The top 5 tax benefits of a 529 plan — and changes to expect in 2026
Contributing to a 529 savings plan can offer powerful benefits for your child, grandchild — and in some cases, even yourself. As we approach the end of the year, it’s an especially good time to review the tax advantages of these plans and highlight several important updates made under the One Big Beautiful Bill Act, passed in 2025.
Below, I’ll walk through the top five tax benefits of 529 plans, along with expanded ways you can now use these funds.
What Can You Use a 529 Plan For?
Most people know 529 plans can be used to pay for college expenses, but the list of qualified expenses has expanded significantly.
Traditional Qualified Education Expenses
529 plan funds can be used tax-free for:
Tuition and mandatory fees
Room and board
Books and supplies
Computers and technology
Special needs equipment, and
Apprenticeship programs
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Expanded 529 Uses Under the One Big Beautiful Tax Act
The recent legislative changes have broadened how 529 funds can be used — particularly for younger students.
K–12 Education Expenses
2025: Up to $10,000 per year can be used for K–12 tuition
Starting in 2026: This limit is increased to $20,000 per year
Newly Qualified Expenses
You can now use 529 funds to pay for:
Standardized and college entrance exam fees
Credentialing and vocational programs
Structured homeschool curricula and materials
Academic tutoring and educational therapies
Support for diagnosed learning differences, including ADHD
Still Not Covered
Unfortunately, some expenses remain excluded, including:
Transportation to and from school
Health insurance purchased through a school
Extracurricular activity fees
Tax Benefit #1: Potential State Income Tax Deduction
One of the most overlooked advantages of 529 plans is the state tax deduction.
Over 30 states offer a deduction or credit for 529 contributions
The deduction typically applies only if you contribute to your state’s sponsored plan
Example: Connecticut
Up to $5,000 per person or $10,000 per couple deductible
At a 6% state income tax rate, a $10,000 contribution could save $600 in taxes
Other examples:
New York: $5,000 deduction
Rhode Island: $500 per person
New Jersey: $10,000 per person
⚠️ Some states (including Arizona, Alaska, Kansas, Minnesota, Missouri, Montana, and Pennsylvania) allow deductions even if you use another state’s plan — but most do not.
Important Timing Note
To claim a state tax deduction for 2025, contributions must be made by December 31, 2025. Contributions made in 2026 will not reduce your 2025 tax bill.
Tax Benefit #2: Student Loan Repayment Assistance
You can withdraw up to $10,000 per beneficiary (lifetime) from a 529 plan to pay for student loan repayment.
Applies to both principal and interest
Limit is per beneficiary, not per account
Can be used for multiple children, if each has their own plan
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Tax Benefit #3: Tax-Deferred Growth and Tax-Free Withdrawals
This is one of the most powerful advantages of a 529 plan.
Investments grow tax-deferred
No annual taxes on dividends, interest, or capital gains
Withdrawals for qualified expenses are completely tax-free
In contrast, money invested in a regular brokerage account may be taxed annually, reducing long-term growth. The tax-deferred nature of 529 plans allows your savings to compound more efficiently over time.
Tax Benefit #4: Using 529s Strategically for K–12 Education
If you’re paying for private K–12 education, a 529 plan can help you recover some of those costs:
Contribute funds to the 529 plan
Potentially receive a state tax deduction
Allow the money to grow
Withdraw it tax-free for qualified education expenses
While there’s no federal deduction for contributions, the combination of tax-free growth and possible state deductions can make this strategy especially attractive.
Tax Benefit #5: Rolling Unused 529 Funds Into a Roth IRA
One of the most exciting features added in recent years is the ability to convert unused 529 funds into a Roth IRA for the beneficiary.
Key Rules to Know
Up to $35,000 lifetime can be rolled from a 529 to a Roth IRA
Annual Roth contribution limits still apply
2025: $7,000 (under age 50)
Beneficiary must have earned income equal to the contribution
The 529 plan must be at least 15 years old
Contributions made within the last 5 years are not eligible
The Roth IRA must be in the beneficiary’s name
The transfer must be a direct rollover
Why This Matters
If education costs are lower than expected, this strategy allows leftover funds to jump-start your child or grandchild’s retirement savings — with tax-free growth for decades.
Keep an Eye on Fees and Plan Costs
Not all 529 plans are created equal.
Some plans carry higher investment costs than others
Direct-sold plans often use low-cost index funds
Advisor-sold plans may include commissions or higher expenses
Keeping costs low can significantly increase long-term results, especially if you’re investing for many years.
Final Thoughts
529 plans are far more flexible and powerful than many people realize. With expanded eligible expenses, tax-deferred growth, potential state tax deductions, and even Roth IRA conversion opportunities, they can play a key role in both education and long-term financial planning.
If your state offers a tax deduction, be sure to make your contribution before the end of the year to capture the benefit for 2025.
As always, I hope you found this helpful — and I look forward to sharing more with you next week.
Written by Ryan Morrissey
President & Principle Wealth Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast