529 Plans and Planning for Your Family’s Future
Key Points – 529 Plans and Planning for Your Family’s Future
- What Tax Benefits Apply with 529 Plans?
- How the SECURE Act and SECURE 2.0 Have Impacted 529 Plans
- The Two Different Types of 529 Plans
- What Should You Do If Your 529 Plan Is Overfunded?
- 6-Minute Read
Supporting Your Family’s Future with 529 Plans
Special moments always happen in a flash—especially the times you treasure with your children, grandchildren, nieces, nephews, and other family members. One minute, they’re taking their first steps. Then, suddenly, they’re taking much bigger steps across a stage for high school and even college graduations. One way you can support them as they’re growing up is to help prepare for their futures by setting up 529 plans. Let’s investigate some of the nuances of 529 plans, including their tax benefits.
What Is a 529 Plan?
Per the SEC, a 529 plan is “a tax-advantaged savings plan designed to encourage saving for future education costs.1” They are legally known as “qualified tuition plans,” which are sponsored by states, state agencies, or educational institutions. 529 plans are authorized by Section 529 of the Internal Revenue Code.2
Tax Benefits of 529 Plans
If you perked up when reading “tax-advantaged savings” at the beginning of that definition, you weren’t alone. There are two types of tax benefits that apply to 529 plans: federal and state.3
Federal Tax Benefits
There are federal tax benefits, as 529 plan contributions grow tax-free. Federal income tax doesn’t impact the earnings when they are taken out for the qualified education costs. There are some states that don’t follow those federal tax treatment guidelines, so make sure to check on the specific qualified expenses for your state.4
State Tax Benefits
Then, there are state tax benefits. Do you live in a state with income tax? As of 2025, only nine states — Alaska, Washington, Wyoming, Nevada, New Hampshire, Texas, South Dakota, Tennessee, and Florida — didn’t have income tax.5 Of the states that have income tax, many of them allow a state tax credit or income deduction for 529 plan contributions whenever you’re filing your state tax return. It’s important to note that those state tax benefits are available to any 529 plan contributor in most states, so you don’t have to be the 529 plan owner to receive them.
Education Savings Plans
When it comes to 529 plans, there are prepaid tuition plans and education savings plans. Education savings plans tend to be more common due to their flexibility. Education savings plans allow you to start an investment account to save for your loved one’s qualified college academic expenses.6 Those expenses include tuition, obligatory fees, and room and board. However, 529 distributions are not eligible for college credits. That’s an important consideration to make when the plan beneficiary is enrolled in post-secondary education.
One of the notable benefits of education savings plans is that the investments grow tax-free and have tax-free withdrawals. The contributions to 529 plans are after-tax contributions, which aren’t federally tax deductible. The withdrawals from these plans are widely accepted at most colleges, both U.S. and international schools.
With the education savings plans, you can pay a maximum of $10,000 per year to help cover the beneficiary’s elementary or secondary education tuition. There is also some flexibility here when it comes to portfolio investment options, ranging from mutual funds and ETFs or a principal-protected bank product.
Rolling Over a 529 Education Savings Plan to a Roth IRA
Education savings plans operate a lot like Roth accounts due to their tax-free nature. And as of 2024, education savings plans are tied even more closely with Roth accounts. When the SECURE Act 2.0 was passed in December 2022, one provision that was included pertained to 529 education savings plans being eligible to be rolled over to a Roth IRA under certain conditions. That provision went into effect on January 1, 2024.
Being Aware of the Roth IRA Contribution Limits
It’s important to keep retirement plan contribution and income limits top of mind when considering a 529 to Roth IRA rollover. For 2026, the Roth IRA contribution limit is $7,500. If you’re 50 or older, that can be $8,600 with a catch-up contribution.
Additionally, there’s a $35,000 lifetime limit that can be rolled over tax-free and penalty-free under certain conditions from a 529 plan to a Roth IRA for each beneficiary.7 You can’t do a $35,000 rollover all at once, though, because the annual limit is $7,500 ($8,600 with a $1,100 catch-up) for 2026.
To take advantage of a 529 education savings plan rollover to a Roth IRA, you need to have had your 529 plan for at least 15 years. Also, funds that you contribute to the 529 education savings plan can’t be rolled over until you exceed the five-year holding period.
Why Doing a Roth IRA Rollover Could Make Sense for a 529 Plan Beneficiary
There are various reasons why doing Roth IRA rollover could make sense for the beneficiary of a 529 education savings plan. Maybe your grandchild, child, or whoever is the beneficiary of the 529 plan decides to forgo finishing college. Your financial support could be more beneficial to them as they’re starting to build their nest egg rather than during college. Those same sentiments were also expressed by Congress within Section 126 of SECURE 2.0.8
“Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education. They should be able to retain their savings and begin their retirement account on a positive note.” – SECURE 2.0, Section 126
Gift Tax Limit Increases in 2025
Since 529 plan contributions constitute as gifts, the annual gift tax limit also comes into play. For 2026, the gift tax limit is $19,000 per person, per beneficiary. That means that single filers can contribute up to $19,000 to a 529 plan in 2026 without having to report it on their tax return. For married couples filing jointly, the gift tax limit is double that ($38,000).
If you exceed the gift tax limit, you’ll be required to file a gift tax return. However, it’s possible that you might not need to pay gift taxes if you need to file a gift tax return. That’s because there is also a lifetime gift tax exemption. In 2026, the lifetime gift tax exemption is $15 million per individual.
Superfunding 529 Plans
If you want to contribute more than $19,000 a year ($38,000 if you’re married and filing jointly), superfunding the 529 plan could be an option.9 You can accelerate 529 plan contributions — making up to five years’ worth of contributions in a single year, subject to IRS guidelines. For 2026, the limit would be $95,000 ($190,000 if you’re married and filing jointly).
Prepaid Tuition Plans
Let’s shift gears to 529 prepaid tuition plans and how they differ from 529 education savings plans. A prepaid tuition plan allows you to buy units/credits at certain academic institutions for future tuition for whoever’s educating you are funding.10 For each unit/credit, you have the option to pay in installments or as a lump sum.
If you buy a prepaid tuition plan, it becomes the plan administrator’s responsibility to invest the money on your behalf. Then, once the beneficiary of the plan is enrolled in college, the funds transfer to that institution.
Restrictions of Prepaid Tuition Plans
Opting for the prepaid rate may offer a potential savings opportunity. Paying for college isn’t getting any cheaper due to inflation.11 However, prepaid tuition plans tend to be more restrictive than education savings plans.
First, they are only offered to new enrollees in select states—Washington, Nevada, Texas, Virginia, Michigan, Mississippi, Pennsylvania, Massachusetts, and Florida.12 This is subject to change going forward based on each state’s guidelines on prepaid tuition plans.
Prepaid tuition plans are usually sponsored by public in-state colleges. You and your plan’s beneficiary could still be in luck, though, if they want to attend a private college that sponsor Private College 529 Plans.13 They also usually aren’t permitted to pay for future room and board for higher education institutions and don’t pertain to tuition at secondary and elementary schools.
Fees and Expenses
There is a wide range of fees and expenses with all 529 plans. It is important to note that these fees and expenses may impact your returns.
For prepaid tuition plans, you can be assessed with an enrollment fee and recurring administrative fees. For education savings plans, you could be tasked with the application fee, yearly account maintenance fees, and recurring fees for program and asset management. The collection of the fees is done by the plan manager or 529 plan’s state sponsor.
Building Generational Wealth
Leaving a legacy and building generational wealth are so important to so many retirees and those who are preparing for retirement. If you have a child, grandchild, niece, nephew, or another loved one who is working hard in the classroom, setting up a 529 plan for them may be worth considering. Start a conversation with our team below if you have any questions about how a 529 plan could make sense for you and your family.
Resources Mentioned in This Article
- How Does a Roth IRA Grow?
- 529 Rollover to a Roth IRA – What You Need to Know
- 2026 401(k) and IRA Contribution Limits
- Catch-up Contributions for Your Retirement Plan
- The Roth IRA Five-Year Rule
- Gifting and Taxes
- The One Big Beautiful Bill Act: What You Need to Know
- 10 Ways to Fight Inflation in Retirement
Other Sources
[1] https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans
[2] https://www.irs.gov/pub/irs-pdf/p5834.pdf
[4] https://www.savingforcollege.com/compare-529-plans/results?plan_question_id=541&plan_type_id=1
[5] https://www.aarp.org/money/taxes/states-without-an-income-tax/
[6] https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
[7] https://www.tiaa.org/public/invest/services/wealth-management/perspectives/529-to-roth-ira-rules
[9] https://www.savingforcollege.com/article/10-rules-for-superfunding-a-529-plan
[10] https://www.savingforcollege.com/article/prepaid-tuition-plans
[11] https://educationdata.org/college-tuition-inflation-rate
[12] https://www.sofi.com/learn/content/prepaid-college-plans/
[13] https://www.savingforcollege.com/529-plans/other/private-college-529-plan
Investment advisory services offered through Modern Wealth Management, LLC, a Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management a Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.