Skip to main content

By Mark Kantrowitz

Even if college promise programs continue to grow, and proposals for a national free tuition program are enacted, there will still be a need for 529 plans. A 529 plan can be used for more than just college tuition: It's a great-estate planning tool, and these plans are the antidote to student-loan debt.

Don't write off 529 plans just yet. As President Obama learned when he proposed taxing plan distributions in 2015, 529 plans are here to stay, with strong bipartisan support. The backlash to his proposal was fierce, forcing an immediate reversal.

Demand continues to grow. According to the College Savings Plan Network, a division of the National Association of State Treasurers, 529 plans just reached a new record of 14 million accounts worth more than $350 billion, a 7% increase over the previous year.

Most free tuition programs are limited to just tuition. They don't cover the cost of textbooks or other living expenses. Moreover, most of these programs are "last dollar," meaning they assume that all other financial aid is applied first to the cost of college tuition before the free tuition program covers the rest. As a result, federal and state grants and private scholarships may not be available to cover other college costs.

Education tax benefits, such as the American Opportunity Tax Credit and the Lifetime Learning Tax Credit, are limited to just tuition and textbooks.

529 Plans Cover More than Just Tuition

In contrast, 529 plans offer the broadest list of qualified expenses.

A 529 college savings plan can be used to pay for most college costs, including tuition and fees, room and board (if enrolled at least half-time), books, supplies and equipment, computers, software, peripherals and internet access, and special needs expenses.

The main college costs that 529 plans can't cover are transportation, health insurance and miscellaneous/personal expenses. These plans also cannot be used to pay off student loans, at least not yet.

A 529 plan can be used to pay for college at an out-of-state public college or at private colleges. Free tuition programs are usually limited to an in-state public college.

These plans can also be used at a 2-year or a 4-year college, while many free tuition programs are limited to 2-year colleges.

A 529 plan can also be used to pay for graduate and professional school (e.g., medical or veterinary school, dental, business school or law school), not just undergraduate-level coursework.

They can also be used to pay for up to $10,000 per year in K-12 tuition.

There are no age limits on 529 plans. The beneficiary does not need to be pursuing a degree or certificate, so these plans can be used to pay for continuing education or just for fun. The account owner can change the beneficiary to themselves, to finish their own education or to retrain after a job loss.

ABLE Account Rollovers

Money in a 529 plan account can be rolled over to an ABLE account for a disabled beneficiary.

Qualified expenses in an ABLE account include a broader set of disability-related expenses than 529 plans. Disability-related expenses include education, housing, transportation, employment training and support, assistive technology, personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses.

However, it is best to not keep too much money in an ABLE account, because a confiscatory clause (26 USC 529A(f)) transfers the remaining funds in an ABLE account to the state upon the death of the beneficiary.

Great Estate-Planning Tool

Section 529 plans are a great estate-planning tool.

A 529 plan does not have any annual contribution limits, other than the maximum annual gift tax exclusion. Aggregate limits vary by state, ranging from $235,000 to $529,000. Once the 529 plan account balance reaches the aggregate limit, no more contributions are allowed, but earnings can continue to accumulate, increasing the account balance.

Contributions to a 529 plan up to the annual gift tax exclusion are immediately removed from the contributor's estate. A married couple can give up to twice as much per beneficiary without incurring gift taxes or using up the lifetime gift tax exclusion.

Contributions can exceed the annual gift tax exclusion through five-year gift-tax averaging, also known as "superfunding." Superfunding spreads the contribution evenly over a 5-year period beginning with the calendar year during which the contribution occurred. If the contributor dies during the five-year period, the contribution is removed from the contributor's estate on a proportional basis.

If the contributor is worried about dying during the 5-year superfunding period, they can elect to use up part of their lifetime gift and estate tax exemption, which will remove the contribution immediately from the contributor's estate.

In addition, the account owner retains control over the 529 plan.

Superior Tax Benefits

Contributions to a 529 plan are made with after-tax dollars, similar to a Roth IRA. Earnings accumulate on a tax-deferred basis and distributions are entirely tax-free if used to pay for qualified higher education expenses.

More than 30 states offer a state income tax break on contributions to the state's 529 plan, making 529 plans superior to a Roth IRA. Seven states -- Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania -- provide a state income tax deduction or tax credit for contributions to any state's 529 plan.

Keep in mind that the earnings portion of a non-qualified distribution is subject to income tax, plus a 10% tax penalty, plus possible recapture of state income tax breaks. However, there are several situations in which the tax penalty is waived:

  • Death or disability of the beneficiary
  • The beneficiary receives a tax-free grant, scholarship or fellowship (the exception is capped at the amount of the award)
  • The beneficiary receives veterans' educational assistance, employer-paid educational assistance or other tax-free educational assistance
  • The beneficiary attends a U.S. Military Academy
  • The beneficiary receives the American Opportunity Tax Credit or Lifetime Learning Tax Credit (the exception is capped at the amount of qualified education expenses required for the tax credit)

If the tax penalty is waived, the tax treatment of the investment in the 529 plan is no worse than an investment in a taxable account.

No Time Limits

Unlike a Coverdell education savings account, there are no time or age limits by which a distribution must be made. The money may remain in the account and continue to grow indefinitely. You don't have to take a distribution.

This makes it possible for a 529 plan account to be passed on to future generations, leaving a legacy for your descendants. If the beneficiary does not go to college or there is leftover money, the beneficiary can be changed to the beneficiary's children, siblings, grandchildren or other relatives.

About the author: Mark Kantrowitz is publisher and vice president of research for, the most popular guide to saving for college and 529 plans. Mark is an expert on student financial aid, scholarships and student loans and has been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. Mark has written for The New York Times, Wall Street Journal, The Washington Post, Reuters, U.S. News & World Report, Money Magazine, Newsweek and Time. He is the author of five bestselling books about scholarships and financial aid and holds seven patents. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education. Mark has two bachelor's degrees in mathematics and philosophy from the Massachusetts Institute of Technology and a master's degree in computer science from Carnegie Mellon University.