Congress continues to increase the tax and estate planning benefits of 529 plans, making them a must-consider tool for parents and grandparents.
529 plans were created to assist families saving for the higher education expenses of their children and grandchildren. The plans have been expanded several times, most notably in 2021 and 2025.
Now, 529 education savings plans offer numerous tax and estate planning advantages.
The plans are named after the number of the tax code section that authorizes them and sets their rules. There are two major types of 529 plans.
A prepaid 529 plan is somewhat like an annuity. A state (or sometimes a college or other organization) tells a family how much money to pay in a lump sum or a series of payments and that amount prepays up to four years of tuition at a public college or university in the state. Some state plans cover tuition at private or out-of-state institutions.
I won’t discuss prepaid plans any further.
529 college savings plans are more like Roth IRAs with some modifications.
College savings plans generally are sponsored by a state, though there are some sponsored by groups of private colleges or other entities.
An account is opened for a beneficiary. Usually, the parents or grandparents of the beneficiary open the account and are the owners. Anyone can open an account for any beneficiary, and anyone can contribute to a 529 account.
There is no tax federal tax deduction for contributions made to 529 savings accounts. But 35 states provide a state income tax benefit (either a deduction or a credit) for contributions their residents make to plans sponsored by the state. Six of those states provide income tax benefits for contributions to any 529 plan in the U.S.
A big advantage of 529 plans is the gift tax treatment of contributions.
A contribution is a gift to the beneficiary under the tax code. The annual gift tax exclusion allows tax-free gifts up to 19,000 per person in 2026. The amount is indexed for inflation each year.
529 plans have a special rule. A person can make tax-free gifts for a beneficiary in one year of up to five times the annual gift tax exclusion. In other words, the contributor can use five-years’ worth of annual gift tax exclusions ($95,000 in 2026) to front-load contributions to the plans and start compounding tax-free returns with the money.
The potential downside is that the annual gift tax exclusion cannot be used for other gifts to that beneficiary during the five years.
The annual gift tax exclusion is per beneficiary, allowing gift-tax free contributions of up to $95,000 per grandchild in one year.
Donations exceeding the gift tax exclusion amount can be made. The excess would use part of the lifetime estate and gift tax exemption amount, which will be $15 million in 2026.
Another benefit is that when the money is in the 529 account it is excluded from the donor’s estate for federal estate tax purposes.
The account owner decides how the balance is invested among choices provided by the plan. Most investment offerings are mutual funds or similar products. Some 529 plans offer custom diversified portfolios.
The investments usually are managed by well-known mutual fund firms, though some states manage some or all the investments.
Investment returns compound in the account tax free. In addition, distributions from a 529 are tax free when used for qualified education expenses.
The account owner can change the beneficiary to another family member or even to himself or herself at any time.
The account owner can withdraw money from the account. That’s a good benefit if the money is needed elsewhere or it seems likely the beneficiary won’t use it for education purposes.
The accumulated income and gains will be taxed and subject to a 10% penalty if the owner withdraws them. The original contribution won’t be taxed or penalized when withdrawn, but some plans impose a penalty when distributions are taken early or for spending other than qualified education expenses.
Tax-free distributions are a significant benefit of 529 plans.
To be tax free, a distribution must pay for or reimburse qualified education expenses.
Originally 529 plans were to provide benefits for higher education and often were referred to as college savings plans. But today a much broader range of education expenses qualify for tax free distributions.
Qualified education expenses include room and board (if the student is at least half-time) and required books and supplies as well as tuition and most fees.
Qualified education expenses also include expenditures for computers and internet costs.
As I said, initially these expenses had to be paid for higher education, including graduate school.
Now, the cost of approved apprenticeships also can be paid tax free from a 529 account when the apprenticeship program is registered with the U.S. Department of Labor.
Up to $10,000 of 529 funds per beneficiary can be used to pay student debt. That’s a lifetime limit, not an annual limit, but the account also can be used to pay student debt of siblings of the account beneficiary (including step-siblings). Up to $10,000 of student debt payments per sibling can be distributed tax free from the 529 account.
Student debt payments can be of either interest or principal. When the 529 money is used to pay interest on a student loan, the interest doesn’t qualify for the income tax deduction for student loan interest.
The One Big Beautiful Bill Act, enacted in July 2025, continued to expand the list of qualified education expenses.
Tuition up to $10,000 annually for K-12 education became a qualified education expense a few years ago. Now, qualified education expenses for K-12 education include curriculum, books, tutoring, and testing fees. In addition, the annual spending limit is increased to $20,000 from $10,000. These changes apply for years after 2025.
The amounts can be paid to a public, private, or religious school.
Also added to the list of qualified expenses are postsecondary “credentialing expenses.” These are expenses incurred to obtain certificates, licenses or other credentials for an occupation or profession.
The credentialing program must be state-approved, WEAMS-listed or identified by the IRS in regulations or other guidance.
Distributions made for qualified credentialing expenses after the July 4, 2025, enactment of the law are tax free.
The changes to 529 plans over the years converted them from higher-education savings plans to accounts that can be used for any level of education and for job-training, workforce-development and disability-related training and education costs.
Distributions can be used for tutoring, vocational education in skilled trades, professional licensing, credentialing programs, and continuing education.
Previously, 529 plans assumed a college-for-all society. Now, they’re available for alternative career and education paths. They can be used by families who are interested in developing almost any in-demand skills.
Those interested in 529 savings plans should beware that not all states have fully conformed their income tax codes to the federal code. Some or all 529 account distributions might be taxable under state law though they are exempt under federal law. For example, some states continue to tax distributions that pay for anything other than higher education, such as distributions for K-12 tuition.
When a beneficiary doesn’t use all the funds in a 529 account for qualified education expenses, there are options. The owner can name one or more new beneficiaries, such as other children, grandchildren, other relatives, or non-relatives.
In addition, some excess 529 funds can be rolled over to a Roth IRA for the beneficiary under certain conditions.
The changes in recent years make 529 plans good estate planning tools and more attractive ways for grandparents to help grandchildren. They should be compared with Roth IRAs and the new Trump accounts to determine the best strategy.
You usually don’t have to be resident of a state to join its plan, and some states openly seek contributions from out-of-state residents by offering quality plans with low expenses and good investment options. The money in a 529 plan can be spent on qualified education expenses incurred in any state.
Shop around. Consider expenses, investment options, and how often investments can be changed.
