529 Plans: More Flexible Than You May Think

For families who want to help children or grandchildren with future education costs, a 529 education savings plan can be one of the most useful planning tools available. In addition to helping families save systematically, 529 plans offer significant tax advantages and, under recent tax-law changes, considerably more flexibility than they once did.

The primary benefit of a 529 plan is tax-free investment growth. Contributions are made with after-tax dollars, but earnings are not subject to federal income tax when withdrawals are used for qualified education expenses. Some states also provide state income-tax deductions or credits for contributions.

Distributions from the 529 plan can be made tax-free for ‘Qualified Expenses’, which generally include college tuition and fees, books, supplies, computers and certain room-and-board expenses. Under new rules funds can also be used for registered apprenticeship programs and certain post-secondary credentialing programs. Beginning in 2026, up to $20,000 per year can be used for qualifying K-12 education expenses, including tuition and certain other educational costs.

One concern we frequently hear is: “What happens if my child doesn't go to college or doesn't use all the money?” Fortunately, there are several alternatives. The account owner can generally change the beneficiary to another qualifying family member without triggering income tax or penalties. This means unused money could potentially be redirected to a sibling, future grandchild or another relative. Unused 529 funds can also be used to repay up to $10,000 of qualified student loans for the beneficiary, with an additional $10,000 potentially available for each of the beneficiary's siblings.

Another highly beneficial option is transferring unused 529 money to the beneficiary's Roth IRA. Subject to several requirements, including the 529 account generally having been open for at least 15 years, as much as $35,000 over the beneficiary's lifetime may eventually be transferred into a Roth IRA for the beneficiary. Annual Roth IRA contribution limits still apply, so the transfer normally occurs over several years.

There are restrictions to keep in mind. Nonqualified withdrawals generally cause the earnings portion of the distribution to be subject to income tax and typically a 10% federal penalty. Contribution limits also vary by state, and gift-tax rules should be considered when making large contributions.

For many families, however, today's 529 plan is much more than a “college-only” account. Its combination of tax-free growth, beneficiary flexibility, expanded education uses and potential Roth IRA rollover makes it an excellent vehicle for helping the next generation while maintaining valuable options if plans change.