Saving with a 529 Plan Has Never Been Sweeter
As we consider the treats ahead for us all during the Halloween season, Thanksgiving, and the upcoming Winter Holidays, let us talk about one of the sweetest treats available for funding future education expenses: 529 education savings plans. Bonus: it has zero calories and does not cause cavities! Beyond the holiday sweetness, the core value remains clear: postsecondary education and training consistently prove highly beneficial to an individual’s lifetime earnings and access to career opportunities.
In large part, we can attribute the tremendous growth of the 529 industry to these life-changing outcomes. For 30 years, the core mission of this financial tool has been educational access and affordability for families as costs continue to rise annually. With a strong focus on reducing student debt and boosting a student’s ability to start adult life on the right foot, 529s have served as the go-to savings vehicle. Recent legislative updates to Section 529 have expanded the list of qualified expenses, directly addressing common concerns that previously deterred potential savers. Additionally, major updates to the Free Application for Federal Student Aid (FAFSA) offer unprecedented flexibility for extended family members eager to support a student’s goals.
Here is a closer look at these enhancements and how they make saving easier for families.
1. Roth IRA Rollovers
Individuals can now roll over up to $35,000 of unused 529 funds into a Roth IRA for the beneficiary, tax-free and penalty-free. This provides terrific peace of mind for savers and rewards families whose students received scholarships, chose alternative paths, or simply did not use the full balance.
2. Expanded Qualified Uses
The definition of what constitutes a valid educational expense has broadened significantly to fit today’s diverse learning pathways:
- Higher K–12 Limits: The annual federal withdrawal cap for K–12 tuition is now $20,000 per student, up from $10,000.
- Broader K–12 Expenses: Funds can cover K–12 textbooks, online educational tools, tutoring, standardized test fees (SAT, ACT, AP), dual-enrollment courses, and certified educational therapies for students with disabilities.
- Trade Schools and Credentials: Funds cover recognized job training, vocational programs, and professional licensing in essential fields such as HVAC, plumbing, or cosmetology.
- ABLE Account Rollovers: Tax-free rollovers from a 529 plan to an ABLE account for individuals with disabilities are now a permanent feature of the tax code.
State Tax Note: State tax rules vary. Be sure to check whether your home state conforms to federal 529 tax treatment before making K–12 withdrawals to avoid unexpected state tax liabilities.
3. FAFSA Rule Changes for Family Contributions
Under updated FAFSA guidelines, 529 accounts owned by grandparents, relatives, or family friends no longer count as student assets, nor do distributions count as student income. Relatives can now contribute directly toward education expenses without reducing a student’s eligibility for need-based federal aid.
These updates are part of a long history of growth. Over the last three decades, federal legislation has continuously transformed Section 529 to keep pace with the needs of families.
- 1996: 529 Code Created: Congress created Section 529 of the Internal Revenue Code via the Small Business Job Protection Act, granting tax-deferred status to qualified state tuition programs.
- 1997: Estate and Gift Tax Rules Added: The Taxpayer Relief Act introduced special gift tax and estate planning rules for multi-generational savings.
- 2001: Tax-Free Higher Education Withdrawals: The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) made earnings tax-free when used for qualified higher education expenses.
- 2006: Permanent Tax-Free Status: The Pension Protection Act permanently codified tax-free distributions for qualified higher education expenses.
- 2015: Refund Re-contribution Provision: The PATH Act allowed tax-free re-contributions of refunded 529 funds if a student dropped a class or withdrew due to illness.
- 2017: K–12 Tuition Expansion ($10,000): The Tax Cuts and Jobs Act expanded qualified usage to include up to $10,000 per student per year for K–12 private or secondary school tuition.
- 2022: Roth IRA Rollovers Enabled: The SECURE 2.0 Act introduced tax-free rollovers of unused 529 funds into a Roth IRA for the beneficiary, capped at $35,000 over a lifetime.
- 2025: Trade and Tutoring Expansion: The One Big Beautiful Bill Act expanded qualified expenses to non-degree credentials, trade programs, tutoring, and test fees, while making ABLE account rollovers permanent.
- 2026: Doubled K–12 Limits ($20,000): Under federal law, the annual K–12 withdrawal cap officially doubled to $20,000 per student per year.
As we reflect on 30 years of growth, Section 529 plans have evolved from rigid college-only accounts into versatile, lifelong financial launchpads. Whether you are setting aside funds for a toddler, helping a teenager prep for college entrance exams, supporting an aspiring tradesperson, or establishing a long-term strategy as a grandparent, saving early remains one of the greatest investments you can make. This holiday season, consider giving a gift that builds confidence, eliminates debt, and lasts a lifetime.
About the author:
Lael M. Oldmixon, M.Ed., is the Executive Director of the Education Trust of Alaska, which offers Alaska’s three 529 plans, Alaska 529, the T. Rowe Price College Savings Plan, and the John Hancock Freedom 529 Plan. She lives in Alaska with her spouse, two children, and two dogs.