Finances FYI Presented by JPMorgan Chase
For years, a 529 plan was treated as a very specific financial tool: Parents could put money aside, watch the account grow, and use it for a child’s college expenses.
That basic idea still holds, but the rules have changed enough that the name “college savings plan” no longer tells the whole story.
Here’s where you and your family might be missing out on the flexibility and benefits that today’s 529 plans offer.
How You Can Use 529 Money
A 529 is a tax-advantaged account sponsored by a state or educational institution.
Account holders make contributions with after-tax money, so there is no federal deduction. The account’s earnings also grow federal tax-free, and qualified withdrawals are tax-free. Some states also offer deductions or credits for contributions.
Traditionally, 529 accounts could be used for expenses like college tuition and fees, books, computers, and, in certain situations, room and board.
Families can also use the account to cover fees, books, supplies, and equipment for a registered apprenticeship or vocational school program, or use up to $10,000 over a beneficiary’s lifetime to repay eligible student loans.
In the last two years, the list of eligible programs covered by 529 earnings has grown further. Recognized postsecondary credential programs, including those that award certain occupational licenses and professional certifications, may now qualify for coverage.
These options now give account owners more ways to support a beneficiary’s future career and success without pushing them down a conventional four-year university path.
New Flexibility for K-12 Expenses
The Internal Revenue Service has allowed 529 plan owners to cover K-12 expenses with account withdrawals since 2018, though spending was limited to $10,000 per student each year.
In 2026, the federal limit doubled to $20,000. The eligible expense list, which once covered tuition, has broadened to include costs like books and curriculum materials, tutoring, standardized test fees, dual-enrollment costs, and certain educational therapies for students with disabilities.
While this update may create new opportunities for many students, families should still check their individual state rules before withdrawing funds for K-12 education. A federally approved withdrawal may still trigger state tax penalties.
A Way Out for Leftover Funds
One of the biggest changes to the 529 plan took effect in 2024.
Thanks to that update, a limited amount of unused 529 money can now be transferred to the account beneficiary’s Roth IRA. The lifetime rollover limit is $35,000, and a transfer counts toward the beneficiary’s annual Roth IRA contribution limit.
There are several conditions: The 529 account must have been open for at least 15 years, contributions and earnings from the previous five years cannot be rolled over, and the money must move directly from the 529 plan to the Roth IRA.
This transfer option doesn’t eliminate the risk that families will overfund a 529. Still, it does lessen the longstanding concern that 529 savings will go to waste if a student receives a scholarship, attends a less expensive school, or skips college altogether.
Another quiet change arrived when the redesigned FAFSA landed in the 2024-25 award year. Distributions from a grandparent-owned 529 are no longer reported as untaxed student income on federal tax forms, eliminating what was once a barrier to some need-based student aid.
The Pros and Cons
The strongest selling point of a 529 plan is still the tax-free growth the account can achieve when used correctly.
Account owners also keep control of the money and can usually change the beneficiary to another eligible family member. Contribution ceilings are generous, too.
The trade-offs are real. Investment options are limited to those offered by the plan, fees vary, and market losses are possible. Making a nonqualified withdrawal will usually subject your account’s earnings to income tax and a 10% federal penalty. Using your funds for K-12 costs, while allowed, may leave your 529 less time to compound and grow before college.
A 529 is still primarily an education account, not a general-purpose savings fund. Still, recent changes have made the rules around this financial resource far less rigid.
For families saving toward college, trade school, private school, or professional training programs, that added flexibility may make the account worth a closer look.
