Life essentials
529 benefits you may not know about
If you’re familiar with a 529 you may know it can help you save for education, but the benefits of this account go beyond the tax breaks.
Tax advantages and benefits for education expenses
One of the most popular and compelling ways families can save for higher education is with a 529 plan. Named for section 529 of the Internal Revenue Code, the government created the 529 account more than twenty-five years ago to help families save for higher education expenses.
529 plans are sponsored by a state and operated by the state or an education or financial institution. In the same way an IRA is designed to offer tax advantages that help you save for retirement, 529 plans offer tax advantages meant to help you save for college education. When you save for education with a 529 you won’t pay federal taxes on earnings or withdrawals (as long as you’re paying for a qualified educational expense), and you could get a state tax deduction. But 529 accounts offer more than tax advantages.
You can use 529 funds for more than you might think
Pay for more than just tuition. Aside from tuition, a 529 can pay for fees, books, room and board (including off-campus housing), computers and related technology expenses like a printer, software you need for school and internet expenses.
Pay for many types of education Your 529 plan funds can be used for K-12 school expenses and paying off up to $10,000 in student loans.1
A 529 plan offers greater control by avoiding automatic transfer at adulthood
There are no income, age or annual contribution limits for 529 plans unlike Roth IRAs or Coverdell Education Savings Accounts. (There are lifetime contribution limits for 529, which vary by plan and state, ranging from $235,000 to over $600,000).
In a 529, the account owner is in control; the student doesn’t have direct access to the account. The person who opened the account is in charge of investments, withdrawals and ultimately how the money is used. They’re also able to change beneficiaries (i.e. transfer the account to another eligible student). This is different from other types of accounts, like UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts, where a child becomes the account owner when they reach adulthood.
A 529 is generally considered financial-aid friendly. Since the account owner controls a 529 account, the funds typically aren’t viewed as part of the student’s assets and may count less against aid eligibility than if the student had the same amount in an account they owned—for example, in a UGMA or a UTMA. However, financial aid eligibility varies by school. You should check with the schools you’re considering to understand how they assess need-based financial aid.
There are several options for leftover or unused 529 funds
You can roll over a 529 into a Roth IRA account. As of 2024, you can roll over up to $35,000 into a Roth IRA for the same beneficiary without taxes or penalty, with a few restrictions: The 529 account has to be at least 15 years old; the funds must have been invested for at least five years; and the beneficiary has to have earned income. You should consult with a qualified tax professional before rolling over funds from a 529 plan to contribute to a Roth IRA.
Change the beneficiary to another eligible family member. There are no tax consequences if you change the designated beneficiary to another eligible family member.
Use the funds for another eligible expense. For example, eligible graduate school expenses or repaying qualified student loans (up to $10,000 lifetime limit per beneficiary). You can also use the money for non-eligible expenses, but you’ll pay income tax and a 10% federal penalty on the earnings portion. No matter how you decide to pay for education, always be on the lookout for ways to keep costs down. Many people miss resources that are out there to help. And, regardless of your child’s age, it’s not too late to contribute to or move money into a 529 plan to receive potential plan benefits.
Speak with a 529 Consultant
If you would like help or have additional questions, TIAA offers free consultations with a college savings specialist
1Some states do not fully conform with the federal laws regarding distributions for K-12, apprenticeship programs and student loan repayment. These distributions may be considered non-qualified and the earnings portion of the withdrawal subject to state income tax. In addition, non-conforming states offering a state income tax deduction for 529 plan contributions may impose a recapture. Limitations also apply. You should talk to a qualified professional about how tax provisions affect your circumstances.
The 529 college savings plans listed above are offered and administered by the issuing state. Please refer to the Plan Description prior to investing for its investment objectives, risks, charges and expenses and whether your home state offers tax or other benefits such as financial aid, scholarship funds, or protection from creditors for investing in its own 529 plan. Carefully read the Plan Description on each state's site, or call the college savings plan for assistance. Investments in the TFI-managed 529 college savings plans are neither insured nor guaranteed and there is the risk of investment loss. Consult your legal or tax professional for tax advice. If funds aren't used for qualified education expenses, a 10% penalty tax on earnings (as well as federal and state income taxes) may apply.
TIAA-CREF Tuition Financing, Inc. (TFI) is the Plan Manager for several state 529 plans, and TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, is the distributor and underwriter for those plans.