Benefits of 529 Plans

Written By: Jeff Campos, Wealth Manager

A 529 savings plan is a tax-advantaged account designed to help families save for education expenses. One of the main benefits of these plans is the potential for tax-free growth on the money invested in the account over time and when funds are withdrawn to use for qualified education expenses. Another potential benefit of these plans is that contributions may also qualify for a state income-tax deduction or credit in some states such as Missouri residents can deduct up to $8,000 per individual (or $16,000 for married couples filing jointly) in annual 529 plan contributions or Illinois residents can deduct up to $10,000 per individual (or $20,000 for married couples filing jointly) in annual 529 plan contributions.

Funds in a 529 plan can generally be used for a range of qualified expenses, including college tuition, fees, books, supplies, and certain room-and-board costs. 529 funds can also be used for eligible K–12 expenses and certain apprenticeship or student-loan expenses but are subject to applicable federal limits and rules, such as permitted withdrawals for up to $20,000 in annual expenses per beneficiary for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.

Unlike some other savings accounts for minors, the account owner, which is usually a parent or guardian, generally retains control of the money, even after the beneficiary turns 18 or 21 in some states. This allows the account owner to switch the beneficiary to another family member with no tax penalty if the original beneficiary does not go to college, there are unused funds left in the plan, etc. The account owner can also cash out or withdraw the money from the 529 plan for anything outside of qualified education expenses but will be subject to a 10% federal penalty and pay ordinary income taxes on any gains/earnings above the contributions, which can be withdrawn tax and penalty free.

Changes with the SECURE 2.0 Act have also increased flexibility in certain circumstances by allowing up to $35,000 (lifetime limit) of unused 529 funds to be rolled into a Roth IRA in the beneficiary’s name if the 529 plan has been open for at least 15 years and the funds being rolled have not been contributed to the plan within the last five years. The annual Roth IRA contribution limits (up to $7,500 in 2026) and earned income requirement also apply, so this must be done over time based on today’s annual limits and how much money the beneficiary earns each year.