For a growing number of parents, saving for a child’s education has overtaken retirement as the top financial priority. The 529 plan remains the primary vehicle for that savings, and recent legislative changes have made it considerably more flexible than it used to be.
How a 529 compares to the alternatives
A 529 plan’s earnings grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. A regular savings account, by contrast, is taxed on interest every year, and a taxable brokerage account owes capital gains tax whenever you sell. A 529 also typically counts as a parental asset for financial aid purposes, which affects aid formulas less than assets held directly in a child’s name, as is often the case with custodial accounts. The tradeoff is that a 529 is education-focused, though the new Roth IRA rollover option (below) has closed much of that gap.
What counts as a qualified expense
Tuition, room and board, and required books, computers, and supplies all qualify. Commuting costs, extracurriculars, and day care do not. Using 529 funds for non-qualified expenses means the earnings portion becomes subject to income tax plus a 10% federal penalty, so it’s worth confirming an expense qualifies before you withdraw.
Anyone can open a 529 for a beneficiary, not just a parent: grandparents, aunts, uncles, or the beneficiary themselves, and there’s no cap on how many accounts a single beneficiary can have.
Expanded flexibility
Legislative changes have pushed 529 usage well beyond the traditional four-year degree. Funds can now cover K-12 tuition up to $10,000 a year, pay off up to $10,000 of student loan debt over a lifetime, and fund vocational schools and apprenticeships.
The most significant addition is the Roth IRA rollover under the SECURE 2.0 Act. Starting in 2024, unused 529 funds can move into a Roth IRA for the beneficiary, addressing the long-standing fear of over-saving. The rules: the account must have been open at least 15 years, there’s a $35,000 lifetime transfer limit, funds must have been in the account at least five years before the transfer, and the transfer counts against the beneficiary’s annual Roth contribution limit for that year.
Funding and paying the bill
You don’t need to be a sophisticated investor to use a 529 effectively. Age-based portfolios automatically shift from aggressive to conservative as the child nears college age, and automatic contributions starting as low as $15 a month add up meaningfully over a decade or more. Some providers also offer gifting platforms where family and friends can contribute directly for birthdays or holidays instead of buying another toy.
When it’s time to pay the school, options typically include direct debit from the account through the school’s bursar system, an electronic check sent directly to the school, or transferring funds to your own bank account first. If you haven’t started saving yet, it’s not too late, any amount now is less you’d otherwise need to borrow later.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
