529 savings plans are a valuable tool designed to help families save for educational expenses through tax-advantaged investments. These plans allow for tax-free growth and withdrawals for qualified education costs, making them an attractive option for clients who are parents and guardians.
The Tax Cuts and Jobs Act of 2017 introduced significant changes that expanded the use of 529 plans, allowing funds to cover a wider range of educational expenses. Most recently, the One Big Beautiful Bill (OBBB) brings further enhancements to these plans, expanding the scope of qualified K-12 expenses. Staying informed about these developments and historical contexts can assist you in providing sound advice and helping clients avoid potential penalties. In this article, we will help you advise clients on how 529 plans work, deductible contributions, and how to maximize 529 plan tax benefits and their savings.
How does a 529 plan work for your tax clients?
529 plans are tax-advantaged savings accounts that allow families to save for educational expenses, including college and K-12 costs. Previously, your clients could only use 529 plans for eligible college and university expenses, including tuition, fees, books, and sometimes room and board. The Tax Cuts and Jobs Act expanded these plans to allow withdrawals of up to $10,000 per year per child for K-12 expense (tuition only), in addition to the unlimited withdrawals permitted for traditional college-related expenses like tuition and fees.
Beginning January 1, 2026, the One Big Beautiful Bill Act allows up to $20,000 per student annually to be withdrawn from 529 plans for qualifying K-12 tuition and expenses, including:
- Tuition
- Books
- Curriculum materials
- Online educational resources
- Standardized test fees
Note: The withdrawal limit for college-related expenses continues to be unlimited.
One key advantage of 529 plans is that contributors have no federal income restrictions, making them accessible to parents, grandparents, and others wishing to help. Starting in 2025, your individual clients can contribute up to $19,000 per beneficiary without incurring gift taxes, while married couples can contribute up to $38,000.
Clients may be interested in setting up a 529 plan because these accounts provide tax-free growth on investments and tax-free withdrawals for qualified education expenses. You can easily advise clients on how to establish a 529 plan with these steps:
- Research state-sponsored plans: 529 plans are primarily state-sponsored savings plans for education, offering potential tax benefits that can vary by state. While most plans are tied to individual states, there are options available nationwide that may not be state-specific.
- Complete an application: Fill out the application form for the chosen plan, usually available online for convenience.
- Decide on funding options: Help clients understand how they want to begin funding the account, whether through one-time contributions or setting up regular deposits.
- Monitor account: Advise clients to review and adjust their investment strategies regularly to meet their education savings goals.
What are the tax benefits of a 529 plan?
529 plan tax benefits can significantly enhance your clients’ financial strategies for education planning. Here are the key advantages that you can highlight for clients:
- Tax-deferred growth: The investments within a 529 plan grow tax-deferred, allowing clients to maximize their savings without the burden of federal income taxes on earnings.
- Tax-free withdrawals: Money withdrawn from a 529 plan used for qualified education expenses – such as tuition, fees, books, and certain K-12 costs – are exempt from federal income tax, providing significant savings for families.
- State tax deductions: Many states offer tax deductions or credits for contributions made to a 529 plan, which can further incentivize your clients to invest in their children’s education while reducing their state tax liability.
- Gifting benefits: Contributions to a 529 plan are considered gifts for tax purposes, allowing clients to contribute up to $19,000 per beneficiary in 2025 without incurring federal gift taxes ($38,000 for married couples). This can be an effective strategy for estate planning and wealth transfer.
By promoting these benefits, you can help your clients understand how a 529 plan serves not only as a savings tool for education but also as a strategic component of their overall financial plan.
Are my client’s 529 plan contributions tax deductible?
When advising clients on 529 plan contributions, it’s essential to clarify their tax implications. At the federal level, contributions to a 529 plan are not tax deductible. However, the primary advantage lies in the tax-free growth and tax-free withdrawals for qualified education expenses, making 529 plans an excellent long-term savings option.
Many states offer tax deductions or credits for contributions to a 529 plan, potentially reducing their state tax liabilities. Each state’s rules can vary significantly, so it’s essential for clients to understand the specific regulations that apply to them. Visit their state’s official tax department website to further review their state’s policies related to 529 plans.
For example, Georgia’s 529 savings plan allows single filers to receive a deduction up to $4,000 per beneficiary ($8,000 for joint filers). In South Carolina, contributions made to a Future Scholar 529 College Savings Plan are 100% tax deductible.
How can your clients use a 529 plan?
Clients can utilize a 529 plan for long-term savings and as a strategic tool to cover various education-related expenses. It’s important to help them differentiate between qualified and non-qualified expenses. They can use funds in a 529 plan for qualified expenses, including:
- Tuition
- Room and board
- Mandatory fees
- Books and supplies
- Required technology
Non-qualified expenses include costs such as:
- Transportation
- Room and board for college students who are not enrolled at least half-time
- Expenses incurred for non-educational purposes.
Before January 1, 2026, clients were limited to withdrawing up to $10,000 annually per student for K-12 education, and the only qualified expense was tuition. However, beginning January 1, 2026, this limit increases to $20,000 annually per student, and the range of qualified expenses expands significantly. These expenses will now include:
- Tuition for public, private, or religious elementary and secondary schools
- Curriculum and curricular materials
- Books and other instructional materials
- Online educational materials
- Tutoring or educational classes outside the home
- Standardized testing fees, including SAT, ACT, AP exams, and other nationally standardized achievement tests
- Dual-enrollment fees for high school students taking college-level courses
This change allows for greater flexibility and options for families addressing their educational needs.
The process of withdrawing from a 529 plan is typically fairly straightforward. Clients can initiate a withdrawal through their plan administrator, usually available through an online portal or account. They will need to specify the amount they wish to withdraw and confirm that the funds will be used for qualified expenses.
Keep in mind, withdrawals from a 529 plan for non-qualified expenses may be subject to taxes and penalties. By guiding clients through these steps and clarifying eligible expenses, you can help them maximize their benefits and avoid penalties for improper withdrawals.
Penalties for 529 plan withdrawal clients should watch out for
As you work with clients planning future educational expenses through a 529 plan, be aware of potential withdrawal fees. Withdrawals for non-qualified expenses are subject to a 10% withdrawal penalty. The earnings portion of any non-qualified distribution will also be subject to federal income tax. To avoid these penalties, advise clients only to withdraw funds for qualified expenses.
Can tax clients roll over a 529 plan?
529 plan rollovers allow your clients to reallocate funds to another 529 account for the same beneficiary or to change beneficiaries within the same family without incurring tax penalties. However, they must complete the rollover process within 60 days to avoid triggering income tax on the earnings. If this limit is exceeded, the IRS may classify the distribution as a non-qualified withdrawal and impose a 10% penalty on the earnings.
The IRS does not allow taxpayers to directly roll over a 529 plan to a 401(k). However, under the SECURE 2.0 Act, funds from a 529 plan can be rolled into a Roth IRA under certain conditions. To be rolled over to a Roth IRA, the 529 plan must meet the following conditions:
- The plan must have been open for at least 15 years
- The funds must have been in the 529 plan for at least 5 years and
The rollover is subject to annual Roth IRA contribution limits and a lifetime limit of $35,000 for each 529 beneficiary
