A 529 savings plan is one of the best tools for paying for education. It lets money grow tax-free when it is used for qualified education expenses, and the rules have become more flexible over the last several years. Here are answers to the questions I hear most often from parents and grandparents.
Do I lose the money if my child doesn’t go to college?
No. You always have access to the money in your 529 account. If you withdraw it for something other than qualified expenses, the earnings are subject to income tax and a 10% penalty. Your contributions were made with after-tax money, so they are not taxed or penalized.
For example, if you withdraw $10,000 and $8,000 of it is contributions and $2,000 is earnings, only the $2,000 is subject to tax and the penalty. You also have other options: you can change the beneficiary to another family member with no tax consequences, use the money for your own continuing education, or roll some of it into a Roth IRA (see below).
What counts as a qualified expense?
Qualified expenses aren’t limited to tuition at a four-year college. They include community college, graduate school, eligible vocational and trade schools, off-campus housing, books, supplies, and computers.
529 plans can also be used for elementary and secondary school. Starting in 2026, you can withdraw up to $20,000 per student per year for K-12 expenses, up from $10,000. Qualified K-12 expenses now include not only tuition but also tutoring, curriculum materials, standardized test fees, dual-enrollment tuition, and educational therapies.
A caution for New York residents: New York does not follow the federal rules for K-12 withdrawals. Using your NY 529 account for K-12 tuition may be treated as a nonqualified withdrawal for state purposes, and New York may recapture the state tax deduction you took on those contributions. Check with your tax professional before using 529 money for K-12 costs.
Can I roll leftover money into a Roth IRA?
Yes, within limits. Unused 529 money can be rolled into a Roth IRA for the beneficiary, up to $35,000 over their lifetime. The 529 account must have been open for at least 15 years, the amount rolled over each year can’t exceed that year’s Roth IRA contribution limit ($7,500 for 2026), the beneficiary must have earned income that qualifies them to contribute to a Roth, and contributions made in the last five years (and their earnings) can’t be rolled over.
What if my child gets a scholarship?
You can withdraw up to the amount of the scholarship without the 10% penalty, although income tax still applies to the earnings. The penalty is also waived if the beneficiary dies or becomes disabled, or attends a U.S. military academy.
Do I have to use my home state’s plan?
No. You can use any state’s plan, and your child can attend any eligible school regardless of where the plan is based. But your home state’s plan may come with tax benefits. New York, for example, lets you deduct up to $5,000 a year of contributions to the NY 529 plan on your state return, or $10,000 if you are married filing jointly. Contributions generally must be made by December 31 to count for that year.
Will a 529 plan affect financial aid?
It will have some impact, but usually a small one. A 529 owned by a parent is counted as a parent asset on the FAFSA, and parent assets are assessed at a maximum of 5.64% of their value. Assets owned by the student are assessed at 20%, so a parent-owned 529 is treated more favorably than money in the child’s name.
Grandparent-owned 529 plans have also become more attractive. Under the new FAFSA, distributions from a 529 owned by a grandparent or other non-parent no longer count as income to the student, which removes what used to be a significant financial aid penalty. Individual colleges may use their own aid formulas, so it is worth checking with the schools your child is considering.
529 contributions also count toward the $19,000 annual gift tax exclusion, which makes them a popular way for grandparents to reduce the size of their estate. See Strategies to Minimize Estate Taxes in New York.
With education costs continuing to rise, a 529 plan can be a valuable part of your family’s plan. If you’re unsure which plan or strategy fits your situation, reach out and I can help you decide.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
