What Families Need to Know about 529 Plans for Education Savings

Going to college can be a life-changing experience that often comes with a potentially life-altering price tag. 

According to the National Center for Education, the average cost of college tuition, fees and room and board has increased by 155% since the 1980s. Even for families with the means to pay out of pocket, college savings plans can provide significant financial benefits.

Many parents turn to 529 plans, which function similarly to a Roth IRA but with even greater flexibility for education savings. Money in a 529 plan grows tax-deferred, and as long as it is used for qualified education expenses, the earnings are not taxed. Additionally, there are no income restrictions on who can contribute, which makes these plans accessible to families at any income level.

529 plans are also more flexible thanks to the SECURE Act 2.0. If your child receives a scholarship or doesn’t use all the funds in their 529 account, the leftover money may be rolled into a Roth IRA under special rules. This allows the beneficiary to access the money tax-free and without penalties for non-education expenses.

However, there are a few important requirements that must be met. The 529 plan must have been open for at least 15 years. Only contributions and earnings that have been in the account for at least five years are eligible for rollover. The maximum rollover is $35,000 per beneficiary over their lifetime.

Lesser-Known Ways to Use a 529 Plan

• Use a 529 to pay for K-12 private school.
  529 plans can be used for private school from kindergarten to graduation, up to $10,000 per year. With that in mind, it makes sense for married couples to consider opening a 529 account as soon as they begin to think about having children. Time in the market can make a significant difference in long-term returns.
  
  
• Power load your 529 with up to five years of contributions.
  Federal tax law allows individuals to gift up to $19,000 per year (2025 limit) to a 529 plan beneficiary gift tax–free. That means two parents can contribute up to $38,000 annually per child without triggering a gift tax return. When a 529 is first opened, the law also allows you to make five years’ worth of contributions upfront, a strategy known as the five-year election. This means an individual can contribute up to $95,000 dollars per child right away, or $190,000 dollars for married couples. Making this initial large contribution can have a big impact, especially for families starting to save later.
  
  
• Anyone in the family can contribute.
  Grandparents, aunts, uncles or even distant relatives can help fund a child's education. A generous extended family could significantly boost the savings potential by contributing regularly.
  
  
• 529s can last for generations.
  If the original beneficiary does not use all the funds, the plan can be reassigned to another qualified family member. This allows the account to continue growing and supporting future students in the family. With the right structure and adequate funding, a 529 plan can become a long-term education fund that supports not just your children but also your grandchildren, nieces, nephews and beyond. However, you should keep IRS rules in mind. To avoid triggering gift taxes, beneficiary changes must be made to qualified family members and cannot skip generations.

If a 529 plan doesn’t seem like the right fit, you might consider other options, like a Coverdell Education Savings Account. While Coverdells can pay for books, supplies and other educational expenses, they come with lower annual contribution limits.

Ultimately, it's best to consult with a financial planner and tax professional to choose the education savings strategy that’s right for your family.

Cort Bethmann is a trust manager based at Pinnacle’s Riverwood office in Atlanta. He can be reached by email at Cort.Bethmann@pnfp.com and by phone at 470-990-8525.

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