Grandparents' Guide to 529 Plans for College and Private School

K-12 tuition, tax breaks, and Roth IRA rollovers: How grandparents can make the most of a 529 plan.

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529 savings accounts are a popular way for grandparents to help pay for education. Contributions to 529 accounts are treated as gifts to the beneficiary, and many states give residents who fund accounts in that state a deduction or credit on state tax returns. Distributions from 529 plans used for college, post-secondary credentialing programs and certain apprenticeship programs are tax-free.

And 529 accounts aren’t just for college. They can also help pay for K-12 education. Tax-free distributions of up to $20,000 per year per beneficiary can be taken from 529 accounts to pay tuition for elementary and secondary school. This amount can now also help cover the costs of materials for curricula and online studying, books, educational tutoring, fees for advanced placement tests or college admission exams, and educational therapies performed by licensed providers to students with disabilities.

The $20,000 annual limit doesn’t apply to 529 distributions used to pay for college, postsecondary credentialing programs or apprenticeship programs. Tax-free 529 payouts cannot be made to cover homeschooling expenses. You should know that not all states treat payouts for K-12 schooling as tax-free for state tax purposes, so be sure to check your state’s tax laws.

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Leftover funds

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What if the beneficiary decides to skip college? Or money is left in the 529 account after the beneficiary has completed school? You can always withdraw it and use the money for purposes other than education, but you will owe regular income tax and a 10% additional penalty tax on the withdrawn earnings.

There are several tax-saving options for handling unused 529 funds. For instance, under the federal tax laws, some 529 funds can be transferred tax-free to a Roth IRA for the 529 beneficiary in a direct trustee-to-trustee transfer. This relief, enacted under the 2022 SECURE 2.0 Act, is subject to important rules. The 529 account must have been open for at least 15 years, with the same beneficiary. There is a $35,000 lifetime cap on such transfers. 529 contributions made in the prior five years are ineligible for the transfer. And the amount of 529 funds transferred to the beneficiary’s Roth IRA in a year can’t exceed the annual contribution limit for Roth IRAs, which is $7,500 in 2026.

Note that any actual contributions made to any IRA owned by the beneficiary count against this limit. For example, let’s say a 529 account beneficiary contributes $3,000 to his traditional IRA in 2026. Only $4,500 of 529 funds can be transferred to his Roth IRA for 2026.

And if the beneficiary has already maxed out IRA contributions in a year, then no 529 funds can be transferred to a Roth IRA for that year.

There are a few other tax-saving options for dealing with excess 529 funds. You can keep the money in the 529 account in the event the beneficiary later decides to attend graduate school, participate in an apprenticeship program or enroll in a postsecondary credentialing program. Leftover funds can be rolled over from a beneficiary’s account to an ABLE account for a disabled beneficiary or the beneficiary’s disabled siblings.

Alternatively, you can roll over leftover funds to a 529 account set up for another family member, such as a sibling or parent. You can also use up to $10,000 to help pay off the beneficiary’s college debt (this $10,000 is a lifetime limit, not an annual limit).

Have a tax question? Write askkiplinger@futurenet.com.

Joy Taylor, the Kiplinger Tax Letter editor, will reply and, with your permission, choose a few queries for our online “Ask the Editor” feature. For past questions and answers go to www.kiplinger.com/tag/ask-the-editor.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that's right on the money.

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Joy Taylor
Joy Taylor
Editor, The Kiplinger Tax Letter

Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to kiplinger.com and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.