Qualified tuition plan (529 plan): Rules, tax benefits, and how it works 

What is a Qualified Tuition Plan (529 plan)?

A Qualified Tuition Program (QTP), also known as a Section 529 plan, allows you to prepay for a student's college tuition or contribute to an education savings account. These plans are sponsored by a state or educational institution, and they offer tax advantages and other incentives to make it easier to save for future educational expenses.

What are the two types of 529 plans? 

The two types of 529 plans are the prepaid tuition plan and the education savings plan.

Prepaid tuition plans allow you to lock in today’s tuition rates and pay tuition in advance. You prepay for tuition now, and your money grows tax free with tuition inflation. When you’re ready, you can use it tax free to cover tuition and mandatory fees.

Savings plans allow you to grow your educational savings tax free and take distributions tax free if you use them for qualified education expenses.

What expenses can a 529 plan be used for? 

It depends on what kind of 529 plan you have. If you have a prepaid tuition plan, you can use it to cover tuition and mandatory fees.

If you have an education savings plan, you can use it for tuition and fees, plus:

• Room and board, which normally includes housing and a food plan
• Graduate school
• Kindergarten through grade 12 tuition and fees up to $20,000 per year
• Computer, peripherals (such as monitors and printers), and internet access
• Books, lab equipment, and other necessary items for classes
• Student loan debt, up to a total of $10,000 lifetime limit per borrower/beneficiary

It’s important to keep in mind that all expenses must be for the named beneficiary. There’s no age limit on who can be a beneficiary; however, an unborn child cannot be a beneficiary, because they do not have a Social Security number.

Are 529 plan contributions tax deductible? 

No, contributions are not tax deductible on federal returns. However, 529 plans come with other valuable tax benefits. Growth is tax free, and distributions are tax free if you use them to pay for qualified education expenses for the plan beneficiary. More than 30 states offer a state income tax deduction or credit for in-state contributions.

What are the annual contribution and gift tax limits?

The contribution amounts are limited to the amount needed to cover the qualified education expenses for the beneficiary. For each donor, the gift tax exclusion limit is $19,000 per donee for 2026. If you contribute more than this amount to a single individual, you will have to file a gift tax return for the year. For example, you can give 3 grandchildren up to $19,000 each without any gift tax consequence.

Can a 529 plan pay for K-12 tuition?

Yes, you can use a 529 plan to pay up to $20,000 per year in K-12 tuition and fees.  

Can you use a 529 plan to pay off student loans?

You can use a 529 plan to pay off up to $10,000 in student loans. Plus, if your beneficiary is your child, who has other siblings (including stepsiblings) with student loans, you can withdraw an additional, one-time $10,000 to pay their loans as well.

Keep in mind that if you use funds from your 529 plan for student loans, you cannot claim the student loan interest deduction for interest paid with those funds.

What happens to leftover money in a 529 plan?

 Any money left over in a 529 plan will stay under your control as the owner. You have a few options on how to use it:

Repurpose the money for other educational costs.

• Keep the money for educational costs that may come up in the future, like graduate school, law school, or trade programs.
• Use the money to pay off student loans, up to $10,000 for the beneficiary and/or their siblings.
• Change the beneficiary to another family member, like the beneficiary’s sibling or a grandchild.

Transfer the funds to a retirement account.

You can transfer up to $35,000 to the beneficiary (lifetime max, up to $7,500 for 2026 if beneficiary is under 50, and up to $8,600 if 50 or older) from a 529 plan to a Roth IRA, tax free, if the plan is at least 15 years old, the funds to be rolled have been contributed prior to the past 5 years, has the same beneficiary, and the beneficiary has earned income at least equal to the rollover amount for the year.

Withdraw the funds.

The last option is simply to withdraw the funds for other non-eligible expenses and pay the tax and IRS penalty.

What taxes and penalties apply to nonqualified withdrawals?

You can withdraw your original contribution tax free and penalty free, but the IRS taxes any growth at your regular income tax rate, plus charges a 10% penalty.

How did 529 plans change under the 2025 tax reform (OBBBA)? 

The One Big Beautiful Bill Act (OBBBA) changed 529 plans in many ways:

• Increased withdrawal limits for K-12 tuition: The maximum you can use from a 529 plan to cover K-12 tuition and fees increased from $10,000 to $20,000.
• Expanded to cover homeschooling expenses: You can now use a 529 plan to cover eligible homeschooling expenses.
• Expanded to cover additional education expenses: You can now use a 529 plan to cover academic tutoring, standardized testing fees, dual-enrollment college courses, and disability therapies.
• Expanded to cover vocational education and licensing expenses: You can now use a 529 plan to cover eligible expenses for vocational programs, as well as licensing fees, certifications, and ongoing training.

How does a 529 plan differ from a Coverdell Education Savings Account?

One major difference between a 529 plan account and a Coverdell account is the age limit of these accounts’ beneficiaries. Money from a Coverdell account must be used by the time the beneficiary reaches 30 years old, and contributions must stop at age 18. There is no age limit for beneficiaries of 529 plans. In both cases, however, the account custodian can designate a new eligible beneficiary without having to pay taxes.

Both a 529 plan and a Coverdell account can be used for K-12 education, as well as college and university.

Coverdell accounts have a limited total annual contribution of $2,000 per child across all accounts. States control the amount you can contribute to a 529 plan account. Though generally, there is no cap on annual contributions.

An individual can be a beneficiary of multiple Coverdell accounts, but the IRS limits how much can be contributed in total each year. An individual can be the beneficiary of multiple 529 plan accounts and only state-set limits apply.

A Coverdell account is only available if the contributor’s annual income is below $110,000 ($220,000 if married filing jointly). There is no income limit for contributing to a 529 plan. 

A 529 plan can be a great savings tool for future education expenses. If you have questions or concerns about how contributions or distributions impact your taxes, what happens if you make a non-eligible withdrawal, or anything else about 529 plans, don’t hesitate to reach out. Your local Tax Pro is here all year and ready to help. Find tax services near you, then walk in or book now.