529 savings plans remain one of the most effective ways to prepare for education expenses. They offer meaningful tax benefits, flexible withdrawal options, and now, with the One Big Beautiful Bill Act (OBBBA), even more opportunities to put that money to work.
How Can a 529 Save on Taxes?
A 529 plan provides two key federal tax advantages:
- Investments grow tax-free
- Withdrawals are tax-free when used for qualified education expenses
Many states also offer tax deductions or credits for contributions, although requirements vary. More than 30 states offer some type of incentive, and a few even allow it regardless of which state’s plan is used.
Some families benefit from “superfunding.” This strategy allows up to five years of gifts to be contributed in a single year. In 2025, that can be up to $95,000 per beneficiary without triggering federal gift tax. The advantage is simple: more dollars invested early means more time for tax-free growth.
How Should a 529 Be Invested?
Investment strategy changes as the beneficiary gets closer to needing the money.
- When college is 10 to 15 years away, a growth-oriented allocation with higher equity exposure makes sense
- As enrollment gets closer, gradually shifting toward more conservative investments helps preserve gains
- In the last few years before college, portfolios often use a mix of bonds, money market funds, or stable value funds to limit volatility
Many plans offer age-based portfolios that automatically adjust over time, which is a simple way to maintain the right level of risk from year to year.
What Expenses Count as Qualified?
Higher education qualified expenses include:
- Tuition and mandatory fees
- Room and board (half-time enrollment required)
- Books, supplies, and required equipment
- Computers, software, and internet used for education
- Up to $10,000 in student loan repayment for each beneficiary
- Special needs services
K–12 expenses expanded under the OBBBA. Starting July 5, 2025, 529 funds can be used for:
- Curriculum and instructional materials
- Books and online learning resources
- Tutoring by qualified professionals
- Standardized testing fees
- Dual enrollment programs
- Educational therapies for students with disabilities
The annual K–12 limit remains $10,000 for 2025 and increases to $20,000 on January 1, 2026.
The OBBBA also recognizes career and workforce training. 529 funds now cover programs such as military credentialing, trade certifications, and state or federally approved professional licenses. Exam fees, continuing education, supplies, and required equipment also qualify.
What Does Not Count as Qualified?
Common non-qualified expenses include:
- Travel or transportation
- Health insurance
- Activity or club fees
- Test-prep programs or materials
- College application and admission testing fees
- General living expenses beyond the school’s room and board allowance
Using funds for these expenses leads to income tax on earnings and a 10 percent penalty, so it is important to verify before withdrawing.
How Do Withdrawals Work?
529 distributions can be sent to the school, the account owner, or directly to the student. Many families prefer paying the school because it simplifies documentation.
Timing is important. Funds should be withdrawn in the same calendar year the expense is paid. If they do not match, the IRS can treat the withdrawal as non-qualified. Keeping receipts, tuition statements, and proof of enrollment protects against problems later.
How Should Spending Be Managed During College?
Keeping a simple log of expenses helps match withdrawals against qualified costs. This is especially helpful when colleges bill multiple times per year or when expenses vary each semester.
Families also need to coordinate with education tax credits. The same tuition dollars cannot be used for both a tax credit and a tax-free withdrawal. Many families pay the first $4,000 of tuition out-of-pocket to qualify for the American Opportunity Tax Credit, then use 529 funds for room, board, books, or equipment.
What If a Student Receives a Scholarship?
If a student receives a scholarship, an equal amount can be withdrawn without paying the 10 percent penalty. Federal income tax still applies on the earnings portion, but avoiding the penalty gives families flexibility. Others choose to keep the funds for graduate school, change the beneficiary, or use the funds for costs the scholarship does not cover.
What Happens If Money Is Left Over?
529 plans allow several penalty-free options:
- Transfer the beneficiary to another eligible family member
- Save the funds for future education
- Rollover to a Roth IRA if the 529 has been open at least 15 years and recent contributions are excluded. Roth rollovers must follow annual contribution limits and are capped at $35,000 lifetime
- Move unused funds to an ABLE account for a beneficiary with disabilities
Moving Forward
The updated rules give families more flexibility than ever. A 529 can now support many paths — traditional college, skilled trades, professional credentials, or military programs.
At Carnegie, we see education planning as a way to create opportunity and build confidence in the future. Because state rules are not always the same as federal rules, it can be helpful to speak with a tax professional about your specific situation. If you would like support applying these updates to your own plan, our team is ready to help.