Saving for education is a priority for many families, and 529 plans have become a widely used tool to help fund future educational expenses. These plans offer tax advantages, flexibility and estate‑planning opportunities.
What is a 529 plan?
A 529 plan is a tax‑advantaged savings plan designed to help individuals save for qualified education expenses. Although commonly used for college, 529 plans can also cover K–12 tuition (up to $10,000 per year), certain apprenticeship programs and up to $10,000 of student loan repayments per beneficiary.
Each state sponsors its own plan, but you may invest in any state’s plan, regardless of where you or the beneficiary resides.
How do 529 plans help with estate planning?
- You control the account, decide when and how to make withdrawals and can change the beneficiary to another qualifying family member, if needed.
- Contributions are considered completed gifts. This means the money is removed from your taxable estate even though you retain some control over the account.
- Contributions qualify for the annual gift tax exclusion ($19,000 per donee in 2026).
- You may choose to front-load contributions using the five‑year spread election, allowing you to contribute up to five years' worth of annual exclusion gifts at once (e.g., $95,000 in 2026, making an election to treat as $19,000 in 2026, 2027, 2028, 2029 and 2030) without using lifetime gift/estate or generation-skipping tax (GST) exemptions.
What are the key advantages of a 529 plan?
- Income tax-free growth and withdrawals for qualified expenses (e.g., tuition, required fees, books, supplies, computers, certain room and board costs, special needs services, up to $10,000 per year for K-12 tuition, and up to $10,000 per lifetime in student loan repayments for the beneficiary or their siblings).
- State income tax deductions or credits may be available (depending on the sponsoring state).
- Removes assets from your taxable estate while still maintaining some control.
- Five-year spread election allows accelerated funding without using lifetime estate/gift or GST exemption.
- Flexibility to change beneficiaries if the original beneficiary does not need the funds. As long as the beneficiary is changed to another member of the family in the same or higher generation, there are no gift tax implications.
- Up to $35,000 of unused 529 plan funds may be rolled over to a Roth IRA for the beneficiary, subject to annual Roth IRA contribution limits and other requirements.
What are the limitations or downsides?
- Contributions must be in cash and cannot exceed the amount necessary to cover the beneficiary’s qualified education expenses. States set limits, often around $300,000.
- Withdrawals must be used for qualified education expenses to retain tax benefits. Nonqualified withdrawals may trigger income tax and a 10% penalty on earnings.
- Investment options may be more constrained than those in a traditional brokerage account.
- It may impact financial aid eligibility for the beneficiary, depending on how the account is owned. However, due to recent Free Application for Federal Student Aid (FAFSA) simplification, distributions from 529 plans owned by grandparents or other third parties no longer hinder the student's ability to maximize available financial aid.
- If you make the five-year spread election and die before the close of the five-year period, the contributions allocable to periods after your death will be included in your estate for estate tax purposes.
- With respect to beneficiary changes, if the new beneficiary is in a lower generation, the change may be treated as a taxable gift from the old beneficiary to the new beneficiary.
- Front-loading contributions limits flexibility for future annual exclusion gifts to the same beneficiary during the five-year election period.
Is a 529 plan right for you?
A 529 plan may be a good fit if you:
- Want to help pay for education for a child, grandchild or other loved one.
- Prefer tax‑advantaged growth and anticipate investment time horizons long enough to benefit from compounding.
- Want to reduce your taxable estate while still retaining some control over assets.
- Are comfortable committing funds specifically for education and following the rules for qualified withdrawals.
It may not be the best fit if you:
- Want maximum investment flexibility.
- Prefer a savings vehicle not tied to education (such as a brokerage account, custodial account or trust).
- Think the beneficiary may not need the funds for education and want to avoid penalties on nonqualified withdrawals.
If you are considering a 529 plan as part of your estate plan, work with your advisors to evaluate your contribution strategy (including annual exclusion gifts and the five-year election), beneficiary designations and how the plan fits with your overall wealth transfer goals.
