A 529 plan is a tax-advantage investment accounts designed to help people save for educational expenses. With the cost of college and university continuing to rise, many families have traditionally used 529 plans to save for a child’s higher education. However, due to legislation that has been passed in the last decade, 529 plans now offer more flexibility, allowing the funds to be used for more than college tuition. In this article, we’ll explain what 529 plans are and how they work. We’ll also cover the recent changes you need to know about to get the most out of your account.
What is a 529 Plan?
A 529 plan is a tax-advantage investment accounts designed to help people save for educational expenses.
Types of 529 College Savings Plans
There are two types of 529 plans, education savings and prepaid tuition. Every state sponsors at least one type of plan. You can enroll in your state’s plan or compare options from other states.
College Savings Plans:
- An investment account with the potential for tax-free growth and withdrawals for qualified education expenses.
- Funds can be used for tuition, fees, and room and board.
- In addition to higher education, college savings plans can be used for private school tuition at the elementary or secondary level.
- Choose from a variety of investment options.
- Start early and let compounding interest help you grow your child’s college savings account.
- Offered by Iowa, Minnesota, and South Dakota.
- As with all investment products, there is a chance of loss and no guarantee of a certain return.
Prepaid Tuition Plans:
- Pre-pay your child’s future tuition at today’s prices.
- Funds can only be used for tuition, not room and board.
- You can also pre-pay for private school tuition.
- Not offered by Iowa, Minnesota, or South Dakota.
- These plans aren’t guaranteed by the federal government, but they may be guaranteed by the state.
Benefits of 529 Plans
Tax Advantages
The primary benefit of 529 plan is the tax-free growth of investments. Although contributions are made with after-tax dollars, the earnings in the account are tax-free when used for qualified education expenses. Tax benefits may vary depending on your state and the type of 529 plan you have.
State Income Taxes
States may offer a tax benefit for contributing to a 529 plan. Withdrawals used for qualified education expenses may be tax-exempt. In the state of Iowa, taxpayers can deduct up to $5,800 of contributions per beneficiary from their state income taxes for the 2025 tax year when using the state of Iowa’s 529 plan.
Federal Income Taxes
Contributions to your 529 plan are not tax-deductible at the federal level. Withdrawals do not count as income on your federal tax return if the funds are used for qualified education expenses.
529 Plan Fees
The last thing to know about 529 plans is that both types of plans may incur enrollment and administrative fees, program and asset management fees, and sales loans and redemption and distribution fees. Review fees carefully before choosing a plan. You aren’t limited to your own state’s 529 plans, so you can shop around.
Wider Range of Qualified Expenses
Expenses that are deemed qualified include tuition, fees, books, room and board, and supplies. In the past few years, the definition of qualified expenses has expanded to include K-12 tuition (up to $10,000 annually), apprenticeship programs, and student loans ($10,000 lifetime limit).
Flexibility & Control
With 529 plans, the account owner controls the contribution, investment, and distribution of the funds instead of the beneficiary. If the beneficiary does not need the funds, you have the option to change the beneficiary to another qualified family member like a sibling, cousin, or even yourself. However, if you do not change the beneficiary and the 529 plan has been in the same beneficiary’s name for 15 years, the beneficiary is eligible to roll over, tax-free and penalty-free, up to $35,000 to a Roth IRA in their name.
Minimal Impact on Financial Aid
529 plans are reported as parental assets when the student is a dependent and the parent is the account owner. This account set up is more favorable when calculating the Student Aid Index or Expected Family Contribution for the beneficiary’s financial aid. A 529 plan that is owned by grandparents does not affect a student’s financial aid as of the 2023-2024 school year.
Changes to 529 Plans Over Time
Since their introduction in 1996, 529 plans have been updated several times over the years in different pieces of legislation. These changes have often been geared towards increasing flexibility and including a wider range of educational expenses. While originally reserved for higher education, 529 plans can now be used for primary school tuition as well. Let’s look at the most recent piece of legislation that changed how 529 plans work.
SECURE 2.0 Act, 2022
In January 2024, the 529-to-Roth IRA rollover provision took effect. Before this piece of legislation, any withdrawal from a 529 plan not used for qualified education expenses was subject to federal income tax plus an additional 10% penalty on earnings. Under Secure 2.0, the beneficiary of a 529 plan can roll over up to $35,000 into a Roth IRA account. Rollovers are subject to IRA annual contribution limits, the 529 plan must’ve been open for at least 15 years, and contributions from the previous five years are not eligible. Also, under the original SECURE Act of 2019, up to $10,000 from a 529 plan can be used to repay the beneficiary’s student loans. In 2025, the total contribution cap into a Roth IRA is $7,000 per year, with an additional $1,000 in “catch-up” amount allowed for those 50 or older.
Recent Updates for 2025 & Coming Changes in 2026
Grandparent-owned 529s are no longer counted on the FAFSA as student income, starting with the 2024-2025 award year.
Starting January 1, 2026, individuals with disabilities occurring before age 46 (up from age 26) will be eligible for ABLE accounts, which can accept 529 rollovers.
State-Specific Resources
As you can see, a lot depends on state law when it comes to 529 plans. While you can shop around for plans from other states, it’s best to start by familiarizing yourself with the plan(s) your state offers and what the rules are around tax benefits. Check out the 529 plan websites for Iowa, South Dakota, and Minnesota below. And if you have any questions about saving for college or how that fits into your overall financial plan, our Wealth Management team would be happy to discuss your goals with you. Reach out to us anytime!
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