Laura explains how 529 savings plans cut taxes and new rules that benefit families and students of all ages.
Laura explains how 529 savings plans cut taxes and new rules that benefit families and students of all ages.
Find a transcript here.
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If you're wondering how you'll ever save enough to pay for an expensive education, like a private secondary school or an out-of-state university, there’s a secret weapon you should know called a 529 savings plan. These accounts were designed to encourage investing for future education expenses, helping you cut taxes and perhaps reduce the need for student loans.
This post will review how 529 plans work, who can use them, and the tax benefits they offer. Plus, we’ll review some brand new rules that make 529s more flexible for students and families.
Welcome back to episode 951 of Money Girl–I appreciate you spending time with me! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter. Subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
You can learn more, ask questions, and sign up for the Money Stack at LauraDAdams.com. Or leave a voice message with your question or comment by calling 302-364-0308. I'd love to feature your question on Finance Friday, our weekly Q&A, bonus edition of the show!
9 ways a 529 plan saves money
Here are nine ways a 529 savings plan can help you save money and cut education costs for yourself or students in your family.
1. You can contribute just about any amount.
A 529 plan owner is typically a parent or grandparent, and the beneficiary is a child who has no legal right to the funds in the account. However, if you’re an adult future student, you can open a 529 and name yourself as the beneficiary. You can also change the beneficiary to another eligible family member at any time.
States sponsor 529 plans, and each has different rules about how much you can contribute. But you don’t have to choose the plan for your home state or even where a student goes to college. Some plans allow you to contribute a total of over $500,000 per beneficiary.
However, you shouldn’t contribute more than the amount necessary to pay for the beneficiary’s qualified education expenses. Also, note that the IRS counts 529 contributions as gifts to the beneficiary. For 2025, you can gift up to $19,000 per recipient, or $38,000 if you’re married and file a joint tax return, without it counting toward your lifetime gift tax exemption.
You can give away about $14 million as an individual and nearly $28 million as a married couple before taxes apply. So, unless you have an ultra-high net worth, contributing higher amounts to a 529 plan in a given year won’t have any negative consequences for your finances. However, you typically must report contributions above the annual gift limit to the IRS.
Most 529 plans allow you to set up automatic contributions by scheduling a recurring transfer from your bank account on any schedule you like. Making small, regular contributions can make your education goal feel less daunting and add up to a massive amount over time. Or, if you get a windfall, you can make a large 529 contribution at any time.
2. You may be eligible for state tax deductions or credits.
Most states offer at least one 529 plan; however, the fees and benefits vary, such as the maximum contribution limit and investment options. As I mentioned, you typically don't have to be a state resident to participate in its plan. For instance, you could live in New York, participate in a Florida 529 plan, and use the money to pay for a school in California.
However, some states with an income tax offer a tax deduction or credit on your state tax return for residents who choose an in-state 529 plan. That could add up to significant savings, depending on where you live.
3. You receive tax-free account growth.
A 529 plan allows you to name and save for a future student or beneficiary, such as a child or yourself. After making contributions, you can choose investments from a menu, similar to a retirement account.
Unlike a traditional retirement account, you don't receive an upfront tax benefit for 529 plan contributions. However, your earnings and investment growth in a 529 are tax-free. That means you have more money to pay for education expenses.
4. You can receive gifts from others.
A 529 plan offers unique gifting features that make the beneficiary more likely to have enough education funds. Anyone, such as relatives or friends, can contribute to a 529.
For instance, a child's grandparents could add funds regularly over many years or make a lump sum contribution, which can be advantageous for their estate planning purposes.
Backer is a great place to open a 529 plan because it allows you to save for college with help from “backers” like family and friends. They can easily contribute to the fund and stay involved as a child approaches their education.
5. You protect eligibility for federal financial aid.
When qualifying for federal financial aid, parental assets are assessed at a lower rate than student assets. In other words, having higher balances in a parent-owned account, like a 529 plan, is better than a future student having a high balance in a UTMA/UGMA custodial account or a Roth IRA.
So, remember that student-owned funds count more toward the Expected Family Contribution for financial aid, and a 529 beneficiary typically isn't the account owner.
That makes having a 529 plan an advantage for families and students who need financial aid to supplement savings because it won't reduce their potential aid as much as other accounts.
6. You receive tax-free withdrawals.
In addition to tax-free growth, your withdrawals from a 529 plan are never taxed at the federal (and often state) level if you spend them on qualified education expenses for the beneficiary. I’ll discuss more about allowable expenses in a moment.
A 529 plan downside is that if you spend it on anything other than qualified education expenses, your account earnings are subject to taxes plus a 10% penalty. There are exceptions, such as when the beneficiary receives a scholarship, veteran's educational assistance, becomes disabled, or dies.
7. You have a range of qualified expenses.
There’s a wide range of qualified 529 expenses, including:
Plus, new rules allow you to spend a 529 on the following:
However, 529 funds can't be used to pay for a student's extracurricular activities (like sports or clubs), travel, transportation, health insurance, or technology used primarily for entertainment. If you're unsure if a fee is 529-qualified, check with your plan provider.
8. You can use it for younger students.
Even though it’s typically called a 529 college savings plan, it’s not just for college anymore. You can spend funds on younger students, such as tuition for kindergarten through high school at public, private, or religious schools.
The 529 limit for secondary education is $10,000 per beneficiary per year. However, starting in 2026, you can spend up to $20,000 per beneficiary per year. In addition to tuition, starting in July 2025, you can now spend 529 funds on the following items for younger students:
9. You can transfer unused 529 funds.
There’s no deadline or beneficiary age when you must empty a 529 account. If a child decides not to go to college or doesn’t need all the funds, you can transfer them to a new beneficiary in your family with no taxes or penalty.
As of 2024, another option for unused 529 funds is to roll over a certain amount to the beneficiary’s Roth IRA. But this transfer comes with the following rules:
Due to these restrictions, the Roth IRA rollover only benefits older working beneficiaries. However, it’s a good way to help them fund retirement instead of education.
Once you open a 529 plan, set a goal to make regular contributions. Whether you contribute $10 or $1,000 a month, the sooner you get started, the easier it will be for you and your family to pay for education expenses.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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