¹The following article is provided for educational purposes only and does not constitute personalized investment, tax, or legal advice. Any examples are hypothetical and for illustrative purposes only. Investing involves risk, and outcomes may differ materially from any projections or scenarios discussed. Readers should consult with a qualified financial, tax, or legal professional regarding their individual circumstances

According to the College Board, the average cost of tuition and fees at a four-year public university rose to $11,260 per year in 2023. With education costs rising faster than inflation, many families are turning to 529 plans as a tax-advantaged way to prepare. Yet confusion persists—some assume these plans only cover tuition, while others worry about losing funds if a child doesn’t attend college.

In reality, 529 plans are more flexible than many think. This article explains what a 529 plan is, how it works, and the rules families should know before contributing.

Key Takeaways

• A 529 plan is a state-sponsored savings account that allows tax-free growth and withdrawals for qualified education expenses.
• Contributions are made with after-tax dollars, but many states offer deductions or credits.
• Funds can cover tuition, fees, books, housing, and even K–12 education in some cases.
• Starting in 2024, unused funds may be eligible to roll into a Roth IRA within IRS limits.
• Anyone—not just parents—can open or contribute to a 529 plan.

What Is a 529 Plan?

A 529 plan is a tax-advantaged savings account designed to pay for education costs. While each plan is sponsored by a state, investors are not restricted to their home state’s plan.

The main benefits are:

• Tax-free growth: Investments in the account grow without federal tax.
• Tax-free withdrawals: If used for qualified expenses, withdrawals are not taxed.
• State incentives: Over 30 states offer tax deductions or credits for contributions (depending on residency).

So what? This combination makes 529 plans one of the few tools where earnings can escape both federal tax and, in some cases, state tax.

What Expenses Qualify?

Contrary to popular belief, 529 funds cover more than just tuition. Eligible expenses include:

• College and university tuition and mandatory fees
• Books, supplies, and technology required for coursework
• Room and board for students enrolled at least half-time
• Up to $10,000 annually for K–12 tuition
• Student loan repayment (limited to $10,000 per beneficiary)

Hypothetical: A student’s laptop, purchased for coursework, may be covered. But if that same laptop is mainly for gaming, the IRS could disallow the expense.

Types of 529 Plans

There are two main types of 529 plans:

• Savings plans – Work like investment accounts, with growth tied to the market. Families choose from funds such as age-based portfolios or index funds.
• Prepaid tuition plans – Allow families to lock in tuition at today’s rates at participating schools.

Most investors use savings plans due to flexibility, but prepaid plans can provide certainty against tuition inflation.

Contribution Rules and Tax Benefits

Contributions are made with after-tax dollars, but the tax advantages show up later. Key rules include:

• Annual contribution limits – There is no federal cap, but contributions must stay within “reasonable” limits set by each state. Some plans allow $300,000-500,000 per beneficiary.
• Gift tax considerations – Contributions count as gifts, but special IRS rules allow “superfunding” up to five years’ worth at once.
• State tax benefits – For example, New York allows a deduction of up to $5,000 per taxpayer ($10,000 for joint filers).

New Rules: Rolling Unused Funds Into a Roth IRA

Starting in 2024, Congress introduced a new feature: some unused 529 funds can be rolled into a Roth IRA for the beneficiary. This addresses a common fear—that money is “trapped” if a child doesn’t need it for education.

However, strict conditions apply:

• The 529 must have been open for at least 15 years.
• Lifetime rollover limit is $35,000.
• Annual IRA contribution limits still apply.

This change effectively allows a 529 to double as a retirement savings tool under certain circumstances.

529 plans aren’t just for tuition—they’re flexible tools with long-term tax advantages. Families who understand the rules can use them not only for college, but also as part of a broader wealth strategy, especially with the new Roth IRA rollover option.