529 College and School Savings
A 529 plan grows tax-free and pays out tax-free for school. Starting in 2026, it covers up to $20,000 a year of K-12 costs, recognized trade and professional credentials qualify, and unused money can move into the beneficiary's Roth IRA. Over 18 years, the untaxed growth on a funded account can be worth tens of thousands of dollars.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Parents and grandparents saving for college, trade school, or private K-12
- High earners who want to move money out of their estate while keeping control
- Grandparents using five-year gift averaging to fund a large amount at once
- Families whose children may pursue a credential rather than a degree
Who it's not for
- Money you may need for non-education purposes in the next few years
- Families expecting large need-based aid who have not reviewed how the account is counted
- Anyone looking for a Texas state deduction; Texas has no income tax, so the benefit is federal only
How it works
Contributions are made with after-tax dollars. Growth is not taxed, and withdrawals for qualified expenses are tax-free. Withdrawals for anything else pay income tax plus a 10% penalty on the earnings portion.
Qualified uses include college tuition, fees, books, and room and board; recognized postsecondary credential programs; and, starting in 2026, up to $20,000 a year per student of K-12 tuition and related costs.
Contributions are gifts. Each donor can give $19,000 per beneficiary a year without using exemption, or elect to spread a gift of up to $95,000 over five years. A married couple can fund $190,000 at once for one child.
Unused funds can roll into a Roth IRA for the beneficiary, up to $35,000 over a lifetime, if the account has been open at least 15 years. Each year's rollover counts against the annual IRA limit ($7,500 in 2026), and the beneficiary needs earned income.
You can change the beneficiary to another family member at any time without tax.
Illustrative example
Illustrative: a grandparent makes the five-year election and contributes $95,000 to a 529 for a newborn grandchild. Assume 6% annual growth for 18 years. Actual returns will differ.
- Growth factor at 6% for 18 years: 1.06^18 ≈ 2.854
- Account value at 18: $95,000 × 2.854 ≈ $271,160
- Untaxed growth: $271,160 − $95,000 = $176,160
- Tax avoided if that growth were taxed as long-term gain at 15% plus 3.8% NIIT: $176,160 × 18.8% ≈ $33,120
About $33,000 of federal tax is avoided on the growth when the money is used for qualified education, and $95,000 leaves the grandparent's estate on day one.
The rules
| Rule | Citation |
|---|---|
| Earnings grow tax-free and qualified withdrawals are excluded from income. | IRC §529(c)(1), (c)(3) |
| K-12 expenses are qualified up to $20,000 a year per beneficiary starting 2026. | IRC §529(c)(7) (as amended by P.L. 119-21) |
| A donor can elect to treat a large contribution as made over five years for gift tax purposes. | IRC §529(c)(2)(B) |
| Up to $35,000 can roll to the beneficiary's Roth IRA after the account is open 15 years. | IRC §529(c)(3)(E) |
Watch-outs
- The five-year election must be made on a gift tax return (Form 709), and gifts above it in those years use exemption.
- Contributions made in the last five years, and their earnings, cannot be rolled to a Roth.
- Coordinate withdrawals with the American Opportunity credit; the same expense cannot support both.
- Changing the beneficiary to a younger generation can trigger gift or generation-skipping rules.
What we do
We size contributions and five-year elections against your gift and estate picture, file the gift tax returns, and track qualified withdrawals so every dollar comes out tax-free. If an estate plan is involved, your estate attorney drafts the documents; we handle the tax side.
Questions
What happens if my child gets a scholarship?
You can withdraw up to the scholarship amount without the 10% penalty. Income tax still applies to the earnings portion.
Does a trade school or certification program qualify?
Yes, if it is a recognized postsecondary credential program. Confirm the program's status before paying.
Can I use a 529 for private elementary school?
Yes. From 2026, up to $20,000 a year per student of K-12 tuition and related costs qualifies.