Unlocking Their Full Potential: 529 Plans
By Nathan Alexander, CPA, CFP®
When we consider the puzzle of how to fund higher education, we often think of the tax incentives available to families. We have two main federal tax credits, but the challenge is that they are adjusted for family income which for many households makes these tax credits unavailable or reduced.
The most commonly used tax credit for higher education for four years of college is the American Opportunity Tax Credit of up to $2,500 per year for four years. The Lifetime Learning Credit of $2,000 per year is next in line, and has the advantage that it can be used for an unlimited number of years, although it is not possible to claim both credits in the same year for the same student. To qualify, adjusted gross income must be below $90,000 for a single taxpayer or $180,000 for a joint filer. Even if family income falls within the thresholds, the credits do not go very far to cover the cost of higher education including tuition, room and board, fees, and books. 529 College Savings accounts are available to everyone, no matter their income level, as a key element of growing savings to be used for funding higher education. They are flexible and dynamic and should be considered by parents and grandparents alike.
Several legislative tax changes over the last several years have made saving for education with 529 plans more attractive, and there are a lot of things to consider as soon as a child is born. For grandparents who desire to help their grandchildren save for college, recent changes to the FAFSA reporting process are a bonus: A grandparent who is considered the owner of a 529 for their grandchild-beneficiary is now fully exempt from FAFSA reporting rules.
For many families, there may be hesitation about funding a 529 over concern that their child/grandchild may be left with a hefty residual 529 balance after their schooling is over, or if they do not end up paying for school in favor of free community college, an apprenticeship, the military or another career path. Keep in mind that the funds can remain in the 529 and may be useful later in the child’s life under some of the expanded spending opportunities described below.
Expanded options to spend down the 529
- As has always been the case, residual balances can be rolled into 529s for other family members such as siblings, step-siblings, cousins or even spouses (this is limited to one rollover per beneficiary per 12-month period). It is also possible to transfer down to a family member of a lower generation, although this would likely have gift tax implications for the transferring owner.
- 529 plans can be used toward K-12 private school tuition and fees up to $20,000 per year (prior to 2025 this was capped at $10,000/yr), and for children destined for lengthy private primary school, 529s can be a very powerful way to help defray these costs.
- The One Big Beautiful Bill Act of 2026 expanded what are considered qualified educational expenses to include certain tutoring costs, vocational and credential expenses, fees for national standardized testing, online education materials, and fees for college courses taken in high school. In addition, the ability to maintain trade and professional certifications with 529 money (see Workforce Innovation & Opportunity Act directories for list of what qualifies) helps defray potentially expensive credentialing. Consider, for example, a family member who wishes to become a pilot with expensive training and flight time requirements.
Expanded tax advantages
- Provided that the 529 plan has been maintained for at least 15 yrs and the funds contributed at least 5 years prior, and further subject to Roth IRA contribution limits, the beneficiary of the 529 may fund their Roth IRA up to a lifetime amount of $35,000. This is an incredibly powerful way to give the beneficiary a head start on their own retirement funding using unspent 529 balances. As we can see, funding the 529 early while the child is still very young is a core requirement to take advantage of this opportunity.
- Student loans (federal or most private, student or parent) principal and interest can be repaid up to a $10,000 qualified student repayment limit, although this does limit the deductibility of student loan interest deductions.
- For those with disabilities, the One Big Beautiful Bill made permanent a provision to allow excess 529 balances to be rolled tax-free into ABLE Accounts.
If 529 balances remain after all the opportunities above have been exhausted, money can be withdrawn for non-qualified expenses, but the earnings portion of the account is subject to federal income tax and a 10% additional tax penalty unless certain exceptions are met (such as disability or if the student received a scholarship and the 529 was not needed). As many students who begin their working career may gradually move into moderate or higher tax brackets, there is still time for good tax planning using lower brackets.
Considering the potential benefits of 529 plan savings can easily feel overwhelming. Never hesitate to reach out to your TCV team. We will help you to contextualize 529 planning in the setting of your personal situation. We will collaborate with you and your tax preparer in crafting a savings approach that makes the most sense for you and your family.