Top 5 Tax Benefits of 529 Plans, #284
529 college savings plans are a favorite tool for families looking to fund education, but recent updates have made them even more compelling. With the passing of the One Big Beautiful Tax Act in 2025, there have been some exciting changes to what you can use 529 funds for, including expanded coverage for K-12 tuition, test fees, vocational programs, and support for learning differences.
I also discuss the various tax advantages of contributing to a 529 plan, like state tax deductions, tax-deferred growth, and even the ability to roll leftover funds into a Roth IRA for your child. He offers real-life examples, highlights differences across state plans, and gives practical tips on maximizing your savings and tax benefits as the year wraps up.
If you’re looking to make the most out of your child or grandchild’s future education while being smart about your finances, this episode is packed with must-know information.
You will want to hear this episode if you are interested in...
[00:00] 529 Plan updates and expansions.
[06:48] 529 Plans: taxes and benefits.
[08:02] 529 Plan tax-free growth.
[09:55] Investment considerations for 529 plans.
[13:49] New rules on 529-to-Roth IRA rollovers.
THe Expanded 529 Universe
Most people know 529 plans are great for covering college tuition, room and board, and required fees. The One Big Beautiful Tax Act of 2025 has expanded what 529 distributions can cover, opening up a wider range of education-related expenses, including much earlier in a student’s academic journey.
Newly Eligible Expenses:
K-12 Tuition: The annual limit for K-12 tuition expenses jumps from $10,000 to $20,000 in 2026.
Test Fees and Credentialing: You can now use 529 funds to pay for standardized testing, college entry exams, and vocational credentialing programs.
Homeschool & Specialized Support: Structured homeschool curricula, academic tutoring, therapies, and materials for diagnosed learning differences (including ADHD) are now eligible.
Apprenticeships & Educational Equipment: Costs for apprenticeship programs and special technology or learning tools can now be covered.
However, there are still some limitations: transportation, school-purchased health insurance, and extracurricular activity fees remain ineligible.
State Tax Deductions
The state tax deduction is a unique benefit offered by many states for 529 contributions, but often families overlook this: over 30 states offer a tax break, but the rules vary. In Connecticut, for example, you can deduct up to $5,000 per person or $10,000 per couple from your state taxable income. You must usually contribute to your own state’s plan (though states like Arizona, Kansas, and Pennsylvania allow deductions for out-of-state plans). Be mindful of year-end deadlines, contributions must be made by December 31st to claim the deduction for that year. Even if your state benefit is modest, it’s essentially “free money” for doing something you’re likely planning anyway.
Student Loan Repayment and Rollovers to Roth IRAs
529 plans now offer more flexibility, even if the intended student doesn’t use all the funds for education.
Student Loan Repayments: Up to $10,000 (lifetime) per beneficiary can be used to pay down qualified student loans, helping recent grads reduce their debt burden.
Roth IRA Rollovers: As of recent law, up to $35,000 can be rolled from a 529 plan to a Roth IRA for the beneficiary, provided the 529 is at least 15 years old, the money isn’t a recent contribution, and the beneficiary has earned income. This can be an incredible jumpstart for retirement savings if college funds aren’t fully used.
All 529 plans are not created equal. Look for low-cost, direct-sold plans rather than advisor-sold plans that carry extra commissions. Every dollar saved on fees is another dollar that can grow tax-free in your account.
Resources Mentioned
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