When it comes to saving for college and other education expenses, the 529 plan is close to being the perfect savings vehicle. Although 529 plans have pros and cons, they offer significant advantages, especially with your taxes.
Here are the top 9 benefits of 529 plans with significant advantages you should know.
1. Maximize Tax Savings
Contributions to a 529 plan are not eligible for federal tax deductions. However, the earnings in a 529 plan grow tax-deferred and are not taxed upon withdrawal when used to pay for qualified higher education expenses, including college.
Other 529 tax benefits include:
- Tax-free withdrawals may include up to $10,000 in K-12 tuition expenses for private, public, or religious elementary and secondary schools (per year, per beneficiary).
- State income tax deductions on 529 plan contributions in more than 30 states.
- Reducing your taxable estate by contributing to 529 plans
- The costs of apprenticeship programs are also now considered qualified education expenses, so you can take 529 funds tax-free to put toward these programs.
The earnings on 529 plan funds can significantly surpass those of taxable accounts, as shown below with two accounts, each beginning with a $100,000 initial investment.
Tax deferred earnings
Assumptions: $100,000 initial investment, with annual contributions of $5,500, 8% pre-tax return on investments per year, and 35% combined Federal and State Income taxes.
2. Roll Over 529 Funds to a Roth IRA
The Secure 2.0 Act of 2022 allows rolling 529 funds over to a Roth IRA without incurring penalties or taxes. The lifetime rollover limit is $35,000, but the contributions are subject to annual IRA limits, which for 2025 are $7,000 for most taxpayers and $8,000 for those over age 50. The 529 must also have been open for more than 15 years.
3. Use 529 Funds to Repay Student Loans
Withdraw up to $10,000 from a 529 plan for student loan repayment (per beneficiary and per sibling and step-sibling of the beneficiary, lifetime).
4. Enjoy Generous Contribution Limits
Unlike some tax-advantaged savings plans, 529 college savings plans have high maximum aggregate, or lifetime, contribution limits and no annual contribution limits. Depending on your state, the maximum aggregate limit for your 529 plan will be from $235,000 to over $550,000.
These high contribution limits help you maximize the available 529 benefits.
5. Retain Full Control Over Your Account
With few exceptions, the beneficiary has no legal rights to the funds in a 529 account — the account owner ultimately controls the money. This differs from custodial accounts under UGMA/UTMA, where the child takes control of the assets once they reach legal age.
A 529 account owner can withdraw funds at any time for any reason, but the earnings portion of non-qualified withdrawals will incur federal income tax and an additional 10% penalty tax.
6. Keep It Simple with Low-Maintenance Plans
A 529 plan is a simple, hands-off way to save for education. To enroll, simply visit our Best 529 Plans page, select the plan you like best, and fill in the info for yourself and your beneficiary. You can also contact your financial advisor for guidance.
Contributions are also often “set it and forget it.” Many plans allow you to automate contributions via payroll deduction or bank account auto-draft. A third-party company will typically handle ongoing investment management, though the account owner may be able to make some decisions.
Best of all, 529 plans offer investment portfolios that automatically adjust based on your investment objectives to include more conservative investments as your beneficiary approaches college age. If you choose to invest in one of these age-based or year-of-enrollment portfolios, you’ll also enjoy a low-maintenance approach to managing the investments in your plan.
You’ll benefit from investing in funds with average returns as high as 7 percent per year on your investment, typically higher than the interest earned with a savings account.
7. Take Advantage of Unmatched Flexibility
You can change your 529 plan investment options twice per calendar year and roll your funds over into another 529 plan once in a 12-month period. However, there is no federal limit on the frequency of these changes if you simultaneously replace the account beneficiary with another qualifying family member.
8. Minimize the Impact on Financial Aid Eligibility
When owned by a parent or dependent student, 529 plan balances are considered parental assets on the FAFSA and reduce financial aid eligibility by up to 5.64% of the account’s value.
This is a minimal impact compared to the benefits of tax-free growth and withdrawals. Custodial accounts, such as UGMA/UTMA accounts, are assessed at 20%, which makes 529 plans a more advantageous option by comparison.
Grandparent-owned 529 plans are not reported on the FAFSA, and recent FAFSA changes mean distributions from these accounts no longer count as untaxed student income.
Effective from the 2024-25 school year, this update makes 529 plans an even more flexible and advantageous way to save for college while preserving financial aid eligibility.
9. Access for Everyone, With No Income Restrictions
Unlike Roth IRAs and Coverdell Education Savings Accounts, 529 plans have no income, age, or annual contribution limits. Most plans have a low minimum contribution or no minimum.
You can also start saving as early as possible. You can open a 529 plan in your name as an adult, so you can start saving before a child is born and change the designated beneficiary later (or even use 529 plan funds for your education expenses). This flexibility can be helpful if your child receives enough financial aid not to need all the money in their 529 account.
If you have questions about taxes, contact a professional, such as a CPA or enrolled agent.
