10.4 Education Savings Plans

529 Plans (Qualified Tuition Programs)

A 529 plan is a state-sponsored, tax-advantaged account for education savings authorized under IRC Section 529. There are two kinds: 529 savings plans (investment accounts whose value floats with the markets) and 529 prepaid tuition plans (lock in today's tuition at participating schools). The savings type dominates exam questions.

Key 529 tax features: growth is federally tax-free, qualified withdrawals are tax-free, many states grant a deduction or credit for contributions, and contributions are treated as completed gifts that qualify for the annual gift-tax exclusion. The donor (account owner) keeps control — a Series 7 favorite — so the owner, not the beneficiary, decides on distributions and can change the beneficiary to another family member.

529 contribution and gifting rules (2026)

Superfunding uses a special election to treat one large gift as if spread over five years: $19,000 x 5 = $95,000 from one donor, or $190,000 from a married couple, without using lifetime gift-tax exemption.

Qualified 529 expenses

• Tuition and fees at colleges and vocational schools; K-12 tuition and listed K-12 expenses (curriculum, books, qualifying outside tutoring, test fees) up to $20,000 per year from 2026 ($10,000 through 2025).
• Room and board if the student is enrolled at least half-time.
• Books, supplies, and required equipment; computers and internet access.
• Up to $10,000 lifetime toward qualified student-loan repayment per borrower.

Non-qualified 529 withdrawals

If money is spent on non-qualified items, only the earnings portion is taxed as ordinary income plus a 10% penalty; the principal is never taxed or penalized because it was contributed with after-tax dollars. (Penalty waivers apply for scholarships, death, or disability.)

529-to-Roth IRA rollover (SECURE 2.0)

Since 2024, unused 529 funds can roll to the beneficiary's Roth IRA: the 529 must be open 15+ years, contributions made in the last 5 years are ineligible, annual rollovers are capped at the Roth contribution limit, and the lifetime cap is $35,000.

Coverdell Education Savings Accounts

A Coverdell ESA trades low limits for broad flexibility. The annual cap is $2,000 per beneficiary (across all contributors combined), it is self-directed like a brokerage account, and it covers a wider set of K-12 expenses than a 529.

Coverdell qualified expenses include K-12 and college tuition, books, supplies, tutoring, uniforms, computer equipment, and room and board at the college level — still broader at the K-12 level than a 529, which does not cover school-required uniforms, transportation or extended-day programs and caps K-12 withdrawals at $20,000 a year from 2026.

529 vs. Coverdell

ABLE Accounts

Achieving a Better Life Experience (ABLE) accounts let people with disabilities save without losing means-tested benefits. Eligibility requires the disability onset before age 46 (raised from 26 effective 2026 under SECURE 2.0). Annual contributions are capped at the gift-tax exclusion ($19,000 in 2026), growth is tax-free for qualified disability expenses (housing, transportation, health, assistive technology), and the first $100,000 is disregarded for SSI eligibility.

Impact on Financial Aid

Planning point: parent-owned 529 plans receive the most favorable aid treatment because parent assets are assessed far more lightly than student assets.

How Representatives Sell and Disclose 529 Plans

529 plans are sold through broker-dealers as municipal fund securities regulated by the Municipal Securities Rulemaking Board (MSRB). That status drives several testable disclosure duties. A representative must deliver the plan's official statement (program disclosure document) and discuss the underlying investment options, fees, and risks.

The single most tested suitability point is the home-state tax benefit. Many states grant a state income-tax deduction or credit only when residents invest in their own state's plan. MSRB rules require the representative to disclose that a client may lose this in-state tax benefit by investing in an out-of-state 529. Investors should also weigh expense ratios, age-based glide-path portfolios, and any sales charges before choosing an out-of-state plan for marginally better investment options.

Ownership, Control, and Beneficiary Changes

Unlike a custodial UTMA/UGMA account, a 529 belongs to the account owner, not the beneficiary. The owner can reclaim the funds (paying tax and penalty on earnings), redirect the account, or change the beneficiary to another qualified family member — a sibling, cousin, parent, or even the owner — with no tax consequence, as long as the new beneficiary is in the same family. This flexibility is why 529 plans are favored over irrevocable custodial accounts: in a UTMA/UGMA, assets become the child's property at the age of majority and cannot be redirected.

Prepaid Tuition vs. Savings Plans

A prepaid tuition plan lets a contributor purchase future tuition credits at today's prices, shifting inflation risk to the plan sponsor; benefits are usually limited to in-state public institutions and may carry residency requirements. A savings plan carries market risk borne by the account owner but offers nationwide use and broader qualified expenses. On the exam, match the client's risk tolerance and college choice flexibility to the right product: a family certain their child will attend an in-state public university may favor prepaid tuition, while most savers choose the flexible market-based savings plan.