBI deductions, and estimated tax payments.
• Ask the Editor, March 21, 2025: Questions on reporting income and deductions.

College costs add up quickly. Especially when you consider that average published tuition and fees are $11,950 at public four-year colleges for in-state students, $31,880 for out-of-state students, and $45,000 at private nonprofit four-year colleges. Include room and board, books, and other expenses and the total cost of attendance can hit the wallet hard.

The best 529 plans for 2026 are excellent tools for saving for college, and make smart additions to your estate and retirement planning strategy, too.

If you're looking for ways to save for your child or grandchild’s future college expenses, you might have considered opening one of these tax-advantaged plans.

Tax-free uses for 529 funds have expanded in recent years to include other educational costs, such as tuition for kindergarten through 12th grade and apprenticeship programs. The One Big Beautiful Bill, signed into law July 4, 2025, has further extended the ways you can use 529 money, including a wider range of postsecondary educational programs.

How do you choose the right one?

529 plans allow you, the contributor, to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses. 529 plans are gaining traction as a premier education savings tool because, despite being funded with after-tax dollars, all investment growth is tax-free.

However, 529 plans can vary. To select the best one, you’ll need to choose which type of plan makes sense for you by comparing tax breaks, benefits for state residents, fees, contribution options, withdrawal restrictions and investment options.

Choosing the right plan takes research, but it’s worth it. An easy place to start is by checking out these top-ranked 529 plans.

Best direct-sold 529 plans

Direct-sold 529 plans are issued directly from a state financial institution. If you choose one of these plans, you’ll be responsible for managing your own investments within the plan’s online account portal. For this reason, these plans are often cheaper than investor-sold plans.

In its most recent November 2025 report, Morningstar awarded its highest Gold Medalist Rating to the top direct-sold 529 plans, citing their low costs, strong investment options and exceptional stewardship for 2026.

1. Utah's my529: Known for low fees, customizable options and strong oversight.
2. Illinois' Bright Start Direct-Sold College Savings Plan: Offers cost-effective index options, a diverse fund lineup, and high-quality management.
3. Alaska's T. Rowe Price 529 Plan: Formerly known as the T. Rowe Price College Savings Plan, this plan features actively managed portfolios from T. Rowe Price with strong long-term performance potential.
4. Massachusetts' U.Fund College Investing Plan: Managed by Fidelity, with very low-cost index funds and solid age-based options.
5. Pennsylvania's PA 529 Investment Plan: Vanguard-managed with ultra-low fees and excellent passive investment choices.

Best adviser-sold 529 plans

Adviser-sold 529 plans are available through an investment firm. These accounts typically charge a higher fee, but financial advisers manage the plan’s investments for you. Some savers feel these accounts are worth the extra cost because of the access to professional investment advice, actively managed investments and flexible portfolios.

According to Morningstar's latest 529 ratings, released in November 2025, no adviser-sold plans earned the top Gold Medalist Rating. (All five Gold-rated plans are direct-sold due to their exceptionally low costs, strong oversight and investment quality).

Even so, several adviser-sold plans received the next-best Silver rating, making them strong options for those working with a financial adviser.

Top Silver-rated advisor-sold plans highlighted in Morningstar's report include:

1. Ohio's BlackRock CollegeAdvantage 529 Plan: Features a solid lineup with BlackRock funds, good risk management and competitive fees.
2. CollegeAmerica (adviser-sold plan): Managed by Capital Group American Funds, with strong long-term potential. It's the largest 529 plan overall.

Other notable adviser-sold plans may also earn Silver or Bronze ratings, such as the Illinois' Bright Directions program, which was upgraded recently and is quite popular for its low fees.

Check out the full Morningstar 529 ratings report for detailed comparisons:

529 prepaid tuition plans

Another college savings option worth considering is a 529 prepaid tuition plan. This type of plan lets savers prepay tuition at today’s tuition rates at eligible public and private colleges or universities. According to FINRA, "Most states guarantee that the funds you put into a prepaid plan will keep pace with tuition."

Prepaid tuition plans only cover tuition expenses, unlike 529 plans, which cover other qualified expenses, such as room and board, books and supplies. You can fund these accounts with one lump sum or through installment payments. Often, these plans must be used within 10 years, or the interest on initial contributions could be lost.

As of early 2026, there are 18 state-sponsored 529 prepaid tuition plans. However, many are closed to new enrollments, due to ongoing funding challenges.

Only seven state plans are currently open to new applicants, and all require state residency to participate.

Additionally, there is one national institution-sponsored prepaid plan, called Private College 529 Plan, which has no residency requirement, focused on participating private colleges.

• Florida: Stanley G. Tate Florida Prepaid College Plan. Popular, state-guaranteed and flexible for in-state and out-of-state use.
• Massachusetts: U.Plan Prepaid Tuition Program. Covers a percentage of tuition and fees at participating MA schools.
• Michigan: Michigan Education Trust (MET). Contract-based, covers tuition and fees at Michigan public institutions.
• Nevada: Nevada Prepaid Tuition Program. Locks in rates for credit hours earned and usable in-state or out of state.
• Pennsylvania: PA 529 Guaranteed Savings Plan. Credit-based, guaranteed growth tied to the increases in tuition.
• Texas. Texas Tuition Promise Fund. Covers tuition and fees at Texas public colleges, with limited enrollment windows.
• Washington. Guaranteed Education Tuition (GET). Unit-based and state-guaranteed. Recently reopened with favorable pricing.

529 plans can be part of your estate planning

Investing in a 529 plan is a great way for parents or grandparents (via the grandparent loophole) to pass down wealth to the next generation. By helping college students graduate with lower or no student debt, you'll give your kids a leg up when it comes to starting their careers.

For students interested in lower-income careers such as the arts or nonprofit work, graduating without debt might mean the difference between pursuing their dream career or slogging through a high-paying job they dislike to pay off debt.

Another benefit of a 529 college savings plan is its potential to jump-start your child's or grandchild's retirement savings. Thanks to provisions in the SECURE 2.0 Act, families can now roll over funds tax-free and penalty-free into a Roth IRA owned by the plan's beneficiary.

This rollover is subject to a lifetime limit of $35,000 per beneficiary, across all 529 accounts, and must meet these key conditions: The 529 account must have been open for at least 15 years, but contributions and earnings from the past five years are ineligible. The beneficiary must have earned income at least equal to the rollover amount in that year. Annual rollovers are capped at the Roth IRA contribution limit for the year — $7,500 in 2026 for those under age 50. These amounts are reduced by any other IRA contributions the beneficiary makes.

This flexibility reduces the risk of overfunding a 529 plan and provides a powerful way to shift education savings to tax-free retirement growth.

What's not to like about this versatile savings tool? The annual contribution limit is that of the beneficiary, not the parents. Not all states have revised their rules to follow the federal government's expanded uses for 529s, so check your state's policies.

Be sure to read: How This 529 'Superfund' Strategy Can Transform Your Estate Plan

Related Content

• How This 529 'Superfund' Strategy Can Transform Your Estate Plan
• Using a 529 Plan? Here’s What to Keep in Mind
• Three Key Ways You Can Help a Child or Grandchild Pay for College
• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)

More families have been taking advantage of 529 plans than ever, with the number of new accounts opened rising each year. And thanks to this surge in popularity, 529s have just hit a new milestone.

Savings in 529 plans across the country have surpassed half a trillion dollars for the first time, according to the College Savings Plans Network (CSPN), a network of the National Association of State Treasurers. Over $508 billion has been invested across 16.8 million open 529 accounts nationally, with the average size of each account increasing from $13,188 in 2009 to $30,295 in 2024.

529 plans are powerful tools that can help you tackle rising education costs. So if you’re looking to save for your child or grandchild’s future college expenses, opening a 529 plan could be the best way to do so, given the plan's favorable tax treatment and the rising cost of a college education.

Mary Morris, Chair of the College Savings Plans Network and CEO of Invest529 says she finds it “encouraging” to see families increasingly recognize “the importance of postsecondary education and that 529 plans exist to help them make that a reality.”

Here’s what you need to know about 529 savings plans and why they’re more popular now than ever.

529 plans and why they’re so popular

529 plans allow a contributor to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses. The main benefit? While 529 contributions have to be made with after-federal-tax money, the contributions grow free from federal or state tax.

But there are two additional benefits that 529s have gained fairly recently that make them increasingly attractive savings vehicles.

The first benefit is the ability to roll over unused funds from your 529 plan to a Roth IRA, thanks to changes made to the Internal Revenue Code by the SECURE 2.0 Act. By rolling over unused funds from a 529 account into a Roth IRA, individuals will now be able to avoid income tax and tax penalties that occur when withdrawing funds for non-education expenses. But there are limitations.

The other benefit? It’s what’s referred to as the “grandparent loophole.” The new streamlined FAFSA (which starts with the 2024–25 award year) recently made changes to how distributions are treated, giving grandparents a positive advantage. On the 2024-25 FAFSA, students are no longer required to report cash gifts from a grandparent or contributions from a grandparent-owned 529 savings plan. Because of this, grandparents can now use a 529 plan to fund a grandchild’s education without impacting their grandchild's financial aid eligibility.

Bottom line

The main reason to invest in a 529 plan is because of its advantageous tax deferral and growth strategies. But additional benefits, like the ability to superfund a 529 (avoid paying gift taxes on large, one-time contributions to a 529 plan through 5-year gift tax averaging), tax-free rollovers to Roth IRAs and contributions from grandparents no longer counting against financial aid eligibility, have made 529 plans even more appealing in recent years.

Related Content

• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
• You Should Be Investing in a 529 Now for Your Kids' or Grandkids' Tuition
• Highest Paying College Majors (and 10 Lowest)
• Keep Track of 529 Plan Spending with Credit Cards for Kids and Teens

Editor’s note: This is the second article in a six-part series focused on paying for education using smart financial and estate planning. Other articles focus on direct tuition payments, Coverdell Education Savings Accounts, Uniform Transfer to Minor Accounts (UTMAs), education trusts and family loans. See below for links to the other articles.

When it comes to preparing to pay for a child’s education, starting early can make a world of difference. With the rising costs of tuition and educational expenses, having a solid savings plan is essential to ease the financial burden and pave a smooth path for your child, grandchild or someone else you care about.

One way to start saving in advance is to set up a 529 plan — a tax-advantaged investment account specifically for education-related costs. This plan derives its name from the IRS code under which it is authorized, Section 529. Every state (except for Wyoming and the District of Columbia) offers a 529 plan, each with its own variations. You do not need to be a resident of a particular state to establish a 529 plan in that state, allowing you to shop around and choose the best plan for your situation.

What you need to know before setting up a 529 plan

When you set up a 529 plan, you contribute after-tax dollars and, therefore, have no initial federal income tax ramifications. Over half of the states with plans offer a full or partial state income tax deduction or credit for 529 plan contributions, although some states limit the tax breaks to contributions to in-state plans.

The primary benefit of a 529 plan is that the contributed assets grow income- and capital gains tax-free in the 529 account and are not taxed when they are taken out as long as they are used to pay for schooling or other “qualified educational expenses” for the beneficiary. The avoidance of all taxes on earnings within the account provides a powerful incentive for people to start saving when the beneficiary is young and take advantage of assets compounding tax-free over time.

It is important to understand what counts as a qualified educational expense (QEE) because distributions for non-qualified expenses from a 529 plan will be subject to income tax on the investment gains as well as an additional 10% penalty. For college and vocational school, QEEs include the full amount of the tuition, books and supplies, computers, any special needs equipment as well as room and board if the student is enrolled at least half-time. They also include up to $10,000 in student loan payments and the cost of any apprenticeship programs.

For elementary and secondary schools, a 529 plan will cover up to $10,000 in tuition expenses per year (per beneficiary) for private, public or religious schools. For private secondary schools and boarding schools, this will generally not be enough to cover the full amount of the tuition, thus, additional planning beyond using a 529 plan may be needed.

Each 529 plan will offer a range of investment options, which include various mutual funds and exchange-traded fund (ETF) portfolios across different asset classes. Part of the process of selecting a plan is evaluating the available investment options and understanding the fees associated with them, as each 529 plan is different.

Contributing to a 529 plan

It is important to note there is a cap on the total amount that can be contributed to a 529 plan, regardless of who contributes to it. The contribution limits vary from state to state but are generally high; the total cap ranges from $235,000 to $530,000 in 2024. States do not impose annual contribution limits, meaning theoretically you could max out the plan in any one year. However, your contribution is treated as a gift to the beneficiary, making it subject to federal gift tax law. Accordingly, many contributors will make contributions each year up to the applicable annual exclusion amount ($18,000 for an individual and $36,000 for a married couple in 2024) and fund a 529 plan account over a number of years.

Once a contribution has been made to the 529 plan, it is no longer part of the giftor’s estate for tax purposes. This makes 529s a great way for parents, grandparents, aunts, uncles, godparents and friends to transfer wealth without paying estate tax upon their death.

For financial aid purposes, it may be more helpful to have the 529 plan owned by the grandparent (or someone else), not the parent. The value of a student-owned or parent-owned 529 plan is included as an asset on a student’s FAFSA and thus might reduce the amount of aid a student is eligible to be given. However, a plan owned by a grandparent or other party is not included on the FAFSA and may be effectively ignored in the financial aid calculation.

Using 'unused' 529 plans

Owners of 529 plans frequently ask what happens if the money is not used for its intended educational purposes. For example, what if the beneficiary receives a scholarship, chooses an institution with less expensive tuition or simply decides not to pursue additional education? To avoid 529 dollars being “lost,” the IRS allows the owner to change the beneficiary, as long as the new beneficiary is a “qualified family member” of the original beneficiary, not an unrelated individual (see note below).

As a result of the recently enacted SECURE 2.0 Act, unused dollars from a 529 plan can now be rolled into a Roth IRA tax-free up to $35,000 if the 529 plan has been in existence for 15 years and there have not been any contributions to the account within the last five years. The rollover is also subject to standard Roth annual contribution limits, so it would take several years to complete the maximum rollover of $35,000 from a 529 plan to a Roth IRA.

Benefits of contributing to a 529 plan:

• Tax-free asset growth within the account
• Flexibility to pay for qualified educational expenses (including room and board)
• High maximum total contribution limits
• Transferable to another qualified family member
• A portion can be rolled into a Roth IRA if certain stipulations are satisfied
• Can be used for elementary and secondary schools ($10,000 annual limit)

Considerations for contributing to a 529 plan:

• Contributions are subject to federal gift tax laws and limitations
• May reduce financial aid (student- or parent-owned plans are included in FAFSA calculation)
• Investment options are limited to those available through the state-sponsored plan

If you are starting to save early for education, a 529 plan can be a powerful way to tackle the rising costs of education with significant tax advantages and flexible usage for qualified educational expenses. Starting early can give your savings the time it needs to grow and benefit from compounding tax-free. While each state’s plan varies and contribution rules apply, the ability to support a wide range of educational needs and even transfer funds to family members makes the 529 plan a robust option. By understanding the specifics of your plan and strategizing your contributions, you can maximize your educational investment and help secure a brighter future for those you care about.

The next article in this series will be a deep dive into Coverdell Education Savings Accounts.

Note: Qualified family members include the original beneficiary’s spouse, child (or stepchild), sibling, aunt or uncle, niece or nephew, first cousin (as well as spouses of any of those mentioned). It also includes in-laws (sister, brother, mother and father).

Other Articles in This Series

• Part one: Direct Tuition Payments: A Tax-Efficient Way to Pay for School
• Part three: Coverdell Education Savings Accounts: A Deep Dive
• Part four: UTMA: A Flexible Alternative for Education Expenses and More
• Part five: How an Irrevocable Trust Could Pay for Education
• Part six: How Intrafamily Loans Can Bridge the Education Funding Gap

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

Saving or paying for college can be expensive. 529 plans can blunt the cost. But what if the 529 account has funds left after the beneficiary’s education, or that beneficiary decides not to attend college or any apprentice program? 

There are a number of options for using the leftover funds. You can roll over the funds tax-free to a 529 plan for another family member's education needs. You can use up to $10,000 tax-free to help pay off some of the beneficiary's college debt (this is a lifetime limit). You can roll over funds tax-free from a beneficiary's 529 plan to an ABLE account if the beneficiary is disabled or to an ABLE account for the person’s disabled sibling.

SECURE 2.0 provides one more option. Starting this year, some 529 funds can be transferred tax-free to a Roth IRA for the 529 beneficiary in a direct trustee-to-trustee transfer.
There are key rules to meet:

• The 529 account must have been open for at least 15 years, with the same beneficiary. 
• There is a $35,000 lifetime cap. 
• 529 contributions made in the prior five years are ineligible for the transfer. 
• Annual 529 distributions for this purpose can’t exceed the annual pay-in limit for Roth IRAs, which is $7,000 in 2024. Note any actual contributions for the year made to any IRA owned by the beneficiary count against this limit. For example, let’s say a 529 plan beneficiary contributes $2,000 to his traditional IRA in 2024. Only $5,000 of leftover 529 funds can be transferred to his Roth IRA in 2024.
• The beneficiary must have earned income for the year at least equal in amount to the Roth IRA contribution transferred from the 529 account.

Here’s a tip: If you satisfy the requirements above, complete a trustee-to-trustee 529 transfer into the Roth between January 1 and April 15, 2024, and designate the Roth contribution with your IRA sponsor as a 2023 contribution, then it seems that you could do a second transfer for 2024. That’s because the Internal Revenue Service treats the first transfer as a Roth contribution for 2023. 

Be wary of state taxes: State tax treatment of recent 529 expansions doesn’t always follow federal law. You see that with the transfer of some leftover 529 funds to a Roth IRA. Nonconforming states include California, Colorado, Connecticut, Delaware, Michigan, Minnesota, Montana, New Jersey, New York, Oklahoma and Vermont. So make sure to check the tax implications in your state.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe. 

Related stories

• 19 IRS Red Flags: What Are Your Chances of Being Audited?
• 11 Education Tax Credits and Deductions
• Have Leftover 529 Funds? Expert Strategies for Unused Balances

College 529 plans have been around for about 25 years. In fact, all those years ago, I launched the first public relations campaign explaining to parents and grandparents how they can save for their loved one’s secondary education.

529 plans derive their name from Section 529 of the Internal Revenue Code. They were birthed because college tuition rates and costs were increasing at two to three times the rate of inflation. Student debt was mounting, and the government felt it had to offer tax-advantaged savings.

529s are a tax-advantaged savings plan to help pay for education. Originally, they were designed for post-secondary education costs, but in 2017, they were expanded to include K-12, and in 2019, they started including apprenticeship programs, as well.

How popular are 529s?

In 2021, total investment in 529s hit $480 billion, but by 2022, that had fallen to $411 billion, according to College Savings Plan Network. Some people started to back off from this investment because if you withdrew money from a 529 to use for a purpose other than the designated approved educational uses, you would have to pay a penalty.

New rules

529 provisions in the SECURE 2.0 Act came into effect this year. SECURE 2.0 has lots of advantages, but with regard to 529s, it enables families to convert leftover 529 money into retirement savings that allows the avoidance of the penalty for non-educational withdrawals.

But there are a few rules you need to be aware of before setting up a 529, including:

• The 529 plan must be open for a minimum of 15 years before you can do a 529-to-Roth IRA transfer.
• The beneficiary of the 529 plan must also be the owner of the Roth IRA.
• 529 plan contributions made within the last five years aren't eligible for a tax-free transfer.
• There's a lifetime maximum of $35,000 for 529-to-Roth IRA transfers.
• Roth IRA annual contribution limits apply.
• Always check into the fees that will be charged.

It can get confusing if you are not familiar with the Roth IRA rules.

You also can't contribute more in any given year to a Roth IRA than you earned in that year. So, if for example, a 529 plan beneficiary earns only $3,000 in a year, that's the most they could transfer to their Roth IRA that year.

Finally, it's worth noting that if you do a 529-to-Roth IRA transfer, you may not put additional money into your Roth IRA that year if doing so would cause you to exceed the annual contribution limit. For example, the Roth IRA contribution limit is $7,000 for 2024, which means you can transfer $7,000 from your child's 529 plan to a Roth IRA in their name. They won't be able to make any additional IRA contributions in 2024 without incurring penalties. However, they could save for retirement in a 401(k) or some other tax-advantaged retirement plan.

Setting up a 529 for your loved ones

There are over 100 529 plans in the U.S., and they are all offered via states. You don’t have to use your state’s 529 to get the benefits. They are tax-free at the federal level, and many states offer their residents a state income tax deduction or a tax credit for 529 contributions to one of their plans. Do some research into the plans available to you to learn more about the investment options you'll have and what kind of fees they charge before you open an account.

Once you've chosen your plan, you must fill out an application, providing information about yourself and your child. You can do this with help from your financial adviser.

Once your account is set up, you can fund it on the schedule that works best for you. That could mean making irregular contributions whenever you have the extra cash. Or you could set up automatic deposits on a recurring schedule. Many 529 plans are designed to easily accept financial gifts from other family members and friends as well.

I have always recommended that parents set up a 529 for their child at birth. Rather than receiving lots of scratchy baby clothes that need to be dry cleaned, wouldn’t it be better to have your friends and family donate to your child’s future?

How a 529 plan works

Most 529 plans are pretty simple. You can have a savings plan locked-in rate or one that offers a variable rate. The IRS does not impose an annual contribution limit on 529s, but it does set limits on aggregate contributions, depending upon the state. In most cases, this means that you can contribute a large investment. But check with your accountant, because in most cases this contribution may be considered a gift by the IRS. The gift limit, without tax consequences, for this year is $18,000 for an individual and $36,000 for a married couple.

You'll also need to choose what to invest those 529 funds in. Just use common sense. When the child is young and has lots of time before college or other education, you can invest in a more aggressive portfolio. This provides time to recover from market downturns. But, as the withdrawal date gets closer, and you will need to count on the money being there, you should move the portfolio into more conservative investments.

I suggest that you try to have a regular investment schedule so you keep building the 529. One benefit is that you can change beneficiaries. That way, if one child decides not to pursue their education, you can switch — or you have the Roth IRA option.

My best advice is to remember that you should not compromise your own retirement savings to help your offspring with their education. They can always borrow for college; you can’t borrow for your retirement. And frankly, if you have not saved enough for retirement, you may become an economic burden to your kids.

Related Content

• 529 Plans: Give the Gift of Education (and Compounding)
• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
• Using a 529 Plan? Here’s What to Keep in Mind
• Forget ‘Girl Math’: Handle Your Money Like a Woman
• New Love for Older Adults: Don’t Make the Same Financial Mistakes

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As the holiday season progresses and the end of the year quickly descends upon us, many minds turn to the subject of giving. Grandparents in particular seek to bring joy to their grandchildren’s faces and enrich their lives at this time of year. Few things in life are as rewarding as seeing a child’s eyes light up when they get the gift they wanted, especially when you’re the one who was able to give it to them! What is arguably even more rewarding is helping to set our loved ones up for long-term success and ease some of the larger burdens they (or their parents) are likely to face as they grow up.

Giving cash directly to the children or their parents is how most grandparents approach this, but as soon as the gift is given, control is surrendered, and this can be problematic for some. Saving for college is one of the biggest concerns many parents and students have these days.

Overall inflation has been abnormally high for the past couple of years, but even the 9% high watermark of June 2022 is dwarfed by the 12% annual inflation experienced between 2010 and 2022 in U.S. college tuition rates. This inflation helps in part to explain the current crisis of student loan debt in the U.S., and it’s reasonable that grandparents would wish to keep their family out of this predicament.

Managing the size of your estate is getting more important

Generosity, estate planning and the turning of the calendar all intersect here. As the current estate tax exemption sunsets at the end of 2025, managing the size of one’s estate is starting to become more of a priority and is an additional motivation to give within your lifetime. The 529 structure solves for tax efficiency, control over use of the gift and takes advantage of continued long-term compounding.

Current gift tax rules allow for each individual to gift up to $17,000 per year per person. So, a married couple may gift $34,000 to each child and grandchild without any of it counting against their lifetime exemption of $12.92 million or needing to file a gift tax return. The 529 uniquely allows a frontloading of five years of such gifts ($85,000 per recipient, or $170,000 from a married couple).

Historically, 529 plans have been very underutilized across our society. One reason for this may be that the upfront tax benefit is not particularly exciting for most Americans. If your state has a plan, you may get some limited deduction on your state income taxes. Many states don’t have a plan, so there is no deduction on contributions, but to focus on this is to largely miss the point. The true tax benefit is not observable at the beginning but is quite significant over the course of the beneficiary’s life.

Most 529 plans are invested in college savings plans. Simply contribute, invest and target a certain account balance. Nine states offer a prepaid tuition plan for public colleges and universities. While locking in a tuition rate in advance sounds attractive, these plans are not for everyone, as they narrow the range of prospective schools from early on.

Qualified 529 expenses are more broadly defined than many may assume. In addition to tuition, funds can be used for housing, meal plans, books, supplies, laptops and even internet service provided the institution deems these items necessary for the course of study.

Solutions for overfunding concerns

One concern about 529 plans we hear raised is the danger of overfunding the account, or the funds being unused if the beneficiary decides on a different path. Given the penalties involved in using plan funds for non-qualified expenses, it is a valid question. Thankfully, the plans allow the account holder to change beneficiaries without any tax consequences so long as the new beneficiary is a member of the current beneficiary’s family. If the new beneficiary is younger than the prior one, it’s likely worth a change in asset allocation to reflect the new time horizon.

Another concern is whether such gifting has an impact on the student’s application for federal aid, which can also have a major impact on the cost of college. While 529 plans owned by parents are considered and do have some impact, plans owned by grandparents are not considered at all on the FAFSA (Free Application for Federal Student Aid) form. From a grant or aid perspective, the grandparent is simply in a much better position to gift and retain control through the 529 structure than the parent.

Congress expanded and enhanced the 529 structure

Enhancements to the original 529 structure have made this gift even more valuable. Recent legislation has seen Congress quietly expand and enhance the 529 structure as a possible long-term solution to the affordability issue in education. Back in late 2017, the Tax Cuts and Jobs Act expanded the eligibility of 529 funds to include private and parochial K-12 schooling.

This legislation was then built upon in 2019 by the first SECURE Act, which allowed 529 funds to be used to pay down up to $10,000 in student debt. The most recent enhancement came in 2022 with the SECURE 2.0 Act, which allows for unused 529 funds, starting in 2024, to be rolled over into Roth IRA assets at the annual contribution limit up to a lifetime maximum of $35,000 for a beneficiary. The account needs to have been open for at least 15 years. The importance of being able to continue to compound these assets in a tax-free environment and remove the 529-related investment and distribution restrictions should not be underestimated.

Whether the priority is reducing the size of your estate, providing for the next generation, being tax efficient or all of the above, the 529 plan should be considered a significant tool in your financial planning toolkit.

The information provided herein is for illustrative and education purposes only and is not intended to be and does not constitute specific investment advice. We urge you to consult with a qualified advisor before making any investment decisions.

Information contained herein has been obtained from sources believed to be reliable. While we have no reason to doubt its accuracy, we make no representations or guarantees as to its accuracy. The opinions and analyses expressed herein constitute judgments as of the date of this publication and are subject to change at any time without notice. Any decisions you make based upon any information contained in this publication or otherwise are your sole responsibility.

Specific securities mentioned are used as examples for illustrative purposes only and should not be construed as a recommendation. Further, it should not be assumed that investments in the securities identified and discussed were or will be profitable. Past performance does not guarantee future results. All investments involve risks including the loss of principal. Employees and related persons of FBB Capital Partners may, and in some instances do, hold positions or other interests in the securities mentioned herein.

Any forward-looking statements or projections herein are based on assumptions. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. You should not place undue reliance on forward-looking statements, which reflect our judgment only as of the date this information was published.

FBB Capital Partners, LLC (FBB) is a SEC-registered investment advisor located in Bethesda, Maryland. Additional information, including our services, advisory fees and other helpful disclosures, can be found in our Form ADV Part 2, which is available upon request or on the SEC's website at www.adviserinfo.sec.gov.

Related Content

• Five Things to Teach Your Kids about Money and Happiness
• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
• Three Key Ways You Can Help a Child or Grandchild Pay for College
• Using a 529 Plan? Here’s What to Keep in Mind
• Benefits of Doing Roth IRA Conversions Early in Retirement

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Higher education costs are still on the rise. Tuition inflation at public four-year colleges averaged 12% from 2010 to 2022, according to the Education Data Initiative. With this surge and the resuming of student loan payments this month, it’s no surprise families are looking closely at their 529 plans.

Some 529 plan account owners have discovered leftover balances, and determining how to handle unused 529 funds can be difficult. This article provides some insight to help you navigate the situation.

Background on the 529 plan

While most are familiar with the basic premise of a 529 plan, its primary allure is its tax-advantage benefit. You can save for future educational pursuits and withdraw the funds tax-free for qualified education costs. 

You might have unused funds for various reasons, including the beneficiary:

• Receiving scholarships that reduced the out-of-pocket cost
• Switching to a less expensive college
• Choosing not to attend college or leaving early
• Overestimating college expenses
• Inheriting money from relatives
• Completing a degree ahead of schedule
• Facing health issues, death or other unforeseen events

While the funds don’t expire, 529 plan account owners will pay a 10% penalty if they spend them on non-education expenses. The 10% penalty applies only to the earnings portion, though, and not to their original contributions.

Excess 529 funds represent both a challenge and an opportunity, and knowing your options is essential. While these plans are intended for educational purposes, life’s unpredictable nature can sometimes leave families with more than they anticipated.

Here are four strategies to avoid the withdrawal penalty.

1. Use 529 funds for additional education or training 

The journey of education and self-improvement is often unending. Even if your student has completed their primary educational goals, there is always more to learn. Consider leveraging the funds for postgraduate courses that can elevate their professional credentials. Alternatively, specialized certifications in emerging fields or vocational training can provide practical skills to improve their career prospects.

2. Transfer the 529 balance to another beneficiary

As family dynamics and educational needs evolve, transferring a 529 account to another beneficiary can be a smart move. Once one child is finished with their education, you might reallocate the remaining funds to their sibling or another family member.

3. Pay student loans with 529 funds

The SECURE Act of 2019 allows you to direct up to $10,000 from a 529 plan toward federal or private student loan repayments. One of my clients’ sons has a student loan balance of $18,000. Using $10,000 of the son's remaining 529 funds can knock the balance down to $8,000, making payments much easier to manage. 

Keep in mind the penalty-free payment applies only to student loans and no other consumer debts, such as credit cards. It’s also important to note that some states classify using 529 funds for student loan repayments as non-qualified, potentially incurring state income tax. Always consult with your financial planner to make sure you’re following proper procedures.

4. Roll extra 529 dollars into a Roth IRA

The SECURE 2.0 Act has opened another door for residual 529 funds: transferring balances to a Roth IRA. Starting in 2024, 529 plan owners will be allowed to convert tax- and penalty-free up to a lifetime limit of $35,000. 

It’s a strategic pivot toward retirement planning, but has a few restrictions, including that your 529 account must have been open for over 15 years and the amount you want to roll over must have been in your 529 for at least five years.

529 transfers, distributions and rollovers

However you choose to use the remaining balance in a 529 account, you’re faced with three potential strategies: a 529 rollover, a 529 transfer or a 529 distribution.

Here’s a quick explanation of each:

• 529 rollover. This involves redirecting your 529 savings into a Roth IRA. Although it’s technically a distribution, “rollover” is the generally accepted term for reallocating money from a 529 plan into a Roth IRA. The ability to roll over unused funds takes effect in 2024. It often starts with a withdrawal request form, but check your state’s specific guidelines.
• 529 transfer. Often, the simplest solution is to change the beneficiary of your current 529 account. As the 529 plan account owner, you can fill out a form on the 529 plan’s website to transfer the plan to another family member. A transfer keeps the money earmarked for educational purposes, but the 529 plan account owner will encounter penalties and taxes if the new beneficiary isn’t a qualified individual according to 529 plan rules.
• 529 distribution. Withdrawing funds from a 529 account is a straightforward process. From their online account, the account owner completes a withdrawal request form. Some plans allow account owners to download a form to mail in or request funds by phone. 

A few caveats to be aware of: Money withdrawn for qualified educational expenses or for student loan repayment (up to $10,000) is penalty-free. Using it for other purposes offers financial flexibility but is likely to incur taxes and penalties.

Next steps for your 529 plan funds

Managing the leftover funds in your 529 account can be a complex undertaking. While a DIY approach might seem tempting, it’s easy to overlook the nuances of 529 regulations. Your financial planner can help you understand your options and weigh the pros and cons so you can make a decision that aligns with your family’s financial goals.

Related content

• How to Prepare to Start Paying Student Loans Again
• Student Loan Borrowers See Struggle As Payment Pause Ends
• College 529 Savings Plans: How to Get the Most Out of Them
• When Choosing Funds for Your College 529 Plan, Don’t Make This Mistake
• Grandparents: Now Is the Time to Contribute to Your Grandkid's 529 Plans

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

If you have a 529 plan — a tax-exempt education savings account — you may already be tapping it this school year or considering tapping it soon. In the process, you’ll want to examine your long-term education goals, understand what constitutes as a qualified expense and have a tax-minded strategy for withdrawal. Here are a few considerations to keep top of mind while using your 529.

Remember your goals

Just like education, 529 plans offer many paths to success. In addition to covering tuition and fees for traditional college and K-12, a 529 can also cover trade and grad school, apprenticeships, study abroad programs — minus traveling costs — and other items like books, supplies, internet access and even student loan repayments.

When making withdrawals, think about your long-term education goals. Ask yourself if you plan to attend graduate school, go to vocational school or even study abroad. Taking a collective tally and potential timeline of expenses will help you understand when and how to make strategic withdrawals.

With that understanding, consider if using the money in the account makes sense now, or if you’d be better served saving it for anticipated future education expenses. If a client is early in an education journey and can comfortably pay for expenses out of pocket, I’ll often encourage them to consider allowing the 529 funds to continue to grow, reaping the benefits of compounding returns.

Understand the logistics

Once you do start making withdrawals, take stock of the limits of how much you can take at a given time. For instance, K-12 tuition expenses have a limit of $10,000 per year, while student loan repayments have a lifetime limit of up to $10,000.

Another part of this planning is understanding tax deductions, penalties and responsibilities. There’s a contribution portion and an earnings portion in all 529 plans. The earnings portion of the plan is not subject to federal income tax and usually not subject to state income tax if used on a qualified expense.

But you’ll face income tax and a 10% withdrawal penalty on the earnings portion if you use a 529 on a non-qualified expense. Non-qualified expenses include college application and testing fees, health insurance, extracurricular activities and transportation costs. The contribution portion is never taxed or penalized, as it’s made with after-tax dollars.

Tax reporting is the responsibility of the 529 account owner, and the IRS requires proof that withdrawals were indeed made for qualified expenses only. Keep track of all payment documentation accumulated throughout the year. This includes receipts of both processed and canceled payments, as well as ongoing billing statements. If the 529 is being used by your child — to pay for college textbooks, for example — be sure to have a discussion around saving documentation.

Keep in mind that withdrawals must be made during the same tax year as the incurred, qualified expense. While this is not an official rule, it’s implied by published IRS guidance. So, pay attention to semester tuition bills and try to align withdrawals as necessary.

In any instance, I recommend you consult with a tax and or legal professional to ensure you’re meeting all requirements and to avoid costly mistakes, as qualified expenses, taxes and penalties can vary by state.

Recognize your options

If education is no longer a goal for the intended recipient, don’t fret. Procedures vary by plan, but 529s offer the flexibility to freely move money from one beneficiary’s account to another. The account owner can also change the beneficiary to another eligible family member without facing penalties or taxes.

Starting in 2024, 529 plans will also offer the option to roll up to $35,000 into a Roth IRA. However, there are some conditions that apply. The account must have been in existence for at least 15 years, and only funds that have been in the account for at least five years (as well as the earnings on those contributions) may be moved. The conversion limit must also be equal to the annual Roth IRA limit (i.e., $6,500 in 2023), and the Roth IRA must also be in the same name as the 529 beneficiary.

Additionally, state rules and considerations apply. If your account qualifies, rolling the funds over can give you — or a loved one — a head start on achieving long-term financial success. This option is considered one of the most compelling features of 529s, according to a recent Vanguard survey.

Balancing education goals — especially for more than one child, or concurrent with retirement and big purchase goals — can be daunting. As a financial adviser, part of my job is to help highlight the big picture and keep you on track financially to achieve all your goals. With this lens, figuring out your finances can go from an arduous task to a celebration of your bright future.

related content

• How to Align Strategies for Student Loans and Retirement
• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
• College 529 Savings Plans: How to Get the Most Out of Them
• Grandparents: Now Is the Time to Contribute to Your Grandkid's 529 Plans
• 529 Plans Get a Boost With Tax-Free Rollovers to Roth IRAs

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

There are many different approaches to saving for college, but 529 plans are used by more Americans than any other option — 30% of Americans use a 529 plan. It’s easy to see why, since 529 plans offer a variety of benefits. But they aren’t a one-size-fits-all solution, and it’s important to consider if they are the right plan for you and your family. Here are some key reasons to consider a 529, as well as reasons to consider alternatives.

Reason No. 1 to use a 529: Tax deferral and growth strategies.

One of the most well-known advantages of a 529 savings plan is that the earnings and growth on the investments grow tax-deferred. So long as the expenses you ultimately pay for with the funds are for qualified higher-educational expenses (such as tuition, books and school supplies, room and board), the investment growth and earnings are also tax-free.

In essence, the 529 plan confers the benefits of tax-deferred growth like in an IRA or 401(k) plan, but with the added advantage that taxes aren’t due on cash distributions when it’s time to take funds out. This is a federal tax benefit, which can be fairly substantial for investors in higher tax brackets. There are not many types of accounts that allow these types of tax benefits.

Additionally, some states also allow for state tax deductions on contributions made into a 529 college savings plan. In my state of Colorado, for instance, there is a generous state tax deduction available — up to $22,700 per taxpayer, per beneficiary in 2024 for individual tax filers (or $34,000 per beneficiary per tax filing for joint tax return filers). That is a dollar-for-dollar reduction in state tax liability, which can be fairly powerful.

Certain states allow for tax deductions for contributions made to only their own state-specific plans, while other states will allow for tax deductions made to other states’ plans. Arizona, for example, allows up to $4,000 in state tax deductions for joint tax filers for contributions made to any 529 plan, not just Arizona 529 plans.

To understand the nitty-gritty details of your situation and state allocations, contact your financial adviser.

Reason No. 2 to use a 529: Gift tax benefits.

Taxpayers are allowed to gift a certain dollar amount each calendar year that is free of gift taxes. Normally, that means you can make an $18,000 gift each calendar year per individual (as of 2024). If you have a generous family member or extra cash to invest, this could be put in a child’s or grandchild’s 529.

However, due to special 529 rules, you can accelerate five years of contributions into a single calendar year so long as you file the appropriate forms with the IRS. That would mean an individual could contribute as much as $90,000 in one year to a beneficiary’s 529 without any gift tax ramifications. That would mean you can’t contribute funds free of gift tax for another four years, but typically there is a benefit to getting a larger amount of assets invested and generating growth and income now vs later.

Reason No. 3 to use a 529: Unused funds can be converted to a Roth IRA.

One issue with 529s has been if the plan is overfunded and the funds remain unused. For families on a tight budget, that creates a difficult choice between saving enough for themselves or providing ample funding for their kids' education. Beginning this year, the SECURE 2.0 Act added a new feature that allows up to $35,000 of unused 529 funds to be contributed to the beneficiary’s own Roth IRA over their lifetime.

There are some requirements that must be met, namely the 529 must be opened for at least 15 years, and the beneficiary must have enough earned income to make annual conversions into their Roth IRA. The contribution limits each calendar year match typical IRA contribution limits, so the full $35,000 amount will need to be made over successive calendar years provided eligibility is attained.

Since a Roth account generally provides tax-free distributions and does not require mandatory retirement distributions, converting assets to a beneficiary’s Roth IRA account could provide a lifetime of tax-free growth that helps give them a head start on their retirement savings. There is a good case to be made for planning to spend Roth IRAs last in retirement (dependent on each saver’s plan), meaning the assets can be invested more aggressively since they will not have mandatory distributions. This could create a good opportunity for maximized tax-free growth for the account beneficiary.

There is still some ambiguity to the new rules that need to be ironed out. Particularly, does the 15-year clock reset when a 529 beneficiary update is made? Or does the same clock reset when a 529 is rolled from one plan to another? Those are issues that should receive additional clarity in the future.

Reason No. 1 not to use a 529: Possible tax penalties.

Contributions to a 529 are considered a completed gift to the beneficiary, which can reduce the size of the gifter’s taxable estate. This may become a more important issue if Congress ends up shrinking the size of the estate tax exemption. Prior to 2018, the estate tax exemption was under $6 million, but is now $13.61 million per individual. As the government looks to find more sources of tax revenue, the estate tax exemption may come under the microscope in the future.

If a family needs funds saved for education to use for another purpose, it may be best to choose an investment option that provides greater flexibility when it comes to control. If you distribute funds from a 529 plan for non-qualified expenses, you’ll pay a 10% withdrawal penalty on the earnings portion of the withdrawal, and it will be taxed as income to the beneficiary. Some additional issues may arise, such as state-specific tax penalties or state income tax deduction recapture.

In short, if assets for a family member’s college savings can’t be invested long-term or earmarked, it might be better to consider investing in a taxable brokerage account or utilizing bank savings. These solutions won’t confer the same tax benefits, but will avoid the tax penalties if the assets need to be diverted to other purposes. If control of the funds is an issue, you can also utilize an UTMA, or custodial account, which allows the parent or custodian to direct the funds. Custodial accounts also confer the benefit of a portion (or potentially all) of the income produced from the account to be taxed at the beneficiary’s lower tax rate.

Reason No. 2 not to use a 529: College isn’t for everyone.

If there is uncertainty about the educational course of the beneficiary or child — perhaps they aren’t college-bound — it may not make sense to allocate a large investment to a 529 plan. There is a little flexibility in that 529 funds might be used for certain trade school or vocational programs, but only if they’re eligible for Title IV federal student aid. If a 529 owner has multiple children or grandkids, the ability exists to reallocate 529 assets to different blood relatives. However, if the family is small and there are few or no other beneficiaries to reallocate to, it would be prudent to avoid saving too much in a 529 plan.

Changes in 2019 also resulted in a few other 529 features. You can take a one-time distribution of up to $10,000 to make payments toward student loans or use up to $10,000 per year toward private school tuition. However, there is a “gotcha” with these two features — some states do not conform to the federal rules, meaning while the federal government would consider distributions for these purposes as qualified, your state may consider them non-qualified payments and assess tax penalties.

With changes in recent years, 529 plans have become more complex. It’s important to be aware of the pros and cons of investing in a college savings plan and to discuss them with your family and financial adviser team. Funding a college education can be very important to helping your family members achieve long-term success, and having the right strategy is critical.

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC-registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

Related Content

• 529s: No Longer the Ho-Hum Investing Device for College
• 529 Plans: Give the Gift of Education (and Compounding)
• Using a 529 Plan? Here’s What to Keep in Mind
• The Best Ways to Pay for College Involve Starting Young
• Three Key Ways You Can Help a Child or Grandchild Pay for College

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Wondering what to do with the cash locked in your 529 plan? You might not be alone. As of 2026, 529 college savings plans remain a dominant, tax-advantaged education savings tool.

As of June 2024 (the most recently available data), there were 16.8 million active 529 college savings plan accounts in the U.S., according to the College Savings Plans Network; some other sources put that number at 17 million.

However, perhaps your child has changed their mind about attending college, or you've saved more than needed for their education. Maybe you've been putting off opening a 529 plan altogether because you're worried about tying up money in an account you were afraid you couldn't access.

As a result of provisions in the SECURE 2.0 Act, you can roll over funds from your 529 plan into a Roth IRA, as long as certain conditions are met.

Here’s what you need to know about the changes, which went into effect at the beginning of 2024. For more information on 529 plans in general, check out our article 529 Plans: Everything You Need to Know About Saving for College.

What are the tax rules for 529 plans? 

The SECURE 2.0 Act contains numerous changes to retirement-related provisions. Under Section 126 (PDF) of the act, the Internal Revenue Code is amended to allow tax-free rollovers from 529s into Roth IRAs under certain conditions.

By rolling over unused funds from a 529 account into a Roth IRA, individuals can avoid income tax and penalties for withdrawing funds for non-education expenses. For this reason, we might see more families opening 529 savings accounts.

Section 126 of the SECURE 2.0 Act reads: ”Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education. They should be able to retain their savings and begin their retirement account on a positive note.”

How much can be rolled over? 

There's a limit on how much money you'll be able to roll over from your 529 plan to a Roth IRA. The limit for beneficiaries of 529 college savings accounts to roll over to a Roth IRA is $35,000 throughout their lifetimes. The lifetime cap remains unchanged at $35,000 per beneficiary under the SECURE 2.0 Act rules, which have been in effect since 2024.

However, these rollovers are subject to Roth IRA annual contribution limits. Contribution limits for 2026 are $7,500 (up from $7,000 in 2025) plus a catch-up contribution of $1,100 or $8,600 for people age 50 and older (up from $8,000 in 2025).

What are the limitations on 529 plan rollovers? 

While the ability to rollover funds from your 529 plan to a Roth IRA can be beneficial in many cases, there are a few limitations.

• Your 529 savings account must have been open for 15 years or more before funds can be rolled over into a Roth IRA.
• If the 529 beneficiary is different from the 529 holder, the Roth IRA must be in the beneficiary’s name.
• 529 contributions made within the preceding five years cannot be rolled over.
• The lifetime maximum that can be rolled over is $35,000.
• The beneficiary must have earned income for the year at least equal in amount to the Roth IRA contribution transferred from the 529 account.

Rolling over 529 funds into a Roth IRA

It can be a smart move to roll over unused 529 funds to a Roth IRA. Thanks to the SECURE 2.0 Act, you can transfer a lifetime limit of up to $35,000 from a 529 plan to a Roth IRA for the beneficiary, tax-free, if the 529 has been open for 15 years and the funds are from contributions made at least five years ago.

This is a good option if your child decides to skip college or if you oversaved, as it enables you to use the money for your retirement. Keep in mind that the rollover counts toward the annual Roth IRA limit ($7,500, plus a catch-up contribution of $1,100 or $8,600 in 2026, if you're 50 or older) and that the beneficiary needs earned income to cover the rollover amount.

Not all states match the federal tax-free treatment, so you might owe state taxes. Check with a tax professional and watch for updates to see if it fits your goals.

Related content

• Best 529 Plans of 2026
• 529s: No Longer the Ho-Hum Investing Device for College
• Using a 529 Plan? Here’s What to Keep in Mind
• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
• Roth IRA Contribution Limits for 2026

The SECURE 2.0 Act is a significant piece of legislation that has brought about substantial changes to the retirement account rules in the United States in recent years. These changes affect retirement savings plans such as 401(k), 403(b), IRA, Roth accounts, and related tax breaks.

The primary objective of SECURE 2.0 is to encourage more workers to save for retirement. However, complex changes have confused some taxpayers and plan sponsors. Therefore, it is important to understand the key points of the law.

Here's what you need to know.

Overview

SECURE 2.0 Act retirement plan changes

More than 90 provisions in SECURE 2.0 cover all types of retirement savings plans.

Some requirements are in place as of last year. Other provisions become effective this year, in 2025, or in later years, i.e., 2026, or 2027.

Some changes in SECURE 2.0 involve:

• RMD Age Rules and Penalties
• Higher 401(k) Catch-up Contributions
• Automatic Enrollment Changes
• Emergency Withdrawal Flexibility
• 529 Plan Roth Rollovers
• A Student Loan Payment 401(k) Match

This SECURE 2.0 summary highlights key provisions of the new law and potential implications for your retirement planning.

Required Minimum Distributions

SECURE Act 2.0 RMD changes

Before discussing the SECURE 2.0 RMD changes, it's helpful to review what an RMD is.

• A required minimum distribution is money that must be taken out of a retirement savings plan.
• More specifically, RMDs are the minimum amounts that must come from given retirement plan accounts each year once the account holder reaches a certain age.
• RMDs, calculated based on a formula described below, are generally designed to ensure that retirees gradually draw down their retirement savings and pay taxes on the funds as they withdraw them.

SECURE RMD age change. Under the law before SECURE 2.0, you generally had to take RMDs from your retirement plan beginning at age 72. SECURE 2.0 increased the required minimum distribution age to 73 as of January 1, 2023.

The bump to age 73 is one of several new RMD rules. However, the RMD age will eventually move to 75.

Delays in the age for taking RMDs raise tax implications and can present practical challenges. The latter can be particularly significant for retirees with lower incomes, who typically use RMDs to cover living expenses.

For example, pushing the RMD age back might be a "nonevent" for some retirees, according to Paul Camhi, vice president and senior financial advisor at The Wealth Alliance, who told Kiplinger, "Most [older adults] can't afford to wait until 72 [to take RMDs], let alone until age 75."

RMD rule delay for inherited IRAs. The IRS again delayed the implementation of IRA RMD final rules, this time until 2025.

• With previous IRS relief, penalties are waived for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023.
• (Missing an RMD or failing to take the appropriate distribution amount incurs a 25% IRS penalty — down from 50% due to SECURE 2.0 RMD penalty changes — added to the amount that should have been withdrawn.) However, the penalty can be as low as 10%.
• IRS transition relief has been offered due to confusion over the timing of required plan payouts and implementation of related legislative changes.

The RMD rule delay allowed beneficiaries of inherited IRAs to better understand distribution requirements and take payouts. The extension offers more time to roll over distributions from earlier this year that were mischaracterized as RMDs.

Related: Inherited an IRA? Distribution Rules Every Beneficiary Should Know

RMDs and Roth 401(k)s. Beginning in 2024, the SECURE 2.0 Act eliminated RMDs for qualified employer Roth 401(k) plan accounts.

Previously, there was a difference in the rules that applied to Roth 401(k) accounts in employer plans versus Roth IRAs (i.e., the latter were not subject to required minimum distributions).

For more information see New Roth 401(k) Changes to Know.

As a result, it is important to consider how SECURE 2.0 RMD changes could impact you and plan accordingly.

SECURE 2.0 401(k) Changes

How does SECURE 2.0 affect 401(k)?

SECURE 2.0 contains numerous provisions that impact 401(k) plans. These provisions take effect in various years and address issues, including financial incentives to contribute to a retirement plan, hardship withdrawal rules, automatic enrollment, contribution limits, and part-time worker access.

Each is mentioned below.

401(k) Financial Incentives

Small incentives to contribute to a retirement plan. The SECURE 2.0 Act allows your employer to offer small financial incentives (e.g., low-dollar gift cards) to help boost employee participation in a workplace retirement plan.

This provision became effective beginning January 2023.

Withdrawal Rules

Hardship withdrawal 401(k)

Emergency expense distributions. As of 2024, under the SECURE 2.0 Act, you can take an early “emergency” distribution from your retirement account to cover unforeseeable or immediate financial needs.

That emergency distribution of up to $1,000, could only be taken once during the year, but won't be subject to the usual additional 10 percent tax that applies to early distributions.

But: if you choose not to repay the distribution within a certain time, you won't be allowed to take other emergency distributions for three years.

• Other hardship withdrawals are provided for in the SECURE 2.0 Act including 403(b) plans.
• (Currently, distribution rules for 403(b) and 401(k) plans are different, so SECURE 2.0 would conform to those rules.)
• Also, under SECURE 2.0, penalty-free withdrawals, on small amounts of money from retirement plans in cases involving domestic abuse, will be allowed.

For more information see New 401(k) Early Withdrawal Tax Rules.

2025 Auto Enrollment

Automatic enrollment SECURE 2.0

Automatic enrollment in retirement plans. Beginning in 2025, the SECURE 2.0 Act expands automatic enrollment in retirement plans. The rationale is that automatic enrollment in 401(k) plans has been shown to increase participation.

According to the U.S. Department of Labor, "Whether you already have a 401(k) plan or are considering starting one, automatic enrollment 401(k) plans offer many advantages."

In addition to helping small businesses attract and retain employees, the Labor Department points to tax advantages associated with 401(k) participation (including the deduction of employer contributions and deferred taxation on contributions and earnings until distribution).

With some exceptions for small businesses, SECURE 2.0 requires 401(k) and 403(b) plans to automatically enroll eligible participants, who can opt out of participation.

Contributions Limits

SECURE 2.0 contribution limits

Higher catch-up contribution limit. Right now, if you are 50 or older, you can make catch-up contributions to your retirement plan up to certain limits.

• A catch-up contribution is a special provision in retirement savings plans that allows older individuals to contribute additional amounts beyond the regular limits.
• This option is typically available to workers aged 50 and older, allowing them to rapidly increase their retirement savings in the years leading up to retirement.
• It's essentially seen as a way to "catch up" if one hasn't been able to save enough earlier or to maximize retirement savings closer to retirement.

SECURE 2.0 increases those limits, beginning in 2025, to the greater of $10,000 or 50 percent more than the regular catch-up amount if you are 60, 61, 62, or 63 years old. After 2025, those amounts will be indexed for inflation.

For more information, see New SECURE 2025 Super Catch-Up Contribution for Ages 60-63.

Also, as of 2024, SECURE 2.0 Act rules, which are now delayed, were designed to impact how eligible workers with incomes over $145,000 make catch-up contributions. (The income threshold will be adjusted for inflation.) See below for more information on the delay of this rule to 2027.

Catch-up Contributions

SECURE Roth catch-up

Under SECURE 2.0, if you are at least 50 years old and earned $145,000 or more in the previous year, you can make catch-up contributions to your employer-sponsored 401(k) account. But you would have to make those extra contributions on a Roth basis, using after-tax money.

• You couldn’t get tax deductions on those catch-up contributions as you would with typical 401(k) contributions, but you could withdraw the money tax-free when you retire.
• The SECURE 2.0 Roth catch-up contribution rule won’t apply to taxpayers making $144,999 or less in a tax year.

Note: The Roth catch-up rule was originally supposed to take effect in 2024. However, due to problems with implementing Roth catch-up contributions, the IRS announced that the final rules surrounding Roth catch-up contributions for high earners age 50 or over won’t be fully implemented until after December 31, 2026.

(Technically, the Roth catch-up rule is applicable beginning in 2026. But the IRS is essentially offering a grace period until 2027 for employers and plans to implement the rule in good faith.)

More: New IRS Start Date for Mandatory Roth Catch-Up Contributions

Student Loans

SECURE student loan match

Employer fund match for student loan payments. Under the SECURE 2.0 Act, your employer can make a matching contribution to your retirement plan account based on your student loan payment amount. This is designed to address high student loan debt, which keeps people from saving for retirement.

This student loan match provision became effective as of 2024. For more information, see IRS: Here's How to Get a 401(k) Match for Your Student Loan Payment.

Note: While the Biden administration had forgiven billions of dollars in student loan debt through special programs, litigation stalled some of those efforts. Additionally, under the second Trump administration, student loan forgiveness applications are backlogged, and related student loan programs have changed.

For more information, see: Trump Targets Student Loan Forgiveness: How Taxes and Repayment Could Change.

529 Plan Rollovers

529 SECURE Act Roth IRA

Roth rollover option for 529 plans. As of 2024, SECURE 2.0 changes 529 plan rules.

A 529 plan is a tax-advantaged investment account designed to encourage saving for future education expenses. Named after Section 529 of the Internal Revenue Code, these plans allow individuals to set aside money for a beneficiary's educational costs, typically for college but also potentially for K-12 education in some cases.

The funds in a 529 plan grow tax-free, and withdrawals are also tax-free when used for qualified educational expenses.

States or educational institutions usually sponsor these plans and offer various investment options. While the funds are primarily used for the account beneficiary, the account owner maintains control over the funds and can change beneficiaries if needed.

Under the new SECURE 2.0 rules:

• In limited circumstances (i.e., there are a lot of requirements that must be met, including that the Roth IRA account must be in the name of the 529 plan beneficiary)
• Some people may be able to rollover a 529 plan that they have maintained for at least 15 years to a Roth IRA.

Annual limits for the rollover would have to be within the annual contribution limit and there will be a $35,000 lifetime limit on what can be rolled to the Roth IRA.

Related: 529 Plans Get a Boost With Tax-Free Rollovers to Roth IRAs

Trump 2025 Tax Bill Changes to 529 Plans. Under the 2025 GOP tax and spending bill, known by some as the "big beautiful bill," 529 education savings plans were expanded.

For example, the annual tax-free withdrawal limit for K-12 expenses was increased to $20,000, and qualified expenses now include tutoring and online resources.

The 2025 tax law now allows these funds to be used for postsecondary vocational training and other lifelong learning credentials, not just traditional college degrees.

2027 Savers Match

SECURE 2.0 Saver's Credit

Saver’s match. Beginning in 2027, the SECURE 2.0 Act replaces the nonrefundable Saver’s Credit for some IRA and retirement plan contributions with a federal matching contribution that will be deposited into your IRA or retirement plan.

The so-called "Saver’s Match" will be 50% of IRA or retirement plan contributions up to $2,000 per person. However, some income limits and phase-outs will apply.

Related: Saver's Credit: Do You Qualify?

Part-Time Workers

Part-time employees SECURE Act changes

The SECURE 2.0 Act contains many more provisions that could impact your retirement savings account (and, in turn, potentially your taxes and tax breaks).

Some of those provisions involve everything from part-time worker access to employer retirement plans and small business tax credits to contributions to SIMPLE edits, to contributions to SIMPLE, and SEP plans.

• For example, the IRS has recently made important changes to help part-time workers save for retirement.
• As of 2025, more part-time workers can join their company's retirement plans, like 401(k)s and 403(b)s.
• Basically, if you work at least 500 hours a year for two years in a row, you'll get the chance to start saving in these plans.
• This opens up retirement savings options for people who might have been left out before.

For now, the IRS is giving companies more time to prepare for these changes, and is asking for feedback on proposed. Stay tuned.

Other SECURE 2.0 provisions address issues surrounding stock ownership and savings bonds. Consult a financial advisor or trusted tax professional if you have questions or concerns about how these changes might impact you or your taxes.

Lost Accounts

Lost 401(k) accounts database

Retirement savings “lost and found.” Have you ever lost track of your 401(k)? Well, the SECURE 2.0 Act enables the creation of a searchable database to help people find retirement benefits that they lost track of.

The retirement savings “lost and found” will be housed at the Department of Labor and will launch soon.

Data show that millions of 401(k) accounts are regularly forgotten, amounting to nearly a trillion dollars in unclaimed retirement benefits.

For more information, see Kiplinger's report Need More Money in Retirement? A Lost 401(k) May Rescue You.

More on Retirement Savings Accounts

• Guide to Required Minimum Distributions (RMDs)
• New SECURE Enhanced Catch-Ups for Those 60-63
• New Roth 401(k) Rule Changes to Know
• Ten Retirement Tax Plan Moves to Make Before December 31

If you are saving for college, it’s important to have information about making 529 contributions that can maximize available state tax breaks. So, here are a few reminders to help you take advantage of tax benefits associated with your 529 college savings plan — beginning with a quick overview of how 529 plans work.

How do 529 plans work?

A 529 plan is a state-sponsored, tax-advantaged college savings investment plan. When you enroll in a 529 plan, the money you invest grows on a tax-deferred basis. When you withdraw from the 529 plan and use the money to pay for qualified education expenses, those withdrawals are tax-free.

529 plans are designed to encourage saving for college and typically cover qualified education-related expenses like tuition, fees, books, computers, and other supplies. Certain room and board expenses are usually considered to be “qualified expenses.” But sometimes, whether 529 college savings can be used to pay for the cost of room and board will depend on whether those costs exceed certain amounts.

Additionally, 529 plan funds can generally be used to pay tuition for professional and trade schools and up to $10,000 per student, per year, can be used to pay for K-12 private school tuition. In any case, keep in mind that each 529 plans may have its own specific rules regarding what particular expenses are considered to be "qualified expenses."

Do you get a tax break for contributing to a 529 plan?

A 529 plan doesn’t offer a federal income tax benefit because 529 plans are state-sponsored. As a result, the contributions to your 529 plan are not tax deductible on your federal tax return. However, some states offer a state tax credit or tax deduction for 529 college savings plan contributions made in your home state.

As previously mentioned, your 529 plan funds grow tax-free, and withdrawals of 529 college savings account funds that are spent on qualified expenses are also tax-free.

But remember: If you withdraw 529 plan funds and don’t use that money for qualified education-related expenses, you could face a 10% federal income tax penalty.

How late can I contribute to a 529 plan?

In most states, you should contribute to your 529 college savings plan by the end of the year, i.e., December 31, to maximize any state tax breaks associated with those contributions.

But in other states, you can contribute until that state’s tax filing deadline next year. (The specific deadlines vary by state). For example, some states that don’t have a year-end contribution deadline for maximizing 529 plan contribution benefits are Iowa, Georgia, Mississippi, Oklahoma, South Carolina, and Wisconsin.

In all cases, and because you are not limited to choosing a 529 plan from your home state, it’s important to know which 529 plan contribution deadlines apply to you. Check your 529 plan rules or talk with a professional tax advisor who may be able to help you maximize your state tax benefits.

How much can I contribute to a college 529 plan in 2023?

Note that 529 college savings plans do not have set individual annual contribution limits like 401(k) plans do. Instead, annual and aggregate contribution limits for 529 plans vary by state.

It’s also important to keep in mind that contributions to your 529 plan are treated as gifts for federal income tax purposes. Under the 2023 gift tax exclusion, you can contribute up to $17,000 tax-free per donor. However, gifts over $17,000 must be reported on a federal gift tax return. That doesn’t necessarily mean you will be taxed on your gift since the lifetime federal gift tax exemption amount is high.

What if my child doesn’t go to college?

From a tax perspective, if your student doesn’t attend college and you withdraw 529 college savings plan funds for other than qualified education-related expenses, then the money you take out of the 529 plan would be subject to the 10% federal income tax penalty.

Additionally, the 529 plan funds you withdraw for non-education-related expenses, would be considered taxable income — which could impact your federal and state taxes.

529 plans: What you can do

Because so much about 529 plans varies by plan and by state, you should familiarize yourself with the specific rules governing your plan. 

Also, consult a qualified financial planner or other trusted advisor if you are uncertain about those rules or about how to get the most tax benefit from your 529 college savings plan.

Related Content

• College 529 Savings Plans: What You Need to Know
• 401(k) Contribution Deadline: What To Know
• Are Scholarships Tax Free or Taxable?

Editor’s note: This is part two of a three-part series about college 529 savings plans. Part one is When Choosing Funds for Your College 529 Plan, Don’t Make This Mistake, and part three is College 529 Savings Plans: How to Get the Most Out of Them.

When it comes to saving for college, the 529 plan remains extremely popular, with over $480 billion in assets as of 2021, according to Statista. In part one of this series, I reviewed how to maximize the growth in your 529. Many readers agreed with me that the age-based mutual fund options within 529 plans are often too conservative.

Still, many parents had additional questions about how 529s work. After all, the plans are complicated and have very specific rules and regulations. In this article, I will summarize answers to the most frequently asked questions on 529s. 

Here's a selection of what you need to know about 529 plans:

What is a 529 plan? The name 529 comes from a section in the IRS tax code. Section 529 Qualified Tuition Programs are investment accounts administered by each state and intended to be used for qualified education expenses.

What are the tax benefits? Generally speaking, the earnings on 529 plan contributions can grow free from federal income tax, and withdrawals used to pay for qualified education expenses are free from federal income tax as well. Contributions are with after-tax money; however, most states offer a state income tax deduction for contributions, but this varies for each state.

Do I have to use my state's plan? No, you do not have to be a resident of that state to use another state's plan. However, there may tax advantages to using your own state. It's best to discuss with your accountant or financial adviser before opening an account.

What are “qualified” education expenses? Qualified education expenses include tuition, mandatory fees, textbooks, computers and software, supplies, required equipment and room and board if enrolled at least half-time. Room and board costs may not exceed certain amounts, either the actual invoiced cost of living on-campus or, if off-campus, the applicable rate determined by the qualified college or institution. Special needs services for a special needs beneficiary are also considered a qualified expense.

Does a 529 account have to be used for college? What about other schools, like a trade or vocation? 529 assets can be used at any eligible institution of higher learning. That includes four-year colleges, universities, qualifying two-year programs, trade schools and vocational schools. To qualify as an eligible institution, a school must be eligible to participate in student financial aid programs offered by the Department of Education.

Can 529 money be used for K-12 schools? A relatively new provision allows 529 account owners to withdraw up to $10,000 per year per student for private primary or secondary education. Unlike for college, this only applies to tuition, not to textbooks, computers or other fees or activities.

What if money is withdrawn for any other expense that isn't considered “qualified”? Any earnings on a non-qualified withdraw are subject to a 10% federal tax penalty. In addition, the earnings are subject to federal and, if applicable, state income taxes.

Are there any exceptions to the 10% penalty? What if my child receives a scholarship? Withdrawals following a beneficiary's death, disability or receipt of a scholarship (to the extent of the scholarship award) will not be subject to the 10% penalty. However, you will have to pay taxes on the earnings.

Who can open an account? Any individual who is of legal age to open an account and is a U.S. citizen or legal resident. In addition, U.S. trusts, corporations, partnerships and non-profit organizations may open an account.

Who is the owner? Typically, the parent is the owner. There can only be one owner, no joint ownership. However, there is an option for a successor owner if the account owner dies.

Who is the beneficiary? Usually the child, but it can be anyone — including yourself — and the beneficiary must be either a U.S. citizen or legal U.S. resident.

Who can contribute to the account? Any person or entity may make contributions to the account for the benefit of a beneficiary at any time.

What are the contribution limits? Contributions to 529 college savings plans are considered gifts for tax purposes. In 2021, gifts totaling up to $15,000 per individual qualify for the annual gift tax exclusion. This means if you and your spouse have three children you can gift $90,000 without gift-tax consequences, since each child can receive $15,000 in gifts from you and $15,000 in gifts from your spouse. Remember, this also includes non-529 gifts (such as gifts to a life insurance trust) so be sure to account for those.

Is there an overall limit to 529 plan accounts? Technically there are overall limits to 529 plan account balances. But limits can vary from state to state, generally from $235,000 to $529,000. Once the balance on a 529 plan reaches its limit, the plan will not accept new contributions. It's worth mentioning some plans will consider balances in other 529 plans for an overall aggregate limit. For instance, if the owner has more than one 529 for the same beneficiary, the plan may aggregate all the plan's balances to determine if the maximum limit has been reached.

What is the five-year election? You can “front-load” your gifts or contributions to a 529 plan and spread the gift over five years for gift tax purposes. For instance, if you contribute $80,000 in 2022, you can elect to use five years' worth of gifts in one year ($80,000 divided by the $16,000 annual exclusion). This is important for larger estates. Any 529 contribution over the annual exclusion amount is deducted from the lifetime gift exemption, which is currently $12.06 million per individual in 2022 (Source: SavingforCollege.com). Staying under the annual exclusion of $16,000 or using the five-year election will help preserve your lifetime gift exemption for other gifts.

What are the estate tax implications of a contribution to a 529 plan? Except in special circumstances, contributions to a 529 plan are not considered part of the estate of the contributor for estate tax calculation purposes.

Can you roll money from other accounts into a 529? Tax-free rollovers from one 529 into another 529 with the same beneficiary are permissible once every 12 months.

Can you roll UGMA or UTMA assets into a 529? Yes, transfers from a UTMA/UGMA are permissible, but restrictions apply. To transfer UTMA/UGMA accounts to a 529 plan, you may be required to sell the UGMA/UTMA assets first. Generally speaking, UTMA/UGMA accounts do not allow for changing the beneficiary, and as such this restriction will carry over to UTMA/UGMA assets transferred to a 529. It's best to consult with a financial or tax adviser before transferring UTMA/UGMA assets to a 529.

Can you change the beneficiary? A 529 account owner may change the beneficiary at any time. However, the new beneficiary must be a member of the family of the previous beneficiary to avoid being considered a withdrawal. If the account owner changes the beneficiary to a new beneficiary who is more than one generation younger than the previous beneficiary, the generation-skipping transfer tax may be triggered. For example, a parent changing the beneficiary from their child to their grandchild is considered a generation-skipping transfer.

Can you change the investments in a 529 account? Currently, the IRS allows an account owner to change the mutual fund or funds only twice a year. There are currently no “aggregation rules” with respect to investment changes, so the investment change limit of two per year is per account. For example, if an owner and beneficiary have other 529 accounts, each account will have their own two-change-per-year limit.

What is the treatment of 529s for financial aid? 529 assets may affect a beneficiary's ability to qualify for federal need-based financial aid. A 529 is an asset of the student's if the student is considered an independent student for tax purposes or an asset of the parent if the if the student is a dependent student. A student is considered independent if, among other criteria, he or she is at least 24 years of age, or is married, or a graduate or professional student. Generally, if a student is considered “dependent” and the 529 is a parent's asset, the more favorable the treatment for financial aid. A 529 should not affect the eligibility for a merit-based scholarship.

As you can see, a 529 education savings plan has many rules. But if one follows the rules, the 529 is an unapparelled place to save for college and private school. There are several advantages, including the ability to defer taxes on earnings, withdraw earnings tax-free for qualified education expenses, plus the ability in some states to deduct — within limits — the contribution from state income taxes. Most accounts have several investment choices as well, from auto-pilot programs, such as age-based options, to the ability to pick individual funds, all of which could help contributions grow and keep pace with future college costs.

The 529 plan is very flexible too, with the ability to change beneficiaries without incurring a penalty (assuming to another qualified beneficiary). For new parents, the low minimum contributions and the ability to invest automatically are attractive features. In addition, there are advantages for high-income earners, such as no income limitations to set up an account, very high contribution rates, and a contribution is a completed gift for estate tax purposes if estate tax planning is important.

Higher education is a way to a better life for many people, and the 529 plan remains an excellent way to help get you there.

The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Investment advisory and financial planning services are offered through Summit Financial, LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666.

The attached materials, URLs, or referenced external websites are created and maintained by a third party, which is not affiliated with Summit Financial LLC or its affiliates. The information and opinions found within have not been verified by Summit, nor do we make any representations as to its accuracy and completeness. Summit Financial and affiliates are not endorsing these third-party services or their privacy and security policies, which may differ from ours. We recommend that you review this third party’s policies and terms. This material is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Editor’s note: This is part three of a three-part series about college 529 savings plans. Part one is When Choosing Funds for Your College 529 Plan, Don’t Make This Mistake, and part two is What You Need to Know about College 529 Savings Plans.

School is back in session, much to the relief of parents nationwide. And in the spirit of back-to-school, now is a good time to review how to save for college and, in particular, the 529 college savings plan. After all, college isn’t cheap, and parents will need to squeeze the most out of their savings plan if they hope to have enough saved. Here to help are a few ways I advise my clients on how to get the most out of their 529 plans.

What Is a 529 Plan?

Hands down, the 529 plan is a great way to save for college. The tax benefits are key. With a 529 plan, you pay no annual taxes on the investment gains inside the account, plus distributions for qualified expenses like tuition, certain fees and qualified room-and-board expenses are tax-free.

A relatively new provision allows account owners to withdraw $10,000 a year per student for private primary or secondary education.

Each state administers its own plan, and you are free to use any state’s plan. However, some states offer a state-tax deduction if you are a resident and use its in-state plan. That’s the basics, there is much more to know, but today I want to focus on five ways parents can maximize their 529 plan.

The Time Horizon Is Not Freshman Year

Parents of teenagers often ask me if they should open a 529. They wonder if it makes sense given how close the child may be to needing the money for college. While there are a variety of factors to consider, I remind parents the time horizon for needing the money for college is not freshman year, but by senior year. So, for instance, a parent with a 13-year-old may think they have only four years till they’ll need the 529 money, when in reality the time horizon could be eight years, since not all the money is withdrawn in the freshman year. If that is the case, then yes, eight years may still be enough time to invest in a 529. (There may be some financial aid considerations.)

Having said that, I probably wouldn’t invest all the 529 money in equity mutual funds, given the time horizon is only eight years — that is too risky. But perhaps the tuition payment earmarked for the eighth year, or senior year, could be invested in a dividend-paying mutual fund or a balanced mutual fund, since that has the longest time horizon. I suggest consulting with a qualified financial adviser who can help ensure your investment mix is aligned properly with your risk tolerance and time horizon.

Your State’s Plan May Not Be the Best Plan

Some states offer a state income tax deduction on your contributions, assuming you are a resident of the state. Other states have upped the ante even more, with some offering matching contributions. Always check your state’s offerings and incentives before opening a 529 account.

Keep in mind, you are not limited to your home state’s option. A parent in Connecticut can use California’s plan and vice versa. The downside in this example is the Connecticut parent does not receive a tax deduction for contributing to a California 529 plan.

Why would anyone not use their home state’s plan and forgo the state tax deduction? Mutual fund choices and fees. If the mutual fund choices in your home state’s plan are lousy or expensive, that probably won’t help the account grow. There are several websites to compare 529 plans, or a financial adviser should know what to look for as far as fees and investment selection. The point is don’t take it for granted your state’s plan is the best option.

A Compromise: Use More Than One 529 Plan

If you still want to use your home state’s plan to get the state income tax deduction, but want better mutual funds, you may want to try using your state’s plan up to the state tax deduction cap – usually $10,000 a year for married parents – and a separate 529 somewhere else for any additional money.

I see this in states that cap the tax deduction to the first $10,000 of contributions. The next penny over the cap is not state tax deductible. A parent then can contribute the first $10,000 to the home state’s plan for the deduction and use another state’s plan for anything above the cap. This may help with diversification, or using a different plan may have more and better fund choices. You want to be mindful of the annual contribution limits.

The downside is the administrative burden, do you really have the time to oversee two different accounts for each child?

Get the Grandparents Involved

A recent rule change on the FAFSA is helpful for grandparents who want to use a 529 for a grandchild’s education. Prior to the rule change that took effect Oct. 1, 2022, distributions from a grandparent’s 529 were counted as untaxed income to the student and could reduce the student’s aid eligibility. Starting with this year’s FAFSA, for the 2023-2024 school year, a grandchild does not have to report a distribution that was taken from a grandparent’s 529. That’s a big change and should prompt more grandparents to use 529 plans.

Keep in mind, the CSS Profile – a financial aid form used by many colleges to calculate their own financial need – still considers a grandparent’s 529 as a countable asset. However, I’m not sure that should deter grandparents from wanting to use 529 plans, as not all colleges use the CSS. Either way, I believe the more hands that can help fill the piggy bank for college, the better, and with the holidays coming up, this could be a good time to talk to Grandma about 529s.

Paying Private K-12 With a 529 Plan

Parents can use up to $10,000 a year from their 529 plan to pay for private K-12 tuition. If you are paying for private school out of a cash or checking account, you may want to consider first routing the payment to the 529 for the state tax deduction. This is a good idea for parents who are already contributing to a 529 plan but not up to the amount for the state tax deduction — they’d have more room to contribute.

For example, if a family is contributing $5,000 a year to their state’s 529 plan, but the state tax deduction is up to $10,000 in annual contributions, they can contribute the additional K-12 tuition payment to the 529 plan to get them to the $10,000 cap. (The $10,000 cap is an example — each state’s rules vary.) This assumes your state offers a state tax deduction for contributions, your state considers K-12 tuition a qualified expense, and there is no minimum waiting period for withdraws. It’s best to check with the 529 administrator first.

There may be some drawbacks to this approach. Namely, it can be a hassle to move money around. Also, it could lead to commingling college funds and K-12 money, which should be invested differently, given their different time horizons, but this trick could also save you a few bucks on your state taxes.

The Right 529 Plan

When considering a new 529 account, I always look for a plan with a strong mutual fund lineup and competitive fees. A good 529 plan will have a wide selection of different mutual fund investment objectives, like growth, value, large and small companies, domestic and international and various fixed income choices, like a preservation portfolio or government bond offering. This can help with diversification. Even if you use a target date fund, which picks the mutual funds for you, diversification is key in my opinion.

Beyond that, the underlying mix of stocks and bonds — your asset allocation — is key to the performance of the account. You don’t want to be too conservative with a young child’s account — the account might not grow enough to outpace the rising cost of college. Parents of younger children may want to be more growth-oriented, whereas those within a few years of needing the money should scale back the risk.

Keep an eye on mutual fund expense ratios, too, that can eat into your return. I sometimes will recommend a client use the large-cap index mutual fund if their 529 has one, then sprinkle in more active managers where I find it may make more sense. I will use an active manager within the 529 if I like the track record and/or use it to complement the index fund. Using index mutual funds within the 529 can help keep the costs down.

Parting Thoughts

The 529 plan is a great way to save for college, grad school and K-12 education expenses. Beyond what I mention here, the best piece of advice I can give new parents is to start early and automate your savings. Starting early can help your investment grow over time, while automating your savings — having some of your paycheck go directly into the 529 each pay period — takes the guesswork out of savings because it’s done for you.

The rest of what I offer here can help enhance the 529 plan and maximize your college savings plan, which, based on the current cost of a four-year college education, is something I think we can all agree is a good thing.

The author is a Certified Financial Planner with over 22 years of experience in helping clients make smarter better financial choices. For more information, please visit www.michaelaloi.com or email maloi@sfr1.com.

Investment advisory and financial planning services are offered through Summit Financial LLC, a SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article. 

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Nobody likes a down market, though most investors probably should. Down markets are where most of the big future gains come from when you are contributing to your investments on a regular basis. Dollar-cost averaging your investments when markets are low is no different than buying anything else when it’s on sale. This is a great way to build wealth for retirement.

But what about when you’re investing to save for college? How do down markets affect those with 529 college savings plans? One way could involve changing the timing of when you decide to tap into the funds you’ve saved.

Saving for College Like You Save for Retirement

Many college savers, like many retirement savers, use the age-based portfolio models for their investments. Age-based 529 investment funds are similar to target date retirement funds. The theory is that as your child ages, the 529 college savings investment portfolio becomes less aggressive, with the goal of reducing the risk the closer you get to needing the money.

That isn’t to say that once your child is ready for college that all the risk is gone from the portfolio. Depending on which investment provider’s plan you are using for your 529 plan, the amount of risk still in the portfolio can vary widely. So, this means that even when your child is ready to go to school, a down market can still have a substantial effect on your account values.

Advice: Consider Holding Off on Tapping Your 529 Plan

It’s important to remember that you do not have to take money out of a 529 college savings account just because your child is about to start college. If the market is down at the time your child enters college, then you could consider waiting until future years to use the funds inside of the 529 college savings accounts.  Doing this would give the accounts time to recover from the market declines, especially if you are still contributing to them via dollar-cost averaging. This could give your investments up to three additional years to grow.

So how do I pay for college if I’m waiting to use my 529s?

Tap into your home: Home equity could be an option, especially with the inflated home prices we’ve seen over the past few years. We often suggest clients have a home equity line of credit (HELOC) for a variety of reasons. Paying for college is a potential use of that HELOC. Just be mindful of interest rates, especially if we continue to see rates climb. 

Tap into your savings: Some clients are using savings or current earnings to fund the first year or two. While we don’t suggest tapping into your emergency fund, many investors have additional savings that are earning low rates of interest, so redirecting those low performing savings to help pay for college, particularly in your student’s early years, can help allow the 529 balances time to recover. 

Take out a loan: Lastly, loans for early years may be an option. Both subsidized and unsubsidized federal loans are a great place to start because they can later be consolidated after graduation with favorable repayment options. Parents and students can explore both Parent PLUS and private loans as well. Some states have their own loan programs, which may have favorable interest rates. Thanks to the SECURE Act of 2019, you can now use 529 funds to repay student loans up to $10,000 per student.  (Note that the $10,000 limit is a lifetime limit, not per year.) We have even had clients use a loan against their portfolio, known as a securities-backed line of credit, to pay for a year or two of college before tapping into the 529s.

Colleges may even be willing to work with you given the current state of the market. It doesn’t hurt to ask for additional financial aid, although don’t expect all schools to be receptive to your request.

The Bottom Line When Markets Fall

As we have seen so far in 2022, markets go down and sometimes by a lot. While this certainly isn’t ideal, just remember that markets are up far more often than they are down, typically by a margin of more than 3-1.

Most times it makes sense to stay the course. If your children are still in grade school or just entering their freshman year of high school, then there is no need yet to start making their 529 college savings portfolio more conservative. You should have ample time to recover any market declines. 

Dollar-cost averaging does not assure a profit and does not protect against a loss in declining markets. This strategy involves continuous investing; you should consider your financial ability to continue purchases no matter how prices fluctuate. Securities offered through Kestra Investment Services LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services or Kestra Advisory Services. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax adviser with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As college costs continue to rise, it’s becoming increasingly difficult for students to pay for it themselves. The total student loan debt in the United States has risen to a staggering $1.75 trillion. This has led many parents and grandparents to want to help carry a portion of their child’s or grandchild’s college debt. They shouldn’t jeopardize their own financial future by entering retirement with someone else’s student loan debt, though.

Even so, the number of adults over the age of 62 with student loan debt has reached a startling 2.4 million borrowers. If parents and grandparents plan on helping to pay for college, they need to plan ahead to stay debt-free in their golden years. There are many ways they can start planning now to help with college costs while still saving for their retirement.

529 plans offer tax advantages

529 plans are investment accounts that can be used to pay for education for a specific beneficiary. Choosing a 529 plan also comes with tax benefits. It will grow federal tax-free and will not be taxed when the money is taken out. It’s important to note that you can use a 529 plan from any state to help cover education expenses in any other state. However, depending on the state you live in, you may qualify for even more tax deductions with a 529 plan. There are seven states that provide a state income-tax break for any contributions to a 529 plan: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania. There are no contribution limits for 529 plans, but there are limits for the tax deductions. These plans can be used for more than just college tuition.

For example, they can help cover student loan repayments and college expenses such as books or meal plans. You can even use them to help pay for K-12 tuition costs. While a good option, 529 plans do come with a few disadvantages. If you are looking into financial aid for college, 529 plans can work against you. You can also run into higher fees with these plans. These downfalls could be why many are hesitant to use these plans for college.

Educational savings accounts are a little different than 529 plans

A Coverdell education savings account (ESA) is very similar to a 529 plan. The earnings in this account can grow tax-deferred, and withdrawals are tax-free when used for educational purposes, as they are in a 529 plan. However, the beneficiary will have to pay taxes on any distributions that exceed their qualified educational expenses. You can contribute only $2,000 per year, per beneficiary, so if you exceed that amount, the rest will be taxed. While very similar, there are a few differences between an ESA and a 529 plan. Contributors must earn less than $110,000 annually, they cannot contribute to the account after the child turns 18, and the money is automatically distributed when the beneficiary turns 30. An ESA may be a better option than a 529 plan if the contributor wants to give the account over to the beneficiary as they grow older.

Tax-free gifts are an easy way to go

Grandparents can also simply give cash directly to either the child or parents. To avoid the federal gift tax, you can make a tax-free cash gift of up to $16,000 per recipient in 2022. This means if you give away anything less than $16,000 to an individual, you and your beneficiary do not have to report that to the IRS. If you decide to go this route, make sure you discuss the exact tuition and any other college expenses with your grandchild or child, and then form a detailed plan on where exactly the money will go. This will help make sure that the money you are giving is going toward college expenses, such as tuition, rather than something else.

Help your family the smart way

No matter if you’re helping save for a family member’s college expenses or saving for retirement, consulting with a financial planner should be your first step. They can help you come up with the right plan for you to save for college, retirement and everything in between.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Did you know that Americans owe nearly $1.75 trillion in student loan debt? This staggering number is spread out among 48 million borrowers. But as a grandparent, you can help your children and grandchildren mitigate this by contributing to a 529 plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs.

According to a recent survey by the College Savings Plans Network, the average 529 plan balance as of Dec. 31, 2021, was $30,652. But is that an adequate amount? Most student tuition and housing costs are going to run much higher than that for four years of college ($43,755/year for a private school and $11,631/year for state residents at public colleges), and many students will need to rely on a combination of savings and financial aid to pay for some or all of those costs.

If you are looking to save money for your grandchildren’s education without hurting their aid eligibility, some recent changes in 529 plans are going to make that easier.

Simplifying the application process is in the works

Good news: The government is working to streamline the FAFSA (Free Application for Federal Student Aid) application process, as part of a bill that was signed into law in December 2021.

Some of the changes are being phased in over multiple calendar years. We can expect to see a new streamlined FAFSA form in October of 2022. Some changes went into effect for the 2021-22 award year, while other changes won’t be completely implemented until the 2024-25 award year.

Distributions from your 529 will no longer reduce your grandchild’s financial aid

In the near term, there’s a welcome change that grandparents can begin taking advantage of for financial planning purposes.

Under the old FAFSA rules, students were required to report distributions from grandparent-owned 529 savings plans as untaxed student income, which had the potential of reducing a student’s aid eligibility by up to half of the distributed amount from the college savings plan.

In other words, a $15,000 distribution from a grandparent’s 529 plan could reduce aid eligibility by $7,500. This has led some families to do some tricky planning — where grandparents would delay 529 distributions until the grandchild was in their last few years of college to avoid the potential financial aid eligibility pitfalls.

Fortunately, with the FAFSA simplification come new rules regarding how grandparent 529 assets are treated. The new rules, effective for the 2023-2024 school year, will no longer count distributions from grandparent-owned 529 college savings plans as untaxed student income, and they will not have a detrimental impact on aid eligibility.

But grandparents can take advantage of the new 529 rules now. Why? The FAFSA looks back at the prior two years of a student’s income tax returns.

If you want to retain control over your college savings for one or more grandchildren, you can now do so without having to worry about it hurting their financial aid eligibility. And you can say goodbye to the complexities of planning distributions in future calendar years to avoid potential problems.

Superfunding five years of gifting into one

One advantage of 529 plans that many people aren’t aware of is that they allow a contributor to superfund five years’ worth of tax-free gifting into a single calendar for a beneficiary. Normally you can gift $16,000 per year using the annual gift tax exclusion amount. With a 529 you can gift $80,000 in one year (or $160,000 if married filing jointly) and avoid gift taxes. You can only do this every five years, but this strategy does offer some great planning opportunities.

An added benefit for wealthy families is that 529s can remove assets from your estate while allowing you to retain control over them. A 529 savings plan is a great vehicle for accelerating savings and maintaining tax efficiency.

529 college savings plans continue to be popular vehicles for college savings. Growth and earnings of assets in these plans are tax-free as long as future cash distributions are used for qualified educational purposes, including such things as tuition, textbooks and computers.

With the new FAFSA changes, it’s a great opportunity for grandparents to revisit their savings plan.

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

College costs have outpaced inflation. Looking back at the last decade, the 10-year historical rate of increase has been approximately 5% per year, according to The College Board. Luckily, there’s a tax-advantaged way to save for these growing college expenses: the 529 college savings plan.

529 basics

When it comes to saving for college, opening a regular savings account/custodial account for your child is an option, but you’d miss out on the benefits of a 529 plan, such as the tax-free growth on earnings if the funds are used for qualified college expenses. Deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion (for 2021). You can also front-load your investment in a 529 plan with $75,000 ($150,000 if joint with your spouse) and use this toward your gift tax exemption for five years, providing there have been no other gifts to that child. This is something that is not possible for a regular savings/custodial account for your child (you would only be able to gift $30K jointly). By adding a large amount up front, you allow the lump sum to grow over a longer time horizon vs. making smaller contributions over time. Contributions to a 529 plan do not have to be reported on your federal tax return.

Contributions to a 529 plan are not tax deductible (although some states do offer tax benefits), but the earnings grow tax free and are not taxed if used to pay for education. Another advantage compared to a custodial account is control; the named beneficiary has no legal rights to the funds, so you can ensure the money will be used for education.

Also on the plus side, a 529 account owned by someone other than the parent (such as a grandparent) is not considered an asset for financial aid purposes. In addition, the value of a 529 account is removed from your taxable estate, yet you retain full control over the account.

How to choose a 529 plan?

Research the underlying expenses of the mutual funds and review the investment options available compared to other plans. The age-based models may be the easiest to manage, as the plan shifts to more conservative investments as the student gets closer to college age. You can choose any state plan no matter where you live, but if you reside in a state that provides tax breaks for using your state plan, you would likely want to start there. For example, New York residents get tax benefits for using their state plan. Keep in mind that you have the ability to move your 529 to another provider, but only one rollover is permitted per 12-month period.

How much to fund?

The amount to contribute to a 529 plan depends on several assumptions, such as whether you expect your child will attend a public college or a private college, the returns during the investment time horizon, and future college inflation. Funding goals vary widely depending on what you would like to achieve and the assumptions involved — and of course there is no right answer.

If the beneficiary does not go to college, you can transfer the 529 plan to a sibling in the future or to another family member, such as a cousin or grandchild. If you don’t have any eligible family members, the worst-case scenario is that you would have to pay tax and a 10% penalty on the earnings to take the money out for another purpose. Withdrawals from a 529 plan that are not used for the beneficiary’s qualified education expenses are taxed and penalized (subject to a 10% federal penalty and taxed at the income tax rate of the person who receives the withdrawal). If the beneficiary gets a scholarship, then the penalty is waived.

Considerations if you have more than one child

If you have several children, it may make sense to fully fund the first plan for the oldest child, and if the funds are not used, they can be transferred to the next child in line. You probably want to avoid fully funding all the plans in the event one child does not end up going to college, gets a scholarship, or starts a business. Some schools and some trade schools/programs do not qualify for 529 funds (for example, if a grandchild wants to go to a specific acting or cooking school). You can find out if your school qualifies by using this link: http://www.savingforcollege.com/eligible_institutions/.

Avoiding tax penalties on 529 Plan funds – not all expenses are qualified

Avoid overfunding the 529 if possible, as “qualified education expenses” do not cover all expenses related to college. Qualified expenses include:

• Tuition and fees.
• On-campus room and board.
• Books and supplies.
• Computers and related equipment.

On the other hand, several costs related to college aren’t considered qualified expenses. These costs can easily add up, so it may make sense to save outside of a 529 plan to help cover them. Funds from a 529 plan cannot be used for:

• The purchase of a car, fuel costs or public transportation costs to and from school.
• Any insurance (car, health etc.) cannot be paid with 529 funds either.
• If your child is a member of a school club or involved in a sports activity, any related fees and costs are also not qualified.
• It might seem intuitive that, if you have a student loan, you can use funds from a 529 to pay off the balance, but this is also not permitted.

If your child is planning to live off-campus, in housing not owned or operated by the college, you are unable to claim expenses in excess of the school’s estimates for room and board for attendance. It is important to confirm room and board costs with the school’s financial aid office, in advance, so you know what to expect. Also, keep in mind that, in order for room and board to qualify, your child must be enrolled half time or more.

Finally, if your child is studying abroad, check with the school to find out if the study abroad program qualifies for 529 funds.

If you inadvertently use funds for the wrong expenses, you will end up being taxed on the earnings, as well as face a 10% penalty on that amount. Although 529 plan accounting tends to operate on the honor system, as you have to track your own expenses, using funds for the wrong items could have consequences in the event of an IRS audit.

Paying for college is a large expense for many families. 529 plans are a tax-advantaged way to save for college, but they come with some complex rules and restrictions — so understanding how these accounts operate before investing could save you from incurring unexpected tax penalties in the future.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

529 plans are one of the smartest ways to save for education. But what you may not realize is that they are also a powerful tool for estate planning and retirement savings. Whether you're a grandparent hoping to make 529 contributions that work in tandem with your retirement plan, or a parent looking forward to celebrating with your future graduate, 529 plans have plenty to offer.

And the numbers prove that point. As of the end of 2025 (the most recent data from the Federal Reserve), the total amount saved in 529 plans was $576.7 billion, with roughly 17 million plans open nationwide. Separately, Best Colleges research shows that the average 529 plan balance is approximately $30,960.

Could your family take advantage of the tax savings of a 529? This guide should answer your questions and help you understand the basics of 529 plans.

How do 529 plans work?

Sometimes called qualified tuition programs, 529 plans take their name from a section in the Internal Revenue Service Code, and are administered by individual states and some private financial institutions. These accounts allow you to prepay a beneficiary's qualified higher education expenses at an eligible educational institution, or to contribute to an account for paying those expenses.

The main advantage: While contributions have to be made with after-tax money (unlike some retirement and health savings plans), there’s no federal deduction and 529 investments grow free from federal or state tax. To be eligible for this tax treatment, withdrawals have to be for qualified educational expenses (we’ll get into more detail about what those are).

Unlike the federal government, many states offer a limited deduction for contributions, provided the account holder resides in the state administering the account. While there are no limits on how much you can contribute each year to 529 plans, contributions are considered gifts and subject to gift taxes — a federal tax ranging from 18% to 40% — when they exceed certain limits. In 2026, annual gifts of up to $19,000 for an individual and $38,000 for couples are not taxed. These limits remain unchanged from 2025.

That limit applies to each individual receiving a gift. So if you have 529 plans for three children, you can contribute up to $19,000 or $38,000 this year to each child’s plan without owing a gift tax.

There’s even a way for someone feeling generous (hello, grandparents?) to do what’s called "superfunding” a 529 by combining multiple years. But this is complex, and you’ll want a good understanding of the laws governing gift taxes. And don’t get carried away. There are also total contribution limits, as contributions are not supposed to exceed what a beneficiary would spend on education. State plan limits can range from $235,000 to $600,000+.

Why a 529 plan should be part of your estate and retirement plan

Besides the obvious benefits of using 529 plans to save for education, they can also be a valuable part of your estate and retirement savings plan. First, contributions to a 529 account can reduce the potential for federal estate tax liability. That's because they are instantly removed from the donor’s estate for federal estate tax purposes. Besides that, control over 529 plans is maintained by the account holder, including the ability to change recipients.

In some states, 529 plan contributions may also be excluded from the donor’s assets, and some beneficiaries (depending on the donor's relationship) may be able to exclude 529 plan accounts from inheritance taxes in their state. In addition, as of January 1, 2024, 529 account holders can transfer up to a lifetime limit of $35,000 to a Roth IRA for each beneficiary (subject to certain limitations), thanks to the SECURE 2.0 Act. That takes some of the worry off the donor about what to do with leftover or unused funds in a 529 plan account.

Also, the Roth IRA rule will help beneficiaries avoid both taxes and the usual 10% penalty for non-qualified withdrawals. It will also help people who want to fund a Roth in the years when their income may be too high to contribute.

Naming a contingent account owner or successor may also help 529 plan account holders avoid probate, which, in the absence of an estate plan, last will and testament, or trust, could delay transferring your estate.

What can you spend your 529 savings on?

While originally conceived as a way to save for college, 529 plan funds can now be used for a wider array of programs and institutions, including public and private colleges and universities, graduate schools and trade schools, and even elementary or secondary schools.

For K-12 education, beginning January 1, 2026, $20,000 can be withdrawn annually for qualified K-12 expenses (up from $10,000 last year). State rules may vary slightly for K-12, and homeschooling expenses generally do not qualify. However, there are no age limits for recipients and the money can be held in the plans indefinitely.

The tuition-only restriction doesn’t apply to higher education expenses, which follow the federal guidelines applied to programs like the American Opportunity Tax Credit. Beyond tuition, these funds can cover a variety of educational costs. This includes the price of Department of Labor-certified apprenticeships, such as fees, books and equipment, as well as a lifetime maximum of $10,000 per beneficiary to cover student loan payments.

However, some 529 plans are created exclusively to cover tuition expenses. These are known as prepaid tuition plans, as opposed to 529 savings plans.

Tip: Sit down with your student and explain how a 529 plan works and involve them in tracking these expenses. By signing them up for an authorized credit card, you can also help build their financial confidence and their credit score.

What is a 529 savings plan?

A 529 savings plan works in some respects like a Roth retirement savings plan. It allows account holders to open an account and invest after-tax savings in different mutual funds, bond funds and exchange-traded funds for the benefit of a designated child’s future qualified education expenses.

This will require making investment decisions: What is your risk tolerance? When will you need the money? Most 529 savings plans will offer an age-based solution in which you can pick a year, or date range, when you expect your child to go to college, and the portfolio will be rebalanced from stocks (more aggressive but riskier) to bonds (lower return, but more stable) during that time. This "set it and forget" option is popular, but could be too conservative, given the rising costs of higher education.

You can move money between plans tax-free only once in 12 months for any reason. When you're ready to make a transfer, contact the plan you're interested in to receive any necessary forms. Because many states continue to improve their plans, it’s smart to check out the options every year or so. Some states require you to be a resident of that state to use their 529 plans, but many do not.

What is a 529 prepaid tuition plan?

Prepaid tuition plans are less popular and much more tied to state residency than savings plans. With prepaid plans, depositors pay current tuition rates for colleges or college systems, rather than a higher rate in the future. The goal of these plans is to lock in the tuition price ahead of inflation.

Unlike 529 savings plans, prepaid tuition plans cannot typically be used for room and board at colleges and universities and cannot be applied to elementary and secondary schools. There are also limitations on how the funds can be spent. If the beneficiary ends up attending a different school, the fund may not pay the full cost of tuition.

To date, only nine states offer prepaid tuition plans to new enrollees: Florida, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington, according to the most recent data from Scholarships360.

There is also a national option not tied to any one state. The nonprofit Tuition Plan Consortium’s Private College 529 Plan allows you to prepay for hundreds of private colleges nationwide.

College Well describes Private 529 plans as prepaid tuition plans that allow families to lock in current tuition rates at nearly 300 private colleges across the United States. Similar to traditional 529 plans, Private 529 plans allow contributions to grow tax-deferred and withdrawals for qualified expenses to be tax-free.

Private 529 plans are available in nearly 300 private colleges and universities coast to coast, including Albright College, PA, Berklee College of Music, MA, California Institute of Technology, CA, Duke University, NC, and Georgetown University, DC, to name a few.

Among other available plans, the Massachusetts U.Plan Prepaid Tuition Program isn't a true 529 plan; it issues state bonds that can be exchanged for tuition at participating institutions in the commonwealth (no, not Harvard).

How does a 529 plan affect financial aid?

Because parents own most 529 plans, the accounts typically have a minimal impact on student financial aid. Due to the Asset Protection Allowance, which varies based on the older parent's age, only assets above a specific limit are factored into aid calculations. Even then, 529 assets only reduce aid eligibility by a maximum of 5.64% of the account's total value. Distributions taken from parent-owned accounts to cover a dependent child's qualified educational expenses are not counted as income for the student.

Accounts owned by grandparents or any people other than the student or parents have been treated differently, however. Assets in grandparents’ 529 accounts are not counted or reported on the Free Application for Federal Student Aid (FAFSA), meaning a grandparent-owned plan won't impact need-based financial aid eligibility. This is referred to as the Grandparent Loophole. Previously, distributions were reported as untaxed income, which could reduce financial aid eligibility by up to 50%.

What happens to 529 money when a child turns 21?

529 accounts owned by parents stay in the parents’ control for as long as they'd like. However, the situation is different for parents who have funded custodial accounts for their children. Money in a child's custodial account is counted as an irrevocable gift, and transferring it to a 529 account won’t change that fact. The money can never be shifted to another beneficiary, for example, and your child will control it when they reach the age of majority, either 18 or 21, depending on state law.

Are 529 plans insured? Could I lose my money?

It’s important to remember that 529 savings plans are an investment and require judgment on risk versus return. Age-based portfolios are popular choices in 529s and are designed to reduce risk as you get closer to the time you expect your child to go to college; this lowers the chance that a stock market swoon will take a big bite of your savings just as you need cash for the bills.

Some 529 savings plans offer ultra-conservative options that allow you to put your money in federally insured certificates of deposit. Here, your chances of loss are close to zero, but now you risk not having the money you put aside grow quickly enough to keep up with the rising cost of education.

529 prepaid plans are different, as they are essentially a futures contract promising you that future tuition will be covered by money contributed now. According to the Securities and Exchange Commission, some state prepaid plans are not guaranteed, meaning you may lose money if the plan sponsor has financial troubles.

What happens if you don’t use 529 funds?

Withdrawals from the funds for non-qualified reasons will be subject to federal income taxes on earnings and an additional penalty of 10%. But there are many ways to avoid that fate.

You could designate another child or grandchild (or even a first cousin) to be the beneficiary. Or yourself. For example, if you want to change careers or increase your employment qualifications, you can use 529 money to fund your own education and training, as long as the schooling comes from a program that meets requirements for accreditation.

There are exceptions to the penalty (though not taxes on earnings):

• If your child receives a tax-free scholarship.
• If your child received educational assistance through a qualifying employer program.
• If your child is permanently disabled (or dies).
• If your child gets a slot at a competitive military service academy.
• If the funds are used to claim another educational tax benefit.

Rolling over 529 funds into a Roth IRA

Another option is to roll over funds from your 529 plan into a Roth IRA, which lets you avoid income tax and tax penalties that occur when withdrawing funds for non-education expenses. However, beneficiaries of 529 college savings accounts can only roll over $35,000 in unused 529 assets throughout their lifetime, and these rollovers are subject to Roth IRA annual contribution limits.

Is a state 529 plan the way to go?

There are advantages and disadvantages to using 529 plans to save for your child’s education. For many people, the advantages, including favorable tax treatment, will outweigh any downsides, including potential penalties for early withdrawals or for using the money for non-qualified educational expenses

Make sure you understand the fees and expenses associated with the particular plan that you choose. This information will be contained in the plan’s disclosure statement.

For now, though, the accounts can benefit families and students by providing tax and other financial advantages that allow money to grow more quickly while creating an incentive to save for educational expenses.

Which state has the best 529 plan?

Each state determines how to administer and structure its own 529 plan. This includes state tax treatment and investment options.

Plus, states have offered incentives to residents to invest in 529 plans. Several now offer matching contributions, seed money, or other financial incentives for residents who invest in their plans.

For example, Colorado's CollegeInvest offers the First Step Program that provides a one-time $118 gift contribution to a CollegeInvest 529 account for every child born or adopted in Colorado on or after January 1, 2020. There are no income or financial limits for this program, and only contributions from the parent/guardian account owner qualify for the match.

So, when deciding where to invest your 529 money, you might first consider your own state and look into the incentives your state’s plan offers for its residents. In addition to the previous examples, these incentives can include special tax treatments, scholarship opportunities and reduced fees.

What this can mean is your state’s plan may be the best for you. But don’t assume that as a given. Compare your state’s offerings with highly rated plans offered elsewhere. Consider the plans’ past performance, fees and costs and financial stewardship in making your assessments.

Savingforcollege.com, which looks at fees and returns, gave the following plans its highest ratings for 2026:

• Alaska 529
• Maryland College Investment Plan
• T. Rowe Price College Savings Plan

How do I enroll in a 529 plan?

Every state and the District of Columbia offers a 529 savings plan. The one holdout is Wyoming. Although residents of Wyoming can still participate in 529 plans from other states, as these are generally open to out-of-state participants, you will likely miss out on any state-specific tax benefits.

Parents and others wanting to save for a child’s education can open the plans for a designated beneficiary. Contributions can be made through payroll deductions or automatic bank account transfers, and most plans can be started with minimal sums.

To enroll, go to the website for your chosen plan and follow the instructions to enroll online. Some plans have financial advisors who can guide you in making a selection and help you enroll. But keep in mind that help may come at a price.

Some plans allow you to open an account with as little as $50. Each account has an owner — sometimes joint owners — and that person controls the assets, regardless of how many people contribute. The owner doesn’t have to be a parent.

Can I use 529 plan money for any school?

Money from a 529 savings plan can be used at any school approved by the U.S. Department of Education to accept Title IV student aid. Most recent data show that the Private College 529 Plan includes nearly 300 participating private colleges and universities nationwide. The number of 529 plans has grown to over 17 million accounts. This includes hundreds of foreign colleges and most colleges and universities in the United States.

Excel or PDF spreadsheets with 2025 - 2026 information about those colleges can be found on this Department of Education website. You can also look up eligible schools on Savingforcollege.com.

What Happens if Your Child Doesn’t Go to College (or Has Money Left Over)?

Good news. 529 plans are more flexible than you may realize, and your money doesn’t disappear or get locked away if your child (or grandchild) doesn't go to college or the 529 has money left over. .

In fact, either way, you have several options:

• You can change the beneficiary at any time to another qualifying family member (even yourself) and keep using the funds tax-free for their (or your) education.
• There’s no deadline or age limit, so you can keep the account open. Your child or grandchild can use it later for college, trade school, for an apprenticeships or for other qualified expenses.
• Roll the funds over (up to the $35,000 lifetime limit) to a Roth IRA in your beneficiary’s name, tax- and penalty-free, as long as your 529 has been open for at least 15 years.
• Use up to $10,000 in lifetime benefits for qualified student loan repayments.

If none of those work for you, non-qualified withdrawals are always possible, but keep in mind that you’ll owe taxes on the earnings plus pay a 10% penalty.

Final word

It's safe to say that 529 plans are one of the smartest ways to save for education, while also providing you with benefits for estate planning and retirement. With tax-free growth, limited impact on financial aid, and the flexibility to cover everything from college and apprenticeships to K-12 expenses and student loans, 529s remain a powerful tool for families investing in their children's future.

Related Content

• How This 529 'Superfund' Strategy Can Transform Your Estate Plan
• Using a 529 Plan? Here’s What to Keep in Mind
• Three Key Ways You Can Help a Child or Grandchild Pay for College
• Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)

I can only imagine the enthusiasm of students and teachers who will finally able to be back in a classroom and learning in person as schools and campuses around the country start coming back to life this fall. As I walked around my neighborhood every morning earlier this spring, front lawns were dotted with signs pronouncing “Congratulations, graduate!” for kindergartners, fifth-graders, high school seniors, college grads and every grade in between as families celebrated these important milestones.

The experience of the pandemic has reminded us just how important and irreplaceable educational experiences are for our future generations. For those thinking about giving the gift of education to a young loved one, there’s never been a more meaningful time.

There are a few ways to make a gift that can be used for education, each with its own set of features you should evaluate thoroughly before deciding upon the right vehicle to use.

The Education-Specific Option

If you want to ensure your gift is used strictly for education, there are two common ways to do so. The first and most straightforward way is to directly pay for the student’s education by writing a check for their tuition payable to their educational institution. Paying for tuition in this way is an efficient way to give, as this type of support does not count toward your annual gift tax exclusion amount ($15,000 per person in 2021) or your lifetime exemption amount ($11.7 million per person) as long as the check is made payable directly to the education institution.

While writing a check is an easy way to pay for tuition due, many parents or family members start thinking about how to save for future college costs as soon as the future college student is born. One of the most popular methods to save for future educational expenses is the 529 savings plan. A 529 savings plan is a tax-advantaged account that can be used to pay for qualified education costs. Once a 529 savings plan is opened, anyone can contribute to it on behalf of a beneficiary.

While there is no federal income tax deduction for making a contribution to a 529 savings plan, some states do offer a state income tax deduction for contributions made by a resident to their state plan. The account, once invested, grows tax-deferred each year until the student goes to college. Withdrawals from the account are tax-free as long as funds are used to pay for qualified educational expenses. (The important word here is “qualified,” as some costs, such as application fees or transportation costs, do not fall into the qualified category.) Some examples of qualified education costs include:

• Tuition and fees for a single college or university
• College room and board, books and supplies, computers and internet access
• Registered apprenticeship program expenses
• Tuition and fees for K-12 schools up to $10,000 per year
• Up to $10,000 in student loan debt repayment

Keep in mind, however, that if the funds are withdrawn for a reason other than the educational uses noted above, income taxes and a 10% penalty will apply to the growth in the account.

Since a 529 plan account is generally established for the benefit of another person, any money you contribute counts as a gift to that person, so your contribution is a great way to utilize your annual gift tax exclusion amount. You can give the full $15,000 each year to a single beneficiary, or $30,000 if you are married and your spouse also contributes. You could also take advantage of a special rule and do a lump sum contribution by accelerating up to five years of your annual gifts all at once — $75,000 if you are single or $150,000 if you are married. A lump sum investment of $150,000 to a 529 savings plan when a child is born would be worth more than $350,000 by the time they turn 18 if the account compounds at 5% each year.

Some families worry about overfunding a 529 account for their child or loved one. If your loved one doesn’t go to college or college ends up costing less than you originally anticipated, one of the great features of a 529 plan is that you can change the beneficiary on the plan to another family member of the original beneficiary. Parents can change the beneficiary to another child, a cousin or even themselves!

A 529 prepaid tuition plan is another way to pay for college, though not quite as common as the more traditional 529 savings plan described above. With a prepaid tuition plan, you prepay future costs at a specific college or university, locking in future tuition costs today regardless of how many years are left until actual enrollment.

The More Flexible Option

There are other ways to financially support a loved one’s education without putting money directly toward tuition costs. Trusts and custodial accounts are a great way to build in flexibility.

By setting up a trust, the trustee can specify what they want the money to be used for, all of which would be clearly laid out in the terms of the trust. For example, you may specify that it be for education-related expenses, such as housing, meals, transportation, internships or textbooks. The trustee may also specify when the money can be accessed by using an age limit or creating terms for the money to be distributed over a specific period of time, for example. For those making the gifts, trusts offer greater customization and flexibility than a 529 savings plan offers. However, trusts do come with higher legal costs to set up and administer as well as less favorable tax treatment, as trusts do not provide tax-free growth or distributions like 529 savings plans do.

A custodial account offers a similar structure to trusts, though they’re easier and less costly to establish. Unlike trusts, however, once the beneficiary reaches the age of majority, the account becomes theirs. They will be able to take control of the account and use the remaining funds for whatever purpose they like – whether it is next semester’s tuition and books or the new car they have their eye on.

Similar to 529 plans, contributions to both trusts and custodial accounts for the benefit of another person count as a gift to that person, so you will need to file a gift tax return. If you are considering using a trust or custodial account, the beneficiary may be subject to Kiddie Tax rules, so take this into consideration when evaluating your options.

The gift of education, no matter how big or small, will make a lasting difference in a loved one’s life. Ultimately, however you decide to make this gift, know that there isn’t a wrong way to do it!

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

States have long offered tax breaks to parents who contribute to 529 college-savings plans. Now, they’re increasingly offering an even more straightforward incentive: cash. Fifteen states offer matching contributions, seed money, or other forms of financing to encourage residents to sign up.

Money stashed in a 529 account grows tax-free, and withdrawals are tax-free as long as the funds are used for qualified educational expenses. While you can invest in any state’s plan, many states provide a tax break for residents.

The new financial incentives could also make investing in your own state’s plan more appealing, although the most generous grants are income-based. Colorado’s CollegeInvest 529 plan will match contributions up to $500 a year for five years as long as the beneficiary is 8 years old or younger when parents sign up and the family’s adjusted gross income is 400% or less of the federal poverty level ($106,000 for a family of four). Other states have no income restrictions, but their offerings are smaller—$50 or $100 for parents of newborns.

Although these incentives may encourage more families to opt for a 529 plan, investors should still shop around, with a focus on plans with low fees and solid investment options, says Emory Zink, an associate director at research firm Morningstar. To find Morningstar’s top-rated plans, go to www.morningstar.com/articles/1006084/the-top-529-college-savings-plans-of-2020.

Editor’s note: This is part one of a three-part series about college 529 savings plans. Part two is What You Need to Know about College 529 Savings Plans, and part three is College 529 Savings Plans: How to Get the Most Out of Them.

The average cost of public in-state college tuition, fees, room and board in 2020-21 is $26,820 a year and $54,880 for a four-year private college, according to a recent study by the College Board. For a child born today, the four-year cost of college is expected to be $526,629 for private and $230,069 for public, according to a recent study by J.P. Morgan. Imagine if you have two or three kids?

True, there is financial aid, merit and athletic scholarships. Most schools discount the sticker price. But there is no guarantee your child will receive aid, so we must plan. Sadly, I find most parents lack a plan for college savings. Parents have good intentions and care for their kids, but for one reason or another they never get around to setting anything up. Parents who say they do “have a plan” often are merely throwing some money aimlessly into an age-based 529 college savings program. That is a good start, but not enough to meet the six-figure future cost of college. Planning for the astronomical cost of college requires more. It requires a thoughtful, meticulous plan.

For my clients, we start with reviewing their goals and objectives. We review the expected cost of public and private college in their home state. Then parents may decide to try to cover 100% of college costs, 50% or maybe a third. Having a goal in mind is extremely important. It creates motivation and lessens anxiety. We then review their monthly cashflow to find a number they feel comfortable allocating into a college savings program. From there we devise a holistic plan. We review their employer plans, such as deferred compensation or company stock plans, insurance needs and expenses, discuss retirement savings, inheritances and anything else that’s important to the conversation. We then review several college saving recommendations.

Here is one: Forget age-based options.

How parents fail to make the most of 529 plans

You probably are familiar with the 529 college savings plan. These programs are a solid choice for college savers. Contributions are after-tax (no federal tax-deduction up-front), earnings grow tax-deferred, and withdrawals for qualified higher-education expenses (room, board, tuition and some fees) are income tax-free. In addition, assets in a 529 plan receive preferential financial aid treatment when owned by a parent. A maximum of 5.64% of parental assets count toward a family’s Expected Family Contribution (EFC) when applying for federal financial aid, versus 20% of a student’s assets (Source: Savingforcollege.com). There are penalties for not using 529 money for college, namely a 10% penalty on withdrawals, plus the earnings are income taxable.

Many parents are familiar with 529s, but many don’t fully utilize the program. In practice, I find parents contributing monthly to a 529 into an age-based mutual fund. On the surface this seems logical. An age-based mutual fund invests in more aggressive equity mutual funds for younger children, then automatically shifts to more conservative bonds as the child ages and gets closer to college. This makes sense, as you want 529 money to be conservative as the child gets closer to withdrawing the money for college. Age-based funds are set-it-and-forget choices, meaning busy parents don’t have to manage the investments themselves.

Personally, I don’t care for age-based options.

Age-based mutual funds are for the most part too conservative. For example, Vanguard’s 529 age-based mutual funds own some bonds for all ages, starting at age zero! This means a newborn, 18 years away from needing the money for college, has some conservative, low-yielding bonds in the account. Fidelity’s Connecticut Higher Education Trust (CHET) 529 age-based option for a child 18 years away from college — the 2039 portfolio — has 5% in bonds. The 2036 portfolio — for a child 15 years from college — has 14% in bonds.

This is a huge mistake, in my opinion. Bonds are too conservative for a child that young. I understand the importance of asset allocation, having been in the business for 20 years. I use bonds to diversify portfolios and believe bonds play an important role in helping a portfolio weather a stock market storm, as bonds usually hold up better in a stock market crash. But I also understand that a newborn child has a long, long time before needing the money for college. In 18 years, the child’s account will see many stock market corrections, booms and busts. I am not so concerned about a dip in the stock market with a child that young. I more concerned about the skyrocketing cost of college, otherwise known as inflation.

The real risk is inflation

Forbes recently reported the cost of attending college rose more than twice as fast as inflation. More than twice as fast as inflation! Costs rose 497% from 1985 to 2018. Good luck beating that inflation rate with low-yielding bonds.

Inflation is the real risk to a newborn, not a stock market correction when the child is 5 years old. Not only that, but if interest rates rise, bond prices may fall, making bonds by some measures riskier than stocks.

A better way

My advice: Forget age-based 529 options and pick the funds yourself, based on your time horizon of needing the money for college. Children more than five to seven years away from college may want to consider an all-equity portfolio to maximize growth. Given the high cost of college, you will need all the growth you can muster from your investments.

If you still want some fixed income in your 529 plan, you should ask yourself: What is the best approach? Does a bond index make sense? Probably not in this low-rate environment. A bond index owns short- and long-term bonds. Long-term bonds have more interest rate sensitivity, meaning if rates rise, your principal will likely go down. You should check whether your 529 plan offers an active fixed income manager to provide some investment flexibility. An active fixed income manager may have higher fees than an index but can better manage the fund for yield and adjust the holdings if interest rates do rise. Some 529 accounts offer a “stable-value” option, which may be lower yielding, but has better principal protection than a bond fund.

Other considerations

Start with reviewing the 529 plan of your home state versus an out-of-state 529. Does your state offer a tax-break for contributions to their 529 plan? Even so, how do the fees compare with your resident state’s 529 versus another state’s plan? You can use a 529 plan in other states. Some states, including California and New Jersey, offer no state tax break for contributions. Either way, you should compare the fees and mutual fund options in your state’s plan versus an out-of-state 529. Just because a state offers a state tax deduction for your contributions doesn’t make it a “good plan.” Besides, the state tax deduction doesn’t usually amount to much either. Other states’ 529 plans may offer lesser fees or better mutual fund selection.

I like 529 college savings plans and have three accounts myself, one for each of my three children. But when it comes to picking a 529 plan and choosing the right mix of investments, I encourage parents to use a little more discretion. A little effort today in choosing the right 529 plan or managing the investment choices can pay bigger dividends for your child in the future, quite literally.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Question: Our daughter is the beneficiary of her grandfather’s 529 college-savings account. We’re paying the college bills, but can he reimburse us for those paid qualified education expenses?

Answer: Yes, he can reimburse you for qualified expenses, such as tuition, textbooks and fees, that you paid on your daughter’s behalf. The withdrawals should be made in the same calendar year that the expense is incurred, and you should keep receipts, canceled checks and other paperwork for your records in case the IRS asks for evidence that the money was used for a qualified expense.

Before making a withdrawal from a grandparent-owned 529 account, review the impact it will have on your student’s financial aid award. Money in a grandparent-owned 529 account is not reported as an asset on the Free Application for Federal Student Aid (FAFSA). But withdrawals from the account are reported as untaxed income to the student, reducing aid eligibility by as much as 50% of the distribution amount. (Students are allowed up to $6,600 in annual income before aid is reduced.)

To minimize the impact on financial aid, grandparents can take distributions after the last tax year that counts for financial aid. After some recent changes, the FAFSA is now based on a two-year lookback period. Families filing beginning on October 1, 2019, for the 2020-21 academic year, for example, will use 2018 income and other financial information. Distributions made after January 1 of the sophomore year of college won’t show up on the FAFSA, assuming the student graduates in four years.

There are several other workarounds to limit a grandparent-owned 529’s impact on financial aid, says Mark Kantrowitz, publisher of SavingforCollege.com. The grandparent can name the student’s parent as the account owner before the money is withdrawn. That way, distributions will not count against financial aid. Instead, the account will be reported as a parent asset on future FAFSAs, reducing aid eligibility by as much as 5.6% of the account’s value. However, not all 529 plans let you switch account owners. And some states will reverse state income tax benefits the previous owner received if the account owner is changed. See SavingforCollege.com for information about each state’s rules.

Another strategy: The grandparent can roll over a year’s worth of funds at a time to a parent-owned 529 plan. If the rollover occurs after the FAFSA is filed and if the funds are spent before the next FAFSA is submitted, the money won’t show up as an asset on the FAFSA. And distributions won’t affect aid eligibility because the 529 is owned by the parent. To avoid unexpected tax penalties, the parent-owned 529 plan should be in the same state as the grandparent-owned account, says Kantrowitz.

Until recently, 529 college-savings plans offered tax-free withdrawals only when the money was used for qualified college education expenses. But under the federal tax overhaul enacted at the end of 2017, parents can withdraw up to $10,000 tax-free from a 529 plan each year to pay for private-school tuition for kindergarten through 12th grade.

Before you start using your 529 plan to pay private-school tuition, check with your state’s plan. Although most states conform with federal law, a few, including Illinois, New York and Oregon, have different rules that could result in unexpected taxes and penalties. They typically charge state income tax on the earnings portion of the distribution and require families to return state tax deductions or credits received for contributions.

There are other reasons to think twice about using your 529 plan for precollege expenses. College savings plans work best when your investments have plenty of time to grow. Plus, tapping the account for precollege expenses could leave you with a shortfall for college. Families planning to use 529 funds for K–12 should consider opening a separate 529 account for that purpose. This allows you to track K–12 and college savings separately and pick investment portfolios that match your needs for each.

When it comes to the college savings conversation, I usually stick with suggesting the traditional 529 plan when helping people choose the right savings and investment vehicle for the goal of funding higher-education costs.

Being in New York gives my in-state clients a great plan right off the bat — and plenty of people from out-of-state use New York’s 529 plan, too, because of its investment options. The fact that our 529 plan is already so good didn’t give me much reason to look for alternative solutions.

Not to mention, I’m generally wary about alternatives, like prepaid state tuition plans, because they typically lock you and your student into a state school*. That could be fine if your student is absolutely set on attending an in-state university …

... but what if your children are still in elementary school? Your fifth grader isn’t going to be able to reliably tell you what they want for their college education when it rolls around in another eight years or so.

All this being said, I do think there may be an alternative to the traditional 529 plan that New York offers that could make sense for some families. I started looking into these options after Kiplinger published my article, The Best College Savings Strategy to Use.

I received a bunch of comments and feedback from the piece, which helped me learn about the Private College 529 plan and how it could be used in conjunction with a traditional 529 plan.

Here’s what to know about these savings vehicles — and how to determine if you should use one for your college savings goals.

What is the Private College 529 Plan?

The Private College 529 Plan is a prepaid tuition plan, but it is different from the state version of prepaid college plans, because it’s a nationwide plan. Your child isn’t limited to an in-state school. It allows families to save on the cost of college by purchasing tomorrow's tuition at today's prices. No matter how much tuition increases over the years, or how volatile the financial markets are, you lock in current rates that can be used at any of the participating colleges and universities.

That’s a big advantage for families who want to reduce risk and volatility, and remove some of the unknowns from the college savings equation. These plans can be even more appealing to those who feel nervous about the skyrocketing cost of higher education.

How These Private Plans Work

You name a beneficiary when you open your account, but you don't have to select a college or university until your student enrolls in a school. The increase in value of the account and the distributions taken, when applied to qualified expenses, are free from federal and state income tax.

While a traditional 529 plan allows you to invest cash into funds within the account in hopes that you earn a return on your money, Private College 529 plans don’t provide a pathway to investing. Instead, you buy tomorrow's tuition at today's prices through the plan in the form of Tuition Certificates. This helps reduce the risk to you, because you eliminate the investment risk associated with putting your money into equities or securities.

The colleges take the risk, because they guarantee today’s prices — which, presumably, will be far, far lower than what they’ll be in five, 10, or 15 years from now.

Understanding Tuition Certificates Purchased in a Private Plan

The Tuition Certificates you purchase through the plan can be redeemed to pay for future tuition at any of the nearly 300 participating private colleges.

The amount of tuition you purchase is based on the current rate of tuition at each participating school. The percentage of a year you purchase will vary by school, based on the tuition rates at the time your Certificates are purchased.

Here’s an example: Let’s say a Tuition Certificate purchased for $10,000 today is worth 0.33 years of tuition at one school where current tuition is $30,000, and it’s worth 0.25 years at another school where current tuition is $40,000.

Each time you contribute to your account, the Plan calculates how much tuition you own at each participating school. The Plan then reports how much tuition you own at your designated sample schools on your account statements.

What Happens If Your Child Doesn’t Go to College?

This is a common question I hear for any type of education savings. The good news is that similar to a standard 529, if your child does not end up going to college, the funds can be transferred to another sibling or family member. If this is not an option, you can withdraw all of your contributions but may not recover the full investment earnings and would forgo much of the benefit of prepaid tuition.

Pros and Cons of Using a Private 529 Plan

The biggest, most obvious advantage of these private plans is the ability to lock in rates now before they rise. You also enjoy the benefit of avoiding market risk, which is especially appealing to those who already worry about market movements.

Of course, there are downsides, too. With the Private College 529 plan you have limited school selection (although not nearly as limited as with a state prepaid plan), which could be a problem if your student doesn’t want to go to one of the schools that participate.

You do have the option of rolling the private plan into a traditional 529 at any point — but the gain you received in tuition hikes will likely be less than what the market did during the time you used the private plan.

Another way to overcome some of the cons of using a private plan would be to use a private 529 plan along with a traditional one. Here’s one strategy to consider:

Funds in most traditional 529 plans are target date funds, with the targeted date being the year your child begins college. As your child enters high school, these funds become much more conservative and will probably earn lower rates of return.

If the student is strongly considering attending a private college that is part of the Private College 529 Plan, the family might be better off with a strategy of moving some assets from the traditional 529 into the Private College 529. That allows them to lock in future tuition at today's rates with the idea that the inflation rate of tuition would be greater than what they were earning in their traditional 529.

That, in turn, could provide you with a better return — especially if the value of bonds falls (as we saw in 2018).

So what’s the best college savings strategy for you to use? As with almost everything in financial planning, the best answer is “it depends” — it depends on your situation, your other priorities and goals, your cash flow and what you have available to save, your children and their preferences and ages …

The list goes on, which can make choosing the right thing complicated. Feel free to reach out if you’d like to have a further, in-depth discussion about the best moves to make for you and your family.

* In some cases funds can be transferred or refunded in case your child chooses a different school.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Worried about funding your kid’s college education? Then let’s start with the good news: There are many ways to pay for college, so you have a lot of options.

But the tricky part is the fact that there are a lot of variables and choices to make in the process. That can make finding the best strategy or choosing the best option out of everything available feel overwhelming.

It’s important to create a realistic plan to achieve your specific college funding goals. Here’s what to keep in mind as you think through this major planning challenge.

What Percentage of the Bill Do You Want to Foot?

When I talk to clients about this, I start with one big question: What is your expectation?

In other words, do you feel like you should be paying the entire cost of college for your kids? Do you feel like you’re not obligated to pay any of it, and they need to make it on their own?

As with most things, the majority of my clients fall somewhere in the middle. They want to do what they can (and some parents want to do more than what they can reasonably afford — and we’ll get to that in a minute if you’re feeling this way, too).

Which School Makes the Most Sense for Your Student?

The next question I focus on is figuring out what ballpark we’re playing in.

If you feel comfortable footing 50% of the bill for your student, we need to know whether that’s 50% of the bill to an in-state school that might cost $30,000 per year … or 50% of the bill to a school like NYU, which could run $70,000 or more per year.

Obviously, those are two very different things — and there may be even more variables to consider, depending on your family and what your children want to do.

Deciding on the type of school is an important part of this, and you need to get clear on what the purpose of higher education is for your kids.

Are they going for practical purposes? Are they (or you) attracted by the name-brand? What does your student really want to do — and what can they realistically expect to earn as an adult out of school?

If you’re taking out massive amounts of loans when that student has no chance of earning significant income, you’re setting everyone up for failure. And keep in mind that a “famous school” does not directly translate to a “good school.”

With college costs growing so fast, you and your kids need to be intentional about choosing the school for them. You need to look at the tangible benefits of attending the school and graduating with a particular degree … and not just be dazzled by the prestige of certain universities. (To get some ideas of colleges that might be worth the money, see Kiplinger’s Best College Values, 2018.)

If you think it’s ridiculous to buy a high-end sports car just to show off to everyone else, keep in mind that going to a school just for its name can be just another form of status symbol.

The Specific Variables to Consider (and Adjust) When Saving for College

When it comes to actually figuring how much to save for college, how to do it, and where to put that cash between now and when your kids go to school, you must know the details of a number of variables to create a plan:

• Annual cost of college
• Expected inflation rate of college tuition
• The year college starts
• Balance of current savings
• Amount of additional monthly contributions
• Targeted rate of return on money saved

A financial planner can help you run projections that use these variables to come up with a very specific amount of money you need to save per year or per month in order to meet your college savings goals.

Getting the answer to “how much should I be saving for college?” is helpful and can give you peace of mind… but most people aren’t saving for college in a vacuum. In real life, we have competing priorities — which is another reason to work with a financial planner on this issue. Their perspective can help you figure out how to deal with all these competing priorities, the biggest of which might be your own retirement.

A Warning: Saving for College vs. Your Own Retirement

The biggest mistake I see my own clients make is their desire to do everything they can to give their kids a full ride to the university of their choice — regardless of the cost and the reality that they have more than just that college savings goal to fund.

I can’t stress this enough: DO NOT bankrupt your retirement savings to pay for college. DO NOT sacrifice your own financial security for the sake of paying for college for your kids.

Why? Aren’t your kids the most important thing in a parent’s life? You could argue that, but I’d like to remind you there are lots of ways to fund college. You can pay for tuition and other college costs with:

• Savings or ongoing cash flow
• Loans (within reason)
• Scholarships and grants
• Other financial aid

Your family also has control over a number of variables in the situation, including your student’s ability to attend a cheaper school, stay in-state versus out, choose public instead of private, or work part-time to help cover their expenses.

You have options for college funding. There is only one way to fund your future retirement, and that’s you and your ability to save and invest for it today. There is no Plan B, so you must prioritize funding your own life after work. If you’re not on track with your own savings, you need to focus there first and figure out if and when you can help out with college later.

Saving for College with a 529 Plan: Does It Make Sense to Stash Cash Here?

Once you determine how much you feel comfortable and able to put toward a child’s college education, the next question is where do you put that money?

If you’re starting when your kids are young, you may have 10 or more years between now and when you need to use the funds — and that means you should consider investing that cash instead of letting it sit in a savings account earning little to no interest.

With a time horizon that could stretch over a decade or more, investing can help you take advantage of compounding returns and put your money to work (so you don’t have to save the entire cost of college, dollar for dollar, on your own).

Many people saving for college choose 529 plans as their investment vehicles, and that’s for good reason. 529 plans offer tax advantages that can help you allocate even more dollars to education expenses.

There are a variety of plans available, and you’re not limited to just your own state’s plan. You may want to consider it if you get a deduction for using your in-state plan; if you don’t or the deduction is minimal, you might want to use another state’s plan if it offers lower fees and better-quality investment options.

For example, I live in Massachusetts — but the maximum deduction I receive for using Mass’ 529 plan is $102 per year. That’s such a (relatively) small deduction that I’m probably better off using another state’s plan (and in fact, I often recommend New York’s plans to my Massachusetts clients).

SavingForCollege.com is a great place to research different programs if you’re not sure where to start.

The Downsides of the 529 Plan

Before you start stuffing cash into a 529 plan, know that it might be wise to only invest money that you know will go toward qualified education expenses.

Again, there are tax benefits to using 529s. If you invest $10,000 and it grows to $20,000, for example, that growth is tax-free, so you don’t pay dividends or capital gains taxes like you would on growth in a regular brokerage account.

But if you don’t use the money for qualified education expenses, then you will pay a 10% penalty on the growth as well as taxes on that amount. (There is an exception to this: If your child gets a full scholarship, the 10% penalty is waived.)

You could also transfer the account from one beneficiary to another within your immediate family (or even use it for your own education); there’s no penalty for that. If you have two children who don’t overlap years in college, you might just want to fund one account and change the beneficiary on the account to the younger child when the older student finishes school.

Should You Use a 529 Plan or a Plain Old Brokerage Account?

If one of your priorities is flexibility because you don’t know how much you want to contribute to a college education or how much it’s going to cost or if your kids will stay in school at all, a non-retirement investment account (or brokerage account) might be better for you.

You can then use that money for whatever you want; it’s still invested and hopefully earning a reasonable return. There are no penalties for using it for non-education costs if that’s what ends up happening. The only downside here is the fact that there’s no specific tax advantage.

At the end of the day, if saving for college is important in any way shape or form, know that actually saving the money is the most important thing. It doesn’t really matter what vehicle is the best one for your savings if you’re not saving anyway!

That being said, I still think it’s a good idea for parents to open 529 plans for their kids even if they don’t want to put their own money into the accounts. Why? Because it makes it easier for other people to help you save for the cost of college.

Even if you’re not sure how you will fund it (if at all), open a 529 plan so that grandparents, aunts and uncles, other family members or family friends can contribute to it.

The only thing I would suggest not doing is fully funding a 529 plan with the amount you think you need to pay for college. Again, if you overfund it and cash out the excess money for non-education purposes, then you’ll be penalized for your savings.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Question: Can I use money tax-free from a 529 college-savings plan to pay for continuing education? Or do I have to be enrolled in a college degree or certificate program? -C.B., Bethlehem, Pa.

Answer: As long as you are taking the course at an eligible institution, the cost of tuition, fees, required books and software can be withdrawn tax-free from the 529, even if you aren’t in a degree or certificate program. Eligible institutions include accredited colleges, universities, vocational schools and other postsecondary educational institutions that participate in a student aid program administered by the U.S. Department of Education (see FAFSA.gov's Federal School Code Search tool). Nearly 4,000 U.S. institutions qualify, along with some outside of the U.S., says James DiUlio, chairman of the executive board of the National College Savings Plan Network.

Continuing education needed to maintain a professional license may also be eligible, depending on the institution where you take the course.

If you’re a parent, you’ve undoubtedly wondered how you should save for your kids’ college educations … and how much you need to save.

With the cost of college only continuing to rise at a clip that outpaces inflation, we can expect higher education to require a hefty amount of money in the future. The best strategy you can use to be prepared for this reality is to start saving as early as you can — and don’t get caught playing catch-up later on.

Leverage a 529 Plan for College Savings

One of the best places to stash cash earmarked for college costs is within a 529 plan. The money you contribute here can grow and be used tax-free when your kids go to school (as long as the money is spent on qualifying education expenses).

Because they’d need a Social Security number, your children need to be born before you can start using a plan; you can’t contribute before you have kids, or even while pregnant. (Note that, technically, if you’re determined to start saving before you start a family, there is one way around it: You can open account with yourself as the beneficiary, and then later switch it to your child.)

As soon as your children arrive in the world, I’d recommend setting aside a small amount of money each month into a 529 plan for them.

Why? Compounding! If you start when your child is born, that gives you 18 years to save. Many parents read that and feel they have plenty of time — but if you wait, you give yourself an uphill battle when it comes to saving enough.

Here’s the thing: Compounding returns is what will allow you to save less every month as long as you save longer. If you start when your child is young, it will be easier to generate the money needed to pay for college costs.

The more money you put in earlier the more time it has time to compound!

Why You Should Front-Load Your College Savings Accounts

Time is arguably your biggest advantage as an investor, because more time leads to increased compounding. Not convinced? Let’s look at a specific example with real numbers.

Imagine that three families all contribute the same amount of cash, $90,000, to their child’s 529 plan over 18 years — but they contribute the money at different times.

Family 1 (we’ll call them the Even Stevens Family) contributes $5,000 per year to a 529 plan.

Meanwhile, Family 2 (who we’ll call the Late Lees Family) contributes $1,000 per year in first five years. They gradually increase their contributions over time as college gets closer, with $2,500 per year for years 6-10, and $5,000 per year in years 11-15. In the last three years they have to save before their kid goes to college, they save $12,500, $15,000 and $20,000.

Finally, Family 3 (or the Early Easons Family) takes yet a different approach: Over the 18 years they have to save for college, they contribute $20,000 per year to the 529 plan for the first four years. In savings year five, they contribute $10,000. And then they simply leave the money invested in the plan, without contributing more cash between now and when their child goes to school.

Which family had the best strategy? Who ended up with the most money in the 529 plan? Here’s what each family has in their plan at the end of that 18-year savings period :

The results might surprise you. As we can see, the Stevens family ends up with almost $30,000 more saved for higher education expenses than the Lees — even though both families contributed the same amount of money.

This is how compounding works: Your money needs to time to grow. The Stevens family gave more of their money a longer period of time to grow. Even though the Lees made some pretty big contributions late in the game, that money never got a chance to compound — so they ended up with less overall.

And just look at what happens if you focus on saving as much as you can as early as you can! The Easons have vastly more money available to fund college — even though, again, they contributed the same amount as everyone else. But they also gave their money the most time to compound and grow, which is why they have over $81,000 more than the Lees and over $51,000 more than the Stevens family.

But What If Your Kid Doesn’t Go to College?

Of course, there’s one big caveat to all this, and it’s one some parents fear dealing with down the road: After all that effort to save “early and often,” what happens to the money in the 529 plan if your kid doesn’t go to college in 18 years?

For parents of multiple children, you could change the beneficiary of the account to another child in your household (or another family member, even yourself). And if you don’t need the money because your child gets a full scholarship, the 10% penalty for taking the cash out of the 529 plan is waived. (For more on that, read The 529 Plan Scholarship Exception.)

If this isn’t an option for whatever reason, then you might be looking at a worst-case scenario: a bunch of college savings with no college student. But this isn’t actually as bad as it seems, because you can access that money. You pay a 10% penalty on the earnings, but most families agree this potential risk is much better than not having enough savings for college for a child who does end up going.

Want to learn more? Be sure to check out this post about difference between direct and broker sold 529 plans — and why you need a direct plan.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Question: Can I use money tax-free from a 529 college-savings plan to pay for continuing education? Or do I have to be enrolled in a college degree or certificate program?

Answer: As long as you are taking the course at an eligible institution, the cost of tuition, fees, required books and software can be withdrawn tax-free from the 529—even if you aren’t in a degree or certificate program.

Eligible institutions are accredited colleges, universities, vocational schools and other postsecondary educational institutions that can participate in a student aid program administered by the U.S. Department of Education. You can look up eligible institutions by using the Federal School Code Search tool at the FAFSA.gov site.

“There are nearly 4,000 U.S. institutions that qualify—including four-year, two-year, technical, graduate, professional, public and private—along with some outside of the U.S.,” says James DiUlio, director of the Wisconsin 529 College Savings Program and chairman of the executive board of the National College Savings Plan Network. (You can find links to each state’s plans at CollegeSavings.org.)

Continuing education needed to maintain a professional license may also be eligible, depending on the institution where you take the course. For example, eligible institutions offer many continuing education programs for librarians, teachers, principals, insurance professionals, and some emergency medical technicians and medical occupations, says DiUlio. (You must be enrolled at least half-time to withdraw 529 money tax-free for room and board, however.)

Using a 529 for continuing education can be particularly helpful for parents who have 529 money left over after their children finish college, or if their kids don’t end up going to college or technical school, says DiUlio. “You can transfer the account’s beneficiary to the person taking continuing education, including yourself,” he says.

In states that give residents an income tax deduction for contributing to a college-savings plan, some people put money in a 529 account to pay for continuing education classes they plan to take soon, DiUlio adds. This way, they can get the tax break even though they won’t be keeping the money in the account for long. You can find out your state’s rules for deducting 529 contributions and whether you need to keep the money in the account for a certain time period at Savingforcollege.com.

If you withdraw money from a 529 for ineligible expenses, you’ll generally have to pay taxes and a 10% penalty on the earnings (but not on the contributions). A portion of each withdrawal is considered to be from principal, and a portion comes from earnings, based on the ratio for your total 529 balance. See the “Qualified Tuition Program” section of IRS Publication 970 for worksheets to help you calculate the taxable amount if you take ineligible withdrawals.

Question: What are the rules for withdrawing money from a 529 college-savings plan to pay for high school expenses? - E.L., Oakland, Calif.

Answer: Federal law now allows you to withdraw up to $10,000 tax-free from a 529 plan each year to pay tuition for kindergarten through 12th grade. Most states follow the federal law, but a few have different rules. California, for example, charges a 2.5% state penalty tax on earnings used for K-12 tuition. Oregon residents may have to repay any tax deduction they received for 529 plan contributions if they use the money for K-12 expenses. Check with your state and plan before making the withdrawal. See collegesavings.org for links to state plans.

Question: We opened a 529 college-savings plan in our home state of New York for a grandchild. But early this year, we moved to Idaho. Can we continue to deduct our contributions to the 529 on our Idaho income tax return?

Answer: You won’t get an Idaho state income tax deduction for contributing to the New York 529 plan. You can, however, qualify for an Idaho income tax deduction of up to $6,000 per year (or $12,000 for married couples filing jointly) if you open an account with the Idaho 529 plan and contribute to it. You can keep your New York 529 plan or roll the money over to the Idaho plan.

Question: My daughter may go to college in Europe next year. Can we use her 529 college-savings money tax-free outside of the U.S.? - S.S., Lubbock, Texas

Answer: Yes. You can use 529 money tax-free at any college that is elig­ible for federal financial aid, which includes more than 400 foreign institutions, says Mark Kantrowitz, of Savingforcollege.com. To look up eligible schools, go to www.savingforcollege.com/eligible_institutions.

Question: I read your column about how you can avoid the gift tax limits by paying a grandchild's tuition directly to the college. But wouldn't this affect the student's eligibility for financial aid?

Answer: Yes, paying your grandchild's tuition could have a big impact on financial aid in future years. That may not be an issue if you plan to pay your grandchild's tuition through the last few years of college. But it's important to keep in mind if you're only paying a portion of the cost or only helping out in the early years of college and your grandchild will be applying for aid to pay the rest.

Grandparents often pay tuition directly to a college because it helps move more money out of their estate without being subject to gift taxes. You usually need to file a gift tax return if you give more than $15,000 to any individual in 2018 (couples may give up to $30,000), but any money you pay directly to the college for your grandson's tuition isn't subject to those limits. However, money paid directly to the college must be reported as cash support on the student's federal financial aid forms and may reduce eligibility for need-based financial aid two years later, says Mark Kantrowitz, publisher of Savingforcollege.com.

Cash support is counted as untaxed student income in the financial aid calculations, and students are expected to contribute up to 50 cents for every dollar of income toward college bills (after an income-protection allowance of about $6,750 a year). Kantrowitz says some colleges will treat the payments as a "resource" because they are restricted to tuition, in which case the payments can reduce a student's eligibility for need-based aid dollar for dollar.

Another option for helping a grandchild with college bills that will have less of an impact on financial aid is to contribute to a 529 college-savings plan owned by the parents, says Kantrowitz. You can contribute up to five years' worth of the annual gift tax limit to a 529 plan—currently a total of $75,000—in a single year. You won't, however, be able to give your grandchild any more money for five years. The 529 money can be used tax-free for tuition, required fees and books, and room and board.

Withdrawals from 529s that are owned by the parents are not reported as income on the Free Application for Federal Student Aid (FAFSA). The money is considered a parental asset, and the impact on financial aid is much smaller than if the withdrawals were taken from a grandparent-owned 529. If the grandparent owns the 529, the assets aren't included in the financial aid calculations, but withdrawals are counted as student income on the FAFSA. See How a Grandparent's 529 Account Affects College Financial Aid for more information.

For more information about the financial aid calculations, see New Strategies to Get More Financial Aid.

A. Yes, The new federal tax law allows families to withdraw up to $10,000 a year from a beneficiary’s 529 account to pay tuition for kindergarten through 12th grade without federal taxes or penalties.

See Also: Special Report: 529 Plans

Even so, you shouldn’t rush into this decision without checking with your state’s plan—or a tax professional. Laws in many states have yet to catch up with the federal legislation passed in late December, and several states have signaled that they don’t plan to conform. If your state treats a withdrawal for your daughter’s tuition as a nonqualified distribution, you could owe state income taxes on a portion of the money withdrawn. And raiding your college savings to pay private school tuition may not be the best financial move.

Catching up with federal law. State-sponsored 529 plans were created more than 20 years ago to help families saving for college keep up with rapidly rising tuition. Money invested in these plans grows tax-deferred and can be withdrawn tax-free for a wide range of college expenses. Thirty-four states plus the District of Columbia also offer a tax deduction or credit to residents, usually for contributing to their home-state plan. Up until now, if you used the money for anything except higher education, the earnings on the withdrawals would be subject to income taxes and a 10% penalty.

States were caught off-guard when Congress expanded the use of 529 money. When states drew up legislation years ago to create their 529 plans, many specifically stated that the money was to be used for “higher education,” says Susie Bauer, 529 manager with the Baird investment firm in Milwaukee. Now they must change their laws to reflect that the accounts can be used for primary and secondary education, too.

As of mid July, 34 states said they will follow the new federal law, says Bauer. Seven states—California, Hawaii, Michigan, Montana, New Jersey, Oregon and Vermont—are not conforming. It’s unclear how the rest will treat withdrawals for K–12 tuition, Bauer says, and some states may seek to reclaim old tax deductions on contributions if the money is withdrawn for K–12 tuition.

Even if your state permits tax-free K–12 withdrawals, it may not be a money-wise move. The advantage of a 529 college-savings plan is that you can aggressively invest in stocks, which have high growth potential, when your child is young and there’s time for the earnings to compound. Dipping into 529 savings early to pay tuition, particularly if you don’t replace the funds, could leave you with a shortfall when much larger college bills come due. You could end up borrowing money from your retirement savings to pay for college, says Jason Lina, a certified financial planner in Alpharetta, Ga.

But if you’ve already salted away enough for college in a 529—or can afford to continue to save for college while contributing money for K–12 tuition bills, too—using the account for the early school years can be a smart tax move if your state offers a tax break. For example, a parent could deposit the current year’s elementary school tuition in a 529, then immediately withdraw the money to pay the school bill—and still take the tax deduction. That’s essentially a discount on tuition. This strategy might not be so easy in Michigan, Minnesota, Montana or Wisconsin, which limit tax deductions if residents immediately withdraw contributions.

Question:

My daughter received a full volleyball scholarship to college, so we’re wondering what to do with her 529 college-savings plan. Can we withdraw the amount of the scholarship without penalty?

Answer: You can withdraw up to the amount of the scholarship without having to pay the 10% penalty, but you will have to pay taxes on the earnings. (A portion of each withdrawal is considered to be from principal, and a portion comes from earnings.)

But before you make a scholarship withdrawal, it’s a good idea to see if you can use the money tax-free for other eligible college expenses.

Besides tuition, you can use the 529 money tax-free for room and board. If your daughter lives on campus, the 529 money can cover the full cost of room and board paid to the college. Even if she lives off campus, she can spend the 529 dollars tax-free for her housing costs, up to the school’s allowance for room and board. (You can find the allowance amount on the school’s website under the cost of attendance or by contacting the financial aid office.) Off-campus room and board only counts if the student is enrolled at least half-time.

You can also withdraw the money tax-free for textbooks, fees, and required supplies and equipment. “Essentially, you can use the money for any expense that is required by the school,” says Kaellen Hessel, of the Oregon 529 Savings Network. “For example, if you are going to art school, then art supplies would be an allowed expense.” The money can also be used to buy a computer and software for your daughter, if she will need it for her schoolwork.

There’s no time or age limit for using the money. So even if your daughter doesn’t spend the money while she’s an undergraduate, she could use it later for graduate school. Or you could change the beneficiary to another eligible family member headed to college, including your daughter’s siblings, nieces, nephews, parents, aunts, uncles, spouse or in-laws. You could even keep the money in her name and ultimately transfer the beneficiary to her own children later. Your daughter could then use up to $10,000 per beneficiary each year to pay for tuition for kindergarten through 12th grade. Or, she can save the money until her kids need it for college.

See the “Qualified Tuition Program” section of IRS Publication 970, Tax Benefits for Education , for more information about the rules.

Question:

I contributed to a 529 plan for my young son, who a few years later was diagnosed with autism and now may not attend college. Can I use the money for anything else without incurring a tax or penalty? I don’t have other children.

Answer: There are several ways to avoid paying a penalty if your child doesn’t end up going to college, including a new option designed specifically to help families who have children with special needs.

You can use money invested in a 529 tax-free for college tuition, room and board, fees, required books and a computer for a student. And a new law lets you withdraw up to $10,000 from a 529 account each year to pay tuition for kindergarten through 12th grade. (See 529 Savings Plans Have More Uses, But States Need to Catch Up.) Or you can change the beneficiary to another eligible family member, including the original beneficiary’s siblings, cousins, parents, aunts, uncles, spouse, children or in-laws.

If you don’t use the 529 funds for eligible expenses, you usually have to pay taxes and a 10% penalty on the earnings portion of the withdrawals.

You may be able to withdraw money from the 529 without penalty if your son meets the IRS’s definition of disability, but you will have to pay taxes on the earnings portion of the withdrawals. That definition of disability is very specific: You must be able to show proof that the 529 beneficiary can’t do “any substantial gainful activity because of his or her physical or mental condition. A physician must determine that the condition can be expected to result in death or to be of long-continued and indefinite duration,” according to the IRS. For more information about the rules, see the “qualified tuition program” section of IRS Publication 970, “Tax Benefits for Education.”

There’s now another option that can be particularly helpful for families who have children with special needs. Under the new tax law, you can roll money over from a 529 account into a state-sponsored ABLE account (the acronym stands for Achieving a Better Life Experience) that can be tapped tax-free for a broad range of expenses. “It can be used for anything that will improve the health, independence or quality of life of the person with the disability,” says Kaellen Hessel, advocacy and outreach manager at the Oregon Savings Network, which administers the state’s ABLE plan.

A big advantage of an ABLE account is that a child can save and invest a significant sum without jeopardizing federal benefits, such as Medicaid. Generally, if people with disabilities have more than $2,000 in their name, they lose Supplemental Security Income or Medicaid. Now they can save up to $100,000 in an ABLE account without affecting SSI benefits, and ABLE balances of any size don’t affect Medicaid eligibility.

People of any age who developed a qualifying disability before age 26 can open an ABLE account. You can make a tax-free rollover from a 529 to an ABLE, up to the maximum ABLE contribution limit each year ($15,000 in 2018), minus any other contributions that have already been made to the ABLE account for the year.

Such rollovers have been an answer for families that started saving in a 529 only to find out later that a disability might put a child’s college plans on hold. “I would get calls from people who had children who were newly diagnosed with autism and had already put money aside in a college savings account and didn’t know what to do,” says Stuart Spielman, senior policy adviser for Autism Speaks. “Now they can roll it into an ABLE account, which helps families who are getting a diagnosis plan for the future.”

Currently, 36 states and the District of Columbia offer ABLE plans, and more are on their way. (You can invest in any state’s ABLE plan, but your own state might offer a tax deduction for contributing to its plan.) The website of the ABLE National Resource Center includes a list of states and links. Many states are still in the process of implementing the new 529-to-ABLE rollover provision, so contact the ABLE to find out about the procedure.

For more information about ABLE accounts, see ABLE Accounts Give Disabled More Financial Freedom.

Question: I read your column Shopping for a 529 Plan for a Grandchild. Don't grandparents have to be careful about opening a 529 for their grandchild because it could hurt his or her ability to get financial aid?

Answer: The way a 529 is owned can make a big difference in the financial aid calculations. If a grandparent contributes to a plan that is owned by the child's parents, the money in the 529 is considered to be a parental asset, and the federal financial-aid calculation expects parents to contribute up to 5.6% of their assets for college costs. Withdrawals from parent-owned 529s are not reported as income on the Free Application for Federal Student Aid (FAFSA).

But some grandparents open a separate 529 if they live in a state that only offers an income tax deduction for the account owner. (Most states that offer a tax break let any residents who contribute to a 529 take the deduction, but some limit the tax break to the account owner.) If the grandparents own the 529, the money in the account is not reported as either a parent's or a student's asset on the FAFSA. But distributions from the 529 must be reported as student income on the FAFSA, and students are expected to contribute 50 cents of every dollar of income toward college bills (after an income-protection allowance of $6,570 a year).

To minimize the impact on financial aid, you could wait to withdraw money from the grandparent-owned 529 until after the last tax year that counts for financial aid. New FAFSA rules that took effect in the 2017-18 school year changed the timing of the tax returns that are used. In the past, withdrawals from grandparent-owned 529s were counted as student income during the first three years of college. Now, distributions made after January 1 of the student's sophomore year of college won’t show up on the FAFSA (if the student graduates in four years). See New Strategies to Get More Financial Aid for more information about the new FAFSA schedule.

Another option is to switch the account owner to the parents before the money is withdrawn to pay for college expenses. That way, the withdrawals will not be reported as income on the FAFSA. However, not all 529 plans let you switch account owners. See www.savingforcollege.com for more information about each state's rules.

Question: My husband and I live in Virginia, and our grandson lives in Utah. What is the best way to set up a 529 plan, given that we live in different states and we have no idea where he will go to college?

Answer: Your grandson will be able to use money from any state's 529 plan tax-free for college tuition, room and board, fees and books, no matter where he goes to college. (He can now use up to $10,000 of 529 money each year tax-free to pay tuition for kindergarten through 12th grade, too). Because any eligible educational institution qualifies for tax-free 529 withdrawals — including almost all public and private colleges, some foreign universities and some post-secondary vocational institutions — you'll be able to choose a 529 plan based on any tax break you may get for your contribution. If your state doesn't offer a tax break, shop for a plan based on its investment choices, fees and other details. You can look up eligible educational institutions at the U.S. Department of Education's school code search.

First, see if you qualify for any tax breaks for your contributions; more than 30 states and the District of Columbia offer residents tax breaks for their 529 contributions. But the states have different rules about what you need to do to qualify for the break and how much you can deduct each year.

In Virginia, for example, the account owner can deduct up to $4,000 in contributions per Virginia 529 account each year. If you contribute more than that in one year, you can carry forward the deduction for any extra contributions to future tax years. People who are age 70 and older may deduct the entire amount contributed to a Virginia 529 in one year.

In your case, these tax breaks will probably give the Virginia 529 plan an edge over the options offered by other states. Virginia residents can only qualify for the tax break if they contribute to their own state's plan and own the account themselves. So you'll want to open an account and make your grandson the beneficiary, rather than contributing to another account that was already set up for him by his parents, for example. In most other states, however, grandparents and others can get a tax break if they contribute to a home-state plan that was set up by someone else, and a few states let you deduct contributions to any state's 529 plan, not just home-state plans.

If your state didn't offer an income-tax break, you'd want to compare other states' plans based on their investment options, fees and other details. See The Best College Savings Plans for a list of our favorite 529 plans for people whose states don't offer a tax break.

For more information about the features of each state's 529 plans and to compare tax breaks, see Compare 529 Plans at www.savingforcollege.com.

Question: My children are now through with college, and we still have some money in their 529 college-savings plans. Can that money remain in those accounts and be used to fund their children's college someday? If so, what steps need to be taken to do that? And what happens if I withdraw the money and use it for things other than education?

Answer: You can't name children yet to be born as 529 beneficiaries, but you can name other eligible family members as beneficiaries. Or you can keep your kids as the beneficiaries and eventually make the switch after your grandchildren are born. There's no time limit for making the change or for using the money in the account, says Brian Boswell, president of 529Expert.com. Eventually, you will be able to use the money in the 529 for your grandchildren's college expenses (tuition and fees, room and board, books, and a computer for the college student). Plus, the new tax law also lets you withdraw up to $10,000 each year per beneficiary to pay tuition for kindergarten through 12th grade. See 529 Savings Plans Have More Uses for more information about the new rules. See IRS Publication 970 for a list of eligible family members you can name as beneficiaries.

Alternatively, you could keep your children as the beneficiaries and use the 529-plan money for graduate school expenses if they end up going back to school. As long as the school is an accredited higher-education institution, then grad school tuition, fees and books are eligible for tax-free 529 withdrawals. (The student must attend school at least half-time to be able to use 529 money for room-and-board expenses.)

If you withdraw the money for anything other than eligible education expenses, you'll have to pay income taxes and a 10% penalty on the earnings portion of the withdrawal. (If your child receives a scholarship, you can withdraw up to the amount of the scholarship without penalty, but you will have to pay taxes on the earnings.) The principal isn't subject to taxes or penalties, but keep in mind that 529 account owners can't withdraw only principal, says Boswell. "Every withdrawal will include an earnings portion, meaning that if the owner makes a nonqualified withdrawal, he or she is going to pay a penalty tax on earnings unless the withdrawal qualifies for an exemption, such as the death or disability of the beneficiary," he says. The portion of each withdrawal that is subject to taxes and penalties is prorated based on the portion of the total account balance that comes from earnings; the rest is a nontaxable return of contributions.

For more information, see the Qualified Tuition Program section for IRS Publication 970, Tax Benefits for Education.

Question: What are the new rules for using money in a 529 college-savings plan for kindergarten through 12th-grade expenses, rather than just college?

Answer: The new tax law expanded the definition of eligible expenses for 529s. You can now withdraw up to $10,000 from a 529 each year tax-free to pay tuition for kindergarten through 12th grade. You can still use 529 money tax-free for college expenses, too, with no annual limit. Eligible college expenses include tuition and fees, room and board (even an off-campus apartment for a student who goes to school at least half-time), books and a computer. For more information about eligible expenses, see the “Qualified Tuition Program” section of IRS Publication 970, Tax Benefits for Education.

The new tax law left some unknowns. Some states need to change their laws to coordinate with the new federal law. Otherwise, they could end up charging state income taxes and a 10% penalty for withdrawals that aren’t used for college, says Susie Bauer, senior vice president and 529 manager at Baird Private Wealth Management. Also, if you received a tax deduction for your contribution, you may have to repay it if you use the money for non-qualified expenses and your state doesn't change its rules. Contact your plan before taking money out of the 529 for K-12 tuition to make sure the withdrawal is a qualified expense in your state. If your state’s rules aren’t clear yet, you may want to wait a few months before taking a precollege withdrawal. More states should be clarifying their laws in the next few months.

You may also want to adjust your investments. “If you’re going to take advantage of the K-12 tuition change, you need to take into account your time horizon,” says Roger Young, a senior financial planner at T. Rowe Price. Depending on your child’s age, you may be taking those withdrawals much earlier than you had originally intended, particularly if you invested in an age-based fund whose mix of stocks and bonds are tied to the year your child will start college. In that case, you may want to shift some money you plan to withdraw for K-12 expenses in the next few years to more conservative investments, so you won’t have to worry about market volatility when the tuition bill is due. And because you can change your 529 investments only twice per year, consider keeping the current money invested where it is but adding new contributions to conservative investments for short-term expenses, says Young.

Even though you can now use some money from your 529 for K-12 tuition, think carefully before taking that withdrawal. “With the shorter time horizon, you’re probably going to be more conservative and will probably have less gain potential,” says Young. “For people who aren’t in a high tax bracket, you have to ask: ‘Does this really make sense to me?’ ” The longer you keep the money growing in the account, the more time you’ll have to benefit from the tax-free gains for eligible expenses.

Recent tax reform has opened up a whole new way for millions of American families to pay their child’s tuition from kindergarten through 12th grade at private schools, including religious schools.

Beginning in 2018, the new law allows parents to take up to $10,000 per child from that child’s 529 college savings plan to pay their K-12 tuition. That could come in handy, considering that the average cost of private high school is over $14,000, according to Private School Review, and in some states, it tops $30,000. So how can parents — and others who set up 529 plans for a child, such as grandparents and family friends — take advantage of the new law to fund their child’s private school education?

Let’s start by understanding the benefits of 529 plans. Created in 1996, these are education savings plans operated by a state or educational institutions to help families set aside funds for future college costs. Money earned in these plans is free from federal and state taxes, and isn’t taxed when withdrawn to pay for qualified education expenses. In addition, over 30 states currently offer a full or partial tax deduction or credit for 529 plan contributions.

With this new funding option, parents or grandparents may wish to deposit a lot more into 529 accounts than they had planned. Keep in mind that while the IRS doesn’t limit the amount you can contribute, the overall balance in the account can’t be more than the expected cost of your child’s educational expenses — the amount varies by state, from $235,000 to $520,000, according to SavingForCollege.com. Here are some new scenarios to consider:

Grandparents Should Consider Large, One-Time Contributions to Offset Estate Taxes.

Beginning in 2018, each parent and grandparent will be able to contribute up to $15,000 annually per child and exclude these contributions from gift taxes. For example, a set of grandparents who are married, can make gifts of $30,000 to their grandchild’s 529 plan each year with no estate or gift tax consequences.

In addition, grandparents may want to consider making a large, one-time contribution and choose to spread it over five years as a way to possibly avoid future gift or estate taxes.

Here’s an example. A grandparent who is married can deposit $150,000 into their grandchild’s 529 plan to cover K-12 expenses — an amount equivalent to a $30,000 contribution each year over five years. When filling out their federal tax forms in 2018, they can elect to include this gift over a five-year period (i.e., $30,000 x 5 = $150,000), thereby excluding the $150,000 from any gift taxes.

Assuming the grandparents live five more years, the entire $150,000, plus the money earned from this investment, will not be taxed as part of their estate. And after this five-year period elapses, they can deposit an additional $150,000 if they want to ensure their grandchild has an Ivy League education, free of student loans. Keep in mind that contributions to irrevocable trusts count toward annual and lifetime gift tax limits, so be sure to consult your CPA before making large deposits into a 529 plan.

Take Advantage of State Tax Credits and Deductions.

If your state offers an income tax deduction for a portion of each year’s contributions, determine if you can use an “in-and-out” strategy to pay for K-12 tuition.

Each person and their financial adviser should check state plan rules, but it’s possible for a parent to deposit $10,000 in 2018, receive a full or partial tax deduction on their 2018 state tax filings, and also withdraw the money in 2018 for private school tuition. To receive the tax credit or deduction, you must be the account owner of the 529 plan.

For example, in New York, a married couple where one of the parents is the account owner can deduct up to $10,000 in 529 plan contributions per year on their state tax return. This move would enable this couple to save $600 to $800 in state taxes annually.

Invest Conservatively for K-12 Expenses.

Most 529 plans offer a variety of investment choices. To guard against potential losses, the funds to be used for K-12 expenses should likely be invested more conservatively compared with funds for a child’s college education.

Because a parent has 18 years to allow money in 529 plans to grow and pay for college expenses, a portfolio with a heavy dose of stocks is usually the best course to take. But parents needing money in 529 plans to pay K-12 private school expenses could have as little as one year before the funds are needed. It’s more appropriate to keep this money in short-term bonds, which are less risky. It’s also possible to have more than one investment selection inside a person’s 529 plan, so consider this option if planning to use the account for both types of education expenses.

Consider the Downside of Spending 529 Funds Now Vs. Later.

A couple who decides to withdraw $10,000 annually from their 529 plan to cover K-12 tuition expenses will begin to drain the money needed for college costs. And taking large amounts out of the account each year will also limit the parents’ ability to benefit from tax-free growth inside the 529 plan.

In addition, parents who are saving for college now and would like to retire early without college debt hanging over their heads (or their children’s heads) may not want to cash in the 529 plan money early. Why? Spending their child’s 529 plan for K-12 expenses now may mean working longer to pay those big college bills.

But make no doubt, the new federal tax law provides parents and grandparents with more options to pay for the young child’s education. Parents and grandparents should develop a long-term financial plan before taking funds out of the 529 plan for K-12 tuition costs. Weighing the short- and long-term impact and benefits will help you make important decisions about one of your most important financial goals — how to fund a child’s education.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Question: A few of my family members would like to contribute money to my son's 529 college-savings account as a gift. How do they do this, and will they be able to get a state income tax deduction?

Answer: Many 529 administrators are making it easier for people to contribute to 529s as gifts. T. Rowe Price, for example, recently introduced a GoTuition gifting portal for its 529 accounts. An account holder can create a profile page online, then share a custom URL for family and friends to make a direct deposit from their bank into the 529 account. Several plans (such as the Colorado CollegeInvest 529, the DC College Savings Plan, College Savings Iowa and Missouri's 529 College Savings Plan) participate in the Ugift program. The program lets you sign up for a code that you can share with family and friends to enable them to contribute to the account online; they don't need to be related to the beneficiary. Go to your plan's website to find out whether it participates in the Ugift program or offers other steps that relatives and friends can take to contribute.

Tax rules vary by state. About two-thirds of states offer an income tax deduction for 529-plan contributions. You generally need to contribute to your own state's plan to get a state income tax break. But a few states, such as Arizona, Kansas, Missouri, Montana and Pennsylvania, let you deduct contributions to any state's 529 plan. Most states let you deduct a contribution you make to someone else's account, but a few, such as New York, let only the account owners deduct contributions. You can find out more about your state's rules at SavingForCollege.com.

If you live in a state that offers a tax break only to account owners, see if you can qualify for the deduction by opening a separate 529 account. You may need to open the account in your own state to qualify for the tax break, unless you live in one of the states that lets you deduct contributions to any state's plan. There's no limit to the number of accounts that can name a child as a beneficiary. If the child doesn't go to college or doesn't need the money, you can switch the beneficiary to another eligible relative of the child, such as a parent, sibling or cousin. See the “Qualified Tuition Program” section of IRS Publication 970, Tax Benefits for Education, for more information about 529s, as well as a full list of eligible relatives of the beneficiary and other rules.