How a 529 plan works
A 529 plan has an account owner, usually a parent or grandparent, and a beneficiary, the future student. The owner controls the money, picks the investments and can switch the beneficiary to another member of the beneficiary’s family without income tax. Each contribution counts as a completed gift to the beneficiary, so the account stays out of the owner’s taxable estate even though the owner can still take the money back.
Plans come in two types. A savings plan invests contributions in a menu of portfolios, and its value rises and falls with the markets. A prepaid tuition plan sells tuition credits at today’s prices. States may offer both types, but a college can sponsor only the prepaid kind. Federal law lets you redirect a 529’s existing investments only twice per calendar year.
There is no federal annual contribution cap and no income limit on who can contribute; each plan instead caps the total balance. Contributions are not deductible on your federal return, but many states give a deduction or credit, and some take it back if the money later comes out for other purposes. Unlike a custodial UTMA or UGMA account, the money never becomes the child’s property at the age of majority.
What a 529 plan can pay for in 2026
Withdrawals are tax-free up to the beneficiary’s adjusted qualified education expenses for the year: what the student spent on eligible costs, minus tax-free grants and scholarships and minus any costs already used to claim an education credit. The list of eligible costs has grown several times, most recently under the One Big Beautiful Bill Act of July 2025. Match each withdrawal to expenses paid in the same tax year, because the two are compared year by year.
- College and graduate school: tuition, fees, books, supplies and required equipment at any school eligible for federal student aid, including some abroad.
- Room and board for students enrolled at least half-time, capped at the school’s cost-of-attendance allowance or its actual on-campus charge, if higher.
- Computers, software and internet access used mainly by the student while enrolled.
- K–12: up to $20,000 per beneficiary per year starting in 2026 (it was $10,000) at a public, private or religious school, covering tuition, curriculum, books, online materials, qualified tutoring, testing fees, dual enrollment and educational therapies.
- Registered apprenticeships, plus tuition, testing and continuing-education fees for recognized postsecondary credentials.
- Student loans: up to $10,000 lifetime per borrower, for the beneficiary or a sibling.
How 529 withdrawals are taxed
Every 529 withdrawal is a mix of your original contributions and investment earnings, in proportion to the account as a whole. Contributions always come back tax-free because they were made with taxed money. The earnings share of any amount above the year’s qualified expenses is added to the recipient’s income and taxed at their marginal tax rate, plus a 10% additional tax.
The 10% additional tax is waived, though income tax on the earnings still applies, when the withdrawal follows the beneficiary’s death or disability, when it does not exceed a tax-free scholarship or similar aid the student received, or when it covers the cost of attending a U.S. military academy. It also does not apply to earnings that become taxable only because the same expenses were used for the American opportunity or lifetime learning credit.
That overlap is the main trap for families. You cannot count the same tuition dollars for a tax-free 529 withdrawal and for an education tax credit. The American opportunity credit, worth up to $2,500 per student, is figured on the first $4,000 of tuition and related costs, so a family whose income qualifies often pays that $4,000 from other money, claims the credit and uses the 529 for the rest.
The 529-to-Roth IRA rollover
The SECURE 2.0 Act added an exit for leftover money starting in 2024: a beneficiary can move 529 funds into their own Roth IRA with no income tax and no 10% additional tax. Because each year’s transfer must fit inside the $7,500 Roth limit, moving the full $35,000 takes at least five years, so the rollover suits a modest leftover balance better than a large one. For a beneficiary or family member with a qualifying disability, a rollover to an ABLE account is another exit, counted within that account’s annual limit. The Roth route has strict conditions:
- The 529 account must have been maintained for at least 15 years; ask the plan how it treats an account whose beneficiary changed.
- Contributions made in the last five years, and the earnings on them, cannot be moved.
- Each year’s rollover counts against the beneficiary’s Roth IRA limit, $7,500 in 2026, minus any other IRA contributions they make that year.
- The beneficiary needs taxable compensation, such as wages, at least equal to the rollover, as for any Roth contribution, but the Roth income limit does not apply.
- The lifetime total is $35,000 per beneficiary, and the money must move directly from the plan to the Roth IRA in a trustee-to-trustee transfer.
529 plan vs. other ways to save for a child
A 529 pairs tax-free growth with high balance limits and owner control, which is why it is the usual first choice for college savings.
A Coverdell ESA also grows tax-free and covers a wider range of K–12 costs, such as uniforms and transportation a school requires, without the $20,000 yearly cap. Its drawbacks are a $2,000 annual contribution limit, income limits for contributors and a payout deadline at age 30. A custodial account can pay for anything that benefits the child, but its earnings are taxed along the way and the assets belong to the child outright at the age of majority. A parent’s Roth IRA is flexible, since contributions can come out at any time, but it uses up scarce retirement room. A taxable brokerage account has no restrictions and no tax shelter.
Illustrative numbers
A $15,000 withdrawal with no qualifying expenses
- Earnings in the withdrawal
- Total withdrawals × the account’s earnings share (earnings ÷ account value)
- AQEE
- Adjusted qualified education expenses: eligible costs minus tax-free aid and minus costs used for an education credit
- Total withdrawals
- All 529 withdrawals for the beneficiary during the tax year
If AQEE is at least as large as the withdrawals, nothing is taxable; otherwise the 10% additional tax also applies to the taxable earnings unless an exception fits.
Account value$60,000
Contributions and earnings inside it$40,000 and $20,000
Withdrawal with no qualified expenses$15,000
Earnings share: $20,000 ÷ $60,000 = 1/3$5,000 of earnings
Income tax on $5,000 at a 22% rate$1,100
10% additional tax on $5,000$500
The owner gets $10,000 of contributions back tax-free and pays $1,600 of federal tax on the $5,000 of earnings, before any state tax or recapture of a state deduction. Had the student received a $15,000 tax-free scholarship that year, the $500 additional tax would not apply, though the income tax on the earnings would.
At a glance
529 plan rules and limits for 2026
| Rule | 2026 figure |
|---|---|
| K–12 expenses | Up to $20,000 per beneficiary per year |
| Student-loan payments | $10,000 lifetime per borrower |
| Rollover to the beneficiary’s Roth IRA | $35,000 lifetime, within the $7,500 yearly Roth IRA limit, after 15 years |
| Gift tax annual exclusion | $19,000 per donor per beneficiary |
| Five-year gift election | Up to $95,000 at once, or $190,000 for a couple |
| Federal annual contribution limit | None; each plan caps the total balance |
| Changes to existing investments | Twice per calendar year |
Put it in your plan
529 plan in MoneyWhatIf
In MoneyWhatIf, a 529 pays for a child’s education through age-based cost stages. Add a child with a birth year, create a college stage such as ages 18–21 with its own annual amount, and name the 529 as that stage’s funding account. The general withdrawal order leaves 529 accounts out, but a named education withdrawal can reach them, and any shortfall falls back to the plan’s usual funding order. The model does not check expense eligibility, financial aid or every 529 tax exception.
Open your forecastCommon questions
529 plan FAQs
What happens to a 529 plan if my child doesn’t go to college?
There is no deadline to use a 529, so you can keep it for later study, or switch the beneficiary to another family member, such as a sibling, first cousin or parent, without tax. The money can also pay for a registered apprenticeship or credential program, or up to $35,000 can move to the beneficiary’s Roth IRA once the account is 15 years old. Cashing out works too, but the earnings are taxed and face the 10% additional tax.
How much can I put in a 529 plan without paying gift tax?
Each contribution is a gift to the beneficiary, so up to $19,000 per beneficiary in 2026 falls under the annual gift tax exclusion. A special election lets you front-load five years of exclusions, up to $95,000 per beneficiary, or $190,000 for a married couple, reported as if spread over five years. If you die during those five years, the part allocated to later years returns to your estate. Larger gifts use up part of your lifetime estate and gift tax exemption.
Can I use any state’s 529 plan?
Yes. Many state savings plans accept savers from other states, and the money can pay any eligible school in any state, plus some schools abroad that take part in federal student aid. The main reason to stay home is state income tax: many states give a deduction or credit only for contributions to their own plan, while some reward any state’s plan. Weigh fees and investment options against the value of that state tax break.
Does a 529 plan affect financial aid?
It counts as an asset, and ownership decides where. The Education Department’s 2026–27 FAFSA guidance reports a 529 owned by a parent or by a dependent student as a parent investment, and says a student who is only the beneficiary, not the owner, does not report it as a student asset. Colleges that use their own aid forms may count accounts held by grandparents or others differently, so check each school’s rules before deciding who should own the account.
What are the disadvantages of a 529 plan?
Earnings withdrawn for anything other than qualified education are taxed and usually face a 10% additional tax, and a state may take back an earlier deduction. You are limited to the plan’s investment menu and can change existing investments only twice a year. A savings plan’s value can fall just before tuition is due. Leftover money has exits, such as a beneficiary change or a Roth IRA rollover, but each comes with limits.