A 529 plan is a state-sponsored, tax-advantaged savings account for education expenses. Contributions are after-tax, but growth and qualified withdrawals are completely federal-income-tax-free. No contribution limits exist at the federal level - though contributions above the annual gift exclusion use lifetime exemption. SECURE 2.0 added the ability to roll unused 529 funds to a Roth IRA after 15 years, making 529s more flexible than ever.
Contributions: No federal deduction. Many states offer a state income tax deduction - often limited to contributions to that state's own plan.
Growth: Tax-deferred inside the account. No tax on dividends, interest, or capital gains while funds remain in the plan.
Qualified withdrawals: Completely federal-income-tax-free when used for qualified education expenses.
Non-qualified withdrawals: Earnings portion subject to ordinary income tax plus a 10% penalty. Basis (contributions) always comes out tax and penalty free.
Federal law defines qualified expenses as: tuition and fees at eligible post-secondary institutions (colleges, universities, vocational schools); room and board (up to the school's published cost of attendance allowance); books, supplies, and equipment required for enrollment; computers, internet access, and educational software; and special needs services. K-12 expenses (tuition, curriculum and curricular materials, books, online educational materials, qualifying tutoring, testing fees, dual enrollment fees, and educational therapies, per §529(c)(7)) are qualified up to $20,000 per year per beneficiary for taxable years beginning after 2025 ($10,000 for earlier years). Apprenticeship programs registered with the Department of Labor also qualify.
Student loan repayment is qualified up to $10,000 lifetime per beneficiary (and $10,000 for each sibling). This is a permanent feature enacted by SECURE Act in 2019.
529 contributions are treated as completed gifts. Under IRC §529(c)(2), a contributor can elect to spread a lump-sum contribution over 5 years for gift tax purposes - meaning a single $95,000 contribution ($19,000 x 5) is treated as 5 annual gifts of $19,000 and uses no lifetime exemption. A married couple can superfund $190,000 into a single beneficiary's 529 in one year with no gift tax consequence. This is the primary estate planning use of 529s beyond education savings.
Beginning in 2024, up to $35,000 lifetime of unused 529 funds can be rolled to a Roth IRA for the beneficiary, subject to: the 529 must have been open for at least 15 years; annual rollover amounts cannot exceed the IRA contribution limit for the taxable year of the rollover ($7,500 for 2026), reduced by the beneficiary's other IRA contributions for that year; IRC §529(c)(3)(E). This eliminates the overfunding concern and makes aggressive 529 contributions more defensible.
529 distributions used to pay expenses that are also used to claim the AOTC or Lifetime Learning Credit create a taxable distribution on the overlapping amount. The $4,000 base of the AOTC cannot be funded by tax-free 529 dollars. Structure withdrawals to cover expenses above the credit base first (room, board, books) and let the credit cover the first $4,000 of tuition.