Many families are familiar with a 529 college savings plan as a tax-friendly way to save for a child’s education. But it also may be one of the most underutilized vehicles for tax optimization and generational wealth transfer.
These state-sponsored plans have come a long way since they were created decades ago to help families pay basic college expenses.
Today, 529 funds can be used for a broader range of expenses, meaning more opportunities to save on taxes. High contribution limits allow for an easy transfer of wealth through educational opportunities from one generation to the next.
Here’s how:
Making the Most of Tax Benefits
There are no income restrictions for opening a 529 account. Money invested in a 529 grows tax deferred, and withdrawals for qualified expenses are 100% tax free. This stretches your education dollars further.
If you end up using the money for non-qualified expenses, the earnings on the withdrawal will be subject to income tax and a 10% penalty¹.
But account owners would be hard pressed not to find ways to spend the money and reap the tax benefits.
See how a tax-advantaged 529 plan stacks up against other savings vehicles.
The Many Uses of 529 Funds
You might think that 529 funds can only be used for the basics: tuition, fees and books. But there are so many other expenses that qualify for tax-free withdrawals from the account—and they don’t all fall within the traditional college path.
For example, you can use the money for a computer, internet access, printer and certain room and board expenses, both on and off campus. Even equipment for special needs students is qualified.
You can use 529 funds to pay tuition at a wide variety of schools in the U.S and at many institutions abroad. Eligible institutions include community colleges, four-year public and private colleges and universities, graduate and professional schools, and technical and vocational schools. Funds can even be used to cover the cost of enrolling in apprenticeship programs2.
The 2025 U.S. Budget Reconciliation Bill (Public Law No. 119-21) was signed into law on July 4, 2025, making changes to what are considered Qualified Higher Education Expenses. Now expenses related to career-focused postsecondary credential programs are allowed and give savers more flexibility and support to pay for a broader range of K-12 school expenses.
Rising Education Costs and What that Means for Future Generations
For years, college costs have been rising faster than the general rate of inflation, and that’s not likely to change. For example, by the time a California kindergartener today will be headed to college, four years of education—including books and living expenses—is projected to run $239,355 at an in-state school and $487,566 at a private institution, according to the ScholarShare 529 College Savings Calculator.
A 529 plan, such as ScholarShare 529, is an easy way to lessen the financial burden on tomorrow’s scholars.
Each state sets a cap on how much you can contribute to a 529 over the beneficiary’s lifetime, although these limits are generous. In California, contributions can continue until the account balance reaches $529,000.
Of course, transferring large sums of money into an account for a child's benefit can give anyone pause. But as the 529 account owner, you maintain control of the money, deciding how to invest the funds and when to make withdrawals.
And if it turns out the child doesn’t go to college or doesn’t need the money, you can change the beneficiary to another eligible family member. Or if you don't need the money for higher education purposes you can always withdraw the funds and pay the tax and penalty on earnings.
The ScholarShare 529 College Savings Calculator can help you estimate future college costs and set a savings goal.
Common Misconceptions and Concerns
Many families mistakenly assume that saving through a 529 plan will significantly reduce a student’s financial aid.
But under the Free Application for Federal Student Aid (FAFSA) that families fill out, 529 accounts have a minimal impact. If a parent owns the account, only 5.64% of the account's value is factored into the Expected Family Contribution, or what the government figures a family can afford to pay for college.3
Even better news: As of the 2024–2025 academic year, distributions from grandparent-owned 529s are no longer considered when calculating a student’s need-based aid.
Some also may worry that it costs a lot of money to open a 529 account or that investing can be complicated. But most 529 plans require little or no minimum contribution. For instance, you can open a ScholarShare 529 account with any amount of money and choose an investment option—all within as little as 15 minutes.
ScholarShare 529 offers a variety of low-fee investment portfolios to choose from. The most popular are the low-maintenance Enrollment Year Investment Portfolios, which are based on the date the student is expected to enter college. You simply choose the portfolio by its target date and professional managers handle the rest at no additional cost. The portfolio gradually becomes more conservative as that date approaches.
Another option is one of the Risk-Based Portfolios whose asset allocation is in line with your tolerance for investment risk.
Although the outlook on rising college costs isn't encouraging, you can start to lessen the burden of that cost one day at a time, starting now. A 529 account makes it simple and beneficial to invest small sums that can grow into sizable amounts and help your child achieve their dreams.
Learn how easy it is to get started with a ScholarShare 529 plan.
Sponsored by TFI.
To learn more about California's ScholarShare 529, its investment objectives, risks, charges and expenses see the Plan Description at ScholarShare529.com before investing. Read it carefully. Investments in the Plan are neither insured nor guaranteed and there is the risk of investment loss. TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, is the distributor and underwriter for ScholarShare 529.
1 Consult your legal or tax professional for tax advice. If the funds aren't used for qualified higher education expenses, a federal 10% penalty tax on earnings (as well as federal and state income taxes) may apply. Non-qualified withdrawals may also be subject to an additional 2.5% California tax on earnings.
2 Withdrawals for registered apprenticeship programs and student loans can be withdrawn free from federal and California income tax. If you are not a California taxpayer, these withdrawals may include recapture of tax deduction, state income tax as well as penalties. You should talk to a qualified professional about how tax provisions affect your circumstances.
3 The treatment of investments in a 529 savings plan varies by school. Assets are typically treated as the account holder’s and not the student’s. (Student assets are generally assessed at 20% whereas parental assets are generally assessed at 5.6%.) Any investments, including those in 529 accounts, may affect the student’s eligibility to get financial aid based on need. You should check with the schools you are considering regarding this issue.
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