4.3 529 College Savings Plans
Key Takeaways
529 plans are municipal fund securities with tax-deferred growth and tax-free qualified withdrawals.
College savings plans are investment-based and more flexible than prepaid tuition plans.
Qualified expenses include higher education costs and K-12 tuition and listed K-12 expenses (up to $20,000 a year from 2026).
Superfunding allows 5 years of gifts at once ($95,000 individual / $190,000 couple in 2025).
Non-qualified withdrawals tax the earnings portion and add a 10% penalty.
SECURE 2.0 allows 529-to-Roth rollovers with a 15-year account age and $35,000 lifetime cap.
529 plans are tax-advantaged savings vehicles specifically designed for education expenses. They're classified as municipal fund securities and require Series 6 registration to sell.
What Is a 529 Plan?
A 529 plan is a state-sponsored investment account that offers tax benefits for education savings:
| Feature | Description |
|---|---|
| Tax Status | Municipal fund security |
| Growth | Tax-deferred federally |
| Qualified Withdrawals | Tax-free for education |
| State Benefits | Many states offer tax deductions |
| Contribution Limits | No annual limit (gift tax applies) |
| Income Limits | NONE - anyone can contribute |
Types of 529 Plans
College Savings Plans
- Investment-based (similar to mutual funds)
- Value fluctuates with market
- Can be used at any eligible institution
- More flexible and popular
Prepaid Tuition Plans
- Lock in today's tuition rates
- Limited to specific state schools
- Less common, less flexible
- May not cover all expenses
Tax Benefits
Federal Tax Treatment
- Contributions: NOT tax-deductible federally
- Growth: Tax-deferred
- Qualified withdrawals: Tax-free
State Tax Benefits
- Many states offer tax deductions for contributions
- Some states offer deductions for any 529 (not just their own)
- State tax treatment varies - check specific state rules
Qualified Education Expenses
Higher Education (College)
- Tuition and fees
- Room and board
- Books and supplies
- Computer equipment
- Special needs services
K-12 Education
- Tuition and, since July 2025, other listed K-12 expenses (curriculum, books, online materials, qualifying outside tutoring, test fees, dual-enrollment fees and educational therapies)
- Limit: $20,000 per year per student from 2026 ($10,000 through 2025)
Expanded Qualified Expenses (2025)
- Apprenticeship programs
- Student loan repayment (up to $10,000 lifetime)
- Vocational training
- Test fees and tutoring
Gift Tax Considerations
Annual Gift Tax Exclusion (2025)
- $19,000 per beneficiary per year (single)
- $38,000 per beneficiary per year (married couple)
Superfunding (5-Year Gift Tax Averaging)
Make 5 years of contributions at once without gift tax:
| Contributor | 2025 Superfunding Maximum |
|---|---|
| Individual | $95,000 ($19,000 × 5) |
| Married Couple | $190,000 ($38,000 × 5) |
How it works: File IRS Form 709 to spread the gift over 5 years. No additional gifts to that beneficiary during the 5-year period, or they'll be subject to gift tax.
Estate Planning Benefits
Superfunding removes assets from your estate immediately while spreading gift tax consequences over 5 years. If you die during the 5-year period, a prorated portion returns to your estate.
Non-Qualified Withdrawals
If funds are used for non-qualified expenses:
| Consequence | Description |
|---|---|
| Income Tax | Earnings portion taxed as ordinary income |
| Penalty | 10% penalty on earnings portion |
| Principal | Returns tax-free (already taxed) |
Exceptions to 10% Penalty
- Beneficiary receives scholarship (can withdraw up to scholarship amount)
- Beneficiary attends military academy
- Beneficiary dies or becomes disabled
- Rolled over to Roth IRA (see below)
529-to-Roth IRA Rollover (SECURE 2.0)
Starting in 2024, unused 529 funds can be rolled to a Roth IRA:
Requirements
| Requirement | Description |
|---|---|
| Account Age | 529 must be open at least 15 years |
| Lifetime Limit | $35,000 per beneficiary |
| Annual Limit | Subject to Roth IRA contribution limits ($7,500 in 2026) |
| 5-Year Rule | Cannot roll contributions made in last 5 years |
| Earned Income | Beneficiary must have earned income ≥ rollover amount |
| Income Limits | Does NOT apply (unlike regular Roth contributions) |
Example: To roll the full $35,000 at $7,000/year would take at least 5 years.
Key Benefit
This provision allows families to overfund 529s without worrying about penalties - excess funds can eventually go to the beneficiary's retirement.
Changing Beneficiaries
529 beneficiaries can be changed to qualified family members:
- Siblings, parents, children
- First cousins, aunts, uncles
- Spouse of any of the above
Key Point: Beneficiary changes within the family are NOT taxable events.
Account Control
| Feature | Description |
|---|---|
| Account Owner | Controls the account (typically parent/grandparent) |
| Beneficiary | Receives the educational benefit |
| No Age Limit | Beneficiary can be any age |
| Owner Can Change | Owner can change beneficiary at any time |
529 vs. Other Education Savings
| Feature | 529 Plan | Coverdell ESA | UGMA/UTMA |
|---|---|---|---|
| Annual Limit | None (gift tax applies) | $2,000 | None (gift tax) |
| Income Limit | None | Yes ($110K/$220K) | None |
| Age Limit to Use | None | 30 | None (but transfers at majority) |
| Investment Options | Limited by plan | Self-directed | Broad |
| Control | Owner keeps control | Custodian | Minor at majority |
Key Exam Points
- Municipal fund security - Requires Series 6 to sell
- No income limits - Anyone can contribute regardless of income
- Superfunding - $95,000 individual / $190,000 couple (2025)
- Qualified K-12 - Up to $20,000/year from 2026 for tuition and listed K-12 expenses
- 529-to-Roth - 15-year account age, $35,000 lifetime limit
- Non-qualified penalty - 10% on earnings + ordinary income tax
- Beneficiary changes - Family members, tax-free
- Owner control - Account owner retains control (unlike UTMA)
What is the maximum amount a married couple can contribute to a 529 plan using superfunding (5-year gift tax averaging) in 2025?
$38,000
$95,000
$150,000
$190,000
Under SECURE 2.0, what is a key requirement to roll 529 funds into a Roth IRA?
The 529 account must have been open for at least 5 years
The 529 account must have been open for at least 15 years
The beneficiary must be under age 30
The rollover must be completed by December 31 of the tax year
A client withdraws $20,000 from a 529 plan to pay for a non-qualified expense. The withdrawal includes $15,000 of contributions and $5,000 of earnings. What are the tax consequences?
The entire $20,000 is subject to income tax and a 10% penalty
Only the $5,000 earnings portion is subject to income tax and a 10% penalty
The $15,000 contribution is taxed, and the $5,000 earnings has a 10% penalty
There is no tax or penalty if the funds are redeposited within 60 days
Sections you finish are checked off in the contents.