529 plans were originally created in 1996 as a tax-advantaged way to save for college. Over the past
several years, Congress has expanded the ways 529 plan funds can be used, making them a more
flexible and versatile savings vehicle.
College, plus other education expenses
A 529 savings plan can be instrumental in building a college fund — its original purpose. Funds
contributed to a 529 savings plan accumulate tax-deferred and earnings are tax-free if the funds are
used to pay qualified education expenses, which now include:
● College expenses: the full cost of tuition, fees, books, and equipment (including
computers) and, for students attending at least half time, housing and food costs at any
college in the U.S. or abroad accredited by the U.S. Department of Education
● Apprenticeships programs: the full cost of fees, books, and equipment for programs
registered with the U.S. Department of Labor
● K-12 tuition expenses: up to $10,000 per year
If 529 funds are used to pay a non-qualified education expense, the earnings portion of any
withdrawal is subject to ordinary income tax and a 10% penalty.
Estate planning tool
529 plans offer grandparents an opportunity to save for a grandchild’s education in a way that
accomplishes estate planning goals, while still allowing grandparents access to those funds if
needed.
Specifically, due to an accelerated gifting feature unique to 529 plans, grandparents (or other
relatives) can contribute a lump sum to a 529 plan of up to five times the annual gift tax exclusion
and avoid gift tax by making an election on their tax return to spread the gift equally over five years.
In 2025, the gift tax exclusion is $19,000, so grandparents could gift up to $190,000 to a 529 plan for
their grandchild ($19,000 x 5 years x 2 grandparents) and avoid gift tax. These funds are not
considered part of the grandparents’ estate for federal estate tax purposes (unless one or both
grandparents die in the five-year period, in which case special allocation rules apply). And if a
grandparent is also the account owner of the 529 plan (529 plan rules allow only one account
owner), then the grandparent will retain control of the 529 plan funds (even though the funds are not considered part of the estate) and can access them for health-care needs, an emergency, or any
other reason (but the earnings portion of any non-qualified withdrawal will be subject to ordinary
income tax and a 10% penalty).
Student loan repayment
Nearly 43 million borrowers have student loans, and the average loan balance is approximately
$38,000.1 To help families who might have leftover 529 funds after college, Congress expanded the
approved use of 529 plan funds in 2019 to include the repayment of qualified education loans up to
$10,000 for the 529 beneficiary or a sibling of the beneficiary. This includes federal and private
loans.
Retirement builder: Roth IRA rollover
As of 2024, 529 account owners can roll over up to $35,000 from a 529 plan to a Roth IRA for the
same beneficiary. Any rollover is subject to annual Roth IRA contribution limits, so $35,000 can’t be
rolled over all at once. For example, in 2025, the Roth IRA contribution limit is $7,000 (for people
under age 50) or 100% of annual earned income, whichever is less, so that is the maximum amount
that can be rolled over in 2025.
There are a couple of other caveats. For the rollover to be tax- and penalty-free, the 529 plan must
have been open for at least 15 years. And contributions to a 529 account made within five years of
the rollover date can’t be rolled over — only contributions outside the five-year window can be rolled
over.
Participation in a 529 plan generally involves fees and expenses, and there is the risk that the
investments may lose money or not perform well enough to cover college costs as anticipated. The
tax implications of a 529 plan can vary significantly from state to state. Most states offering their own
529 plans may provide advantages and benefits exclusively for their residents and taxpayers, which
may include financial aid, scholarship funds, and protection from creditors. Before investing in a 529
plan, consider the investment objectives, risks, charges, and expenses, which are available in the
issuer’s official statement and should be read carefully. The official disclosure statements and
applicable prospectuses contain this and other information about the investment options, underlying investments, and investment company and can be obtained from your financial professional.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is
for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP’s express prior written consent. Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Advisor. IFP and Hitchcock Maddox Financial Partners are not affiliated.