May 29th, or 529 Day, rolls around every year. And every year, a lot of people ask the same question: should I start one for my child or loved one?
The honest answer is that it depends. But for most families with children, grandchildren, or other loved ones they want to support, a 529 is one of the most flexible and tax-advantaged savings tools available. The problem is that a lot of people either don’t know about them or assume they’re more complicated or limited than they actually are.
What Is a 529 Account?
A 529 is a tax-advantaged savings account designed to help families save for education expenses. You contribute after-tax dollars, the money grows tax-deferred, and withdrawals for qualified education expenses come out tax-free. The name comes from Section 529 of the Internal Revenue Code. Every state offers at least one 529 plan, though you are not required to use your own state’s plan.
It’s Not Just for Four-Year College
One of the biggest misconceptions about 529 accounts is that they’re only useful if your child is headed to a traditional four-year university. That’s not the case.
529 funds can be used for two-year community college programs, four-year universities, trade schools and vocational programs, and certain apprenticeship programs. In addition, 529 funds can now be used for K through 12 private school tuition up to $20,000 per year, following an expansion effective January 1, 2026. Note that state conformity with this new limit varies, so it’s worth checking your specific state’s rules. So, if you have a child in private school right now, this account could be working for you today, not just years down the road.
What Happens If Your Child Doesn’t Use All the Money?
This is the question we hear most often from parents who are hesitant to contribute heavily to a 529. What if my kid gets a scholarship? What if they don’t go to college at all? You have more options than most people realize.
First, if your child receives a scholarship, you can actually withdraw up to the scholarship amount from the 529 without the usual 10% penalty. You would still owe income tax on the earnings portion, but the penalty itself is waived.
Second, a rule that took effect in January 2024 under the SECURE 2.0 Act allows unused 529 funds to be rolled over into a Roth IRA for the beneficiary. The account must have been open for at least 15 years,
contributions must be at least five years old to qualify, and there is a $35,000 lifetime cap per beneficiary. Annual rollovers are also subject to the Roth IRA contribution limits for that year. This is a meaningful development. Money you saved for your child’s education can become the foundation of their retirement savings if they don’t end up needing it all for school.
Third, you can always change the beneficiary to another family member, use the funds yourself, or save them for future generations.
When Should You Start a 529?
The earlier the better. Like any investment account, a 529 benefits from time. The longer the money is invested, the more opportunity it has to grow. Starting when a child is born or young gives the account the most runway.
That said, it is never too late to start. Even a few years of tax-deferred growth is better than none, and contributions can make a real dent in education costs.
Do You Need to Use Your Own State’s Plan?
No. You can open a 529 in any state, regardless of where you live or where your child plans to attend school. That said, many states offer an income tax deduction or credit for contributions to their own state’s plan. That benefit can add up considerably over time. It’s worth checking before you decide.
How to Get Started
If you have not started a 529 yet, decide who the beneficiary will be, check whether your state offers a tax deduction for contributions, choose an investment option that aligns with the beneficiary’s timeline, and set up automatic contributions if possible. Even a modest amount each month adds up over time.
If you already have a 529, use this as a reminder to review it. Check the investment mix, make sure it still aligns with when you will need the funds, and confirm the beneficiary information is current.
And if you have questions about whether a 529 fits into your broader financial picture, or how it works alongside your other savings goals, reach out to our team. We talk through these decisions with people every day.
Note: The K-12 limit increase to $20,000 per year and the SECURE 2.0 Roth IRA rollover rules involve details that are still subject to state-level conformity and evolving IRS guidance. We recommend speaking with a financial professional before taking action.
Video Transcript:
May 29th is 529 Day. 529s are an important and valuable component to an overall financial plan as you’re thinking about helping your children or other loved ones save and prepare for college education.
But it’s not just about college. 529 accounts can be used in a number of different ways. Predominantly, we think they are an excellent vehicle for post-secondary education, whether that’s a two-year community college associate’s degree, a four-year university, or other types of trade schools and programs. In addition to that, 529s can be used for K through 12 private education or programs.
And if you are saving and accumulating money in these accounts, investing it so it grows and accumulates for your children or your grandchildren or your favorite niece or nephew or any loved one’s financial future and higher education, and they don’t need all of those funds, a newer rule can actually allow you to roll those funds over into a Roth IRA account for the beneficiary that they can then use to accumulate and grow for their long-term financial goals.
So, if you’ve not started a 529, or if you aren’t aware of them, now’s a great time on May 29th to learn more and determine if they’re a right choice for your overall financial picture to save for your future or that of a child or other family member or loved one.
