5 Things You Didn’t Know About 529 Savings Plans

Published: July 28, 2024 (updated August 20, 2026)

 

Unlock the Full Potential of Your 529 Savings Plan: Discover Five Hidden Benefits to Maximize Your Child's Education Savings

Regardless of your child's age, starting early can provide more time to prepare for future education expenses. And with recent changes expanding how 529 funds may be used, families may find these accounts offer more flexibility than they realize.

What Is a 529 Plan?

Before we jump into 5 surprising benefits, let's take a moment to learn about 529 plans in general. Understanding the basics will help you see how these lesser-known benefits can further maximize your education savings strategy.

A 529 plan is a tax-advantaged savings program designed to help families prepare for qualified education expenses. Named after Section 529 of the Internal Revenue Code, these programs are generally established and maintained by states or state agencies.

There are two primary types of 529 plans:

• Education Savings Plans: These allow families to contribute money to an investment account that may later be used for qualified education expenses.
• Prepaid Tuition Plans: These generally allow families to prepay certain future tuition costs at participating colleges and universities, subject to the specific plan's terms.

One of the primary federal tax benefits of a 529 education savings plan is that earnings can grow tax-deferred, and withdrawals are generally free from federal income tax when used for qualified education expenses.

But 529 plans may offer more flexibility than many families realize.

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5 Things You Didn’t Know About 529 Plans

When it comes to saving for your child's education, 529 plans are a popular choice due to their tax benefits and flexibility. However, there are several lesser-known aspects of 529 plans that can enhance your saving strategy. Here are five things you might not know about the 529 plan advantages:

1) You aren't necessarily limited to your home state's 529 plan.

Families can generally consider 529 education savings plans offered by states other than their own. That makes it possible to compare plans based on factors such as investment choices, fees, expenses and contribution limits.

However, your home state may offer tax deductions, credits, matching contributions or other benefits that are available only when using that state's plan. Those potential benefits should be considered before selecting an out-of-state plan.

 

2) You may be able to change the beneficiary.

Plans change, especially when you're saving years in advance.

If the original beneficiary doesn't need all of the funds, the account owner may generally change the beneficiary to another qualifying family member without triggering federal income tax consequences.

That flexibility can allow a family to redirect education savings when circumstances change, subject to applicable rules and plan provisions.

 

3) Qualified education expenses are broader than you think.

529 plans were created to help families prepare for education expenses, but today's definition of a qualified expense extends considerably beyond traditional college tuition.

Depending on the circumstances and applicable requirements, 529 funds may be used for qualified expenses including:

• College and university tuition and fees
• Certain room and board expenses
• Books, supplies and equipment
• Computers and certain internet expenses
• Registered apprenticeship programs
• Certain student loan repayments, subject to lifetime limits
• Certain elementary and secondary school expenses
• Certain recognized postsecondary credentialing programs

Beginning in 2026, up to $20,000 per beneficiary per year may be used for qualifying elementary and secondary education expenses under federal law.

Because rules and limitations vary by expense, families should verify that a particular cost qualifies before taking a distribution.

 

4) 529 plans are treated differently from student-owned assets on the FAFSA.

For a dependent student, a 529 education savings account that must be reported on the FAFSA is generally treated as a parent asset rather than a student asset.

Under current FAFSA rules, parents also generally do not report education savings accounts they hold for their other children when completing the FAFSA for a dependent student.

Financial-aid eligibility depends on a family's complete financial circumstances, however, so the existence of a 529 account is only one component of the federal aid calculation.

 

5) You have options if education doesn't use all of the money.

One concern families sometimes have is what happens if a child receives a scholarship, chooses a less expensive school or simply doesn't use everything accumulated in the account.

Several options may be available.

The account owner may be able to change the beneficiary to another qualifying family member. Funds may also remain available for future qualified education, including graduate school.

And under provisions introduced by SECURE 2.0, certain unused 529 assets may be eligible for a tax-free rollover to a Roth IRA for the beneficiary.

These rollovers are subject to several requirements, including a $35,000 lifetime limit, annual Roth IRA contribution limits, a requirement that the 529 account have been maintained for at least 15 years and restrictions involving more recent 529 contributions and earnings. Transfers must also meet applicable requirements to qualify for tax-free treatment.

This option doesn't eliminate the importance of estimating education needs carefully, but it provides another potential path for certain unused 529 assets.

Understanding these lesser-known aspects of 529 plans can help you make the most of your savings strategy for educational expenses. From state tax benefits and flexible use of funds to minimal impact on financial aid, 529 plans offer a variety of features that can be tailored to your family's needs.

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How to Evaluate a 529 Plan

With plans available across the country, choosing a 529 involves more than simply opening the first account you encounter.

A few factors worth considering include:

State Tax Benefits: Determine whether your state provides deductions, credits or other benefits tied to participation in its own plan.

Fees and Expenses: Compare administrative expenses, investment management costs and other plan-specific charges.

Investment Options: Review the investment choices available and consider factors such as the beneficiary's age, your time horizon and your tolerance for investment risk.

Contribution Limits: Maximum account balances and contribution provisions vary by plan.

Plan Features and Flexibility: Review the plan's provisions for changing beneficiaries, investment selections and other features that may become important as your family's circumstances evolve.

Start With the Goal

A 529 plan can be one way to prepare for a child's future education, but the appropriate strategy depends on your family's goals, financial circumstances and the other resources available to you.

Starting the conversation early can provide something that's difficult to replace later: time.

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Partner with Hall Financial Advisors for Expert Guidance

At Hall Financial Advisors, we help families evaluate education savings within the context of their broader financial plans. If you're considering a 529 plan, reviewing an account you already have or comparing education savings options, we'd welcome the opportunity to help you understand the choices available.

Whether you're looking to maximize education savings, plan for retirement, or grow your wealth, we’ll work with you every step of the way. Take a proactive approach to your financial future today. Contact Hall Financial Advisors to learn how we can help you build a comprehensive plan tailored to your unique needs.

 

Sources:

U.S. Securities and Exchange Commission. (2023, August 31). Updated Investor Bulletin: 10 Questions to Consider Before Opening a 529 Account. SEC. Retrieved June 25, 2024, from https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_529accountquestions
Compare 529 Plans By State. (2023, October 17). Forbes Advisor. Retrieved June 25, 2024, from https://www.forbes.com/advisor/student-loans/compare-529-plans-by-state/

Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Past performance is no guarantee of future results. Material provided by Oechsli, an independent third-party. Raymond James is not affiliated with Oechsli Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer's official statement. The official statement is available through your financial advisor and should be read carefully before investing. Before investing, it is important to consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Tax implications can vary significantly from state to state.
Withdrawals from 529 accounts that are not used for qualified education expenses are subject to taxes and penalties.

As a result of the SECURE ACT 2.0, unused funds in a 529 account can be rolled over to a ROTH IRA for the beneficiary. The 529 account must have been open for a minimum of 15 years and Contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for a tax-free transfer. Rollovers to a ROTH IRA are subject to the standard annual ROTH IRA contribution limits. 

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