529 Plan 2026
A 529 plan is the workhorse of college savings: money grows tax-free and comes out tax-free for education — and many states throw in a deduction on top. Here is how it is taxed in 2026, and the new escape hatch for leftover funds.
Growth
Tax-free
While invested
Withdrawals
Tax-free
For qualified education
Non-qualified
Tax + 10%
On the earnings portion
Roth rollover
$35,000
Lifetime, under SECURE 2.0
What a 529 Plan Is
A 529 plan is a state-sponsored education savings account. You contribute after-tax dollars, the money grows free of federal (and usually state) tax, and withdrawals are tax-free when used for qualified education expenses — college tuition, fees, room and board, books, supplies, and equipment.
See your overall tax picture
Understand your federal tax situation while planning savings.
The Tax Treatment
- Contributions are not deductible on your federal return (they are a state-level benefit, where available).
- Growth — interest, dividends, and gains — is not taxed while the money stays in the plan.
- Withdrawals for qualified education are completely tax-free.
The trade-off: withdrawals for non-qualified expenses are taxed as ordinary income on the earnings portion, plus a 10% penalty. That is the incentive to keep the money earmarked for education.
What Counts as a Qualified Expense
- Tuition and fees at eligible colleges, universities, and trade schools.
- Room and board (up to the school's published allowance).
- Books, supplies, and required equipment.
- Computers and related technology used for education.
- Up to $10,000 per year toward K-12 tuition, and up to $10,000 (lifetime) toward student loan repayment.
State Tax Deductions
More than 30 states and the District of Columbia offer a state income-tax deduction or credit for 529 contributions. If you live in one, contributing to your own state's plan (or sometimes any state's plan) can lower your state tax bill. No federal deduction exists, so the state benefit is the main upfront incentive.
The New Roth Rollover Option
A major fix for the "what if my child does not use it all" worry arrived with SECURE 2.0: up to $35,000 of unused 529 funds can be rolled over to the beneficiary's Roth IRA. Conditions apply — the account must have been open at least 15 years, and the rollover is subject to annual Roth contribution limits and earned-income requirements. It turns a leftover college fund into a retirement head start.
Frequently Asked Questions
Do I have to use my own state's 529 plan?
No, you can invest in any state's plan. But your home state's tax deduction (if any) often applies only to its own plan, so weigh fees and the state tax benefit together.
Can a grandparent open a 529 for a grandchild?
Yes. Anyone can open and fund a 529 for any beneficiary. Grandparent-owned 529s can also be a smart estate-planning tool, since contributions may qualify for the annual gift tax exclusion.
Can I change the beneficiary?
Yes, you can change the beneficiary to another qualifying family member (like a sibling) without tax consequences, as long as the new beneficiary is an eligible relative.
Is a 529 better than a regular brokerage account?
For education, usually yes — the tax-free growth and withdrawals beat a taxable account, plus you may get a state deduction. The trade-off is the penalty for non-qualified use, so only earmark money you are confident will fund education.
Sources
- IRS Publication 970 — Tax Benefits for Education (529 plans).
- SECURE 2.0 Act — $35,000 529-to-Roth rollover provision.
- State revenue departments — 529 contribution deductions.
This is informational, not tax or investment advice. State deductions and plan fees vary — compare plans before investing.