As families across the country ease back into the school routine – packing lunches, buying new sneakers, and printing class schedules – there is another supply parents should be thinking about: education savings. Whether college is five years away or fifteen, now is the perfect time to revisit, or start, your strategy for how to pay for it. One of the most powerful tools available is the 529 plan.
A 529 plan is a tax-advantaged investment account that helps families save specifically for qualified education expenses. These plans were established under Section 529 of the Internal Revenue Code in 1996 and are sponsored by individual states. While each state offers its own plan, you are not required to use your home state’s option. You can shop around for plans with lower fees, better investment choices, or state-specific benefits. Some states offer tax deductions or credits for contributions, although Tennessee does not. The primary advantage of a 529 plan is that your investments grow tax-deferred, and withdrawals are completely tax-free when used for qualified education expenses. These include tuition, fees, textbooks, room and board (for students enrolled at least half-time), and even computers or internet service used for school.
Taking money out of your 529 plan is fairly straightforward, but it is important to time it correctly. Withdrawals must be made in the same calendar year the educational expenses are incurred. For example, if you pay spring tuition in January, be sure the withdrawal occurs in the same year. You can choose to send funds directly to the school, to the student, or have them reimbursed to yourself as the account owner. Regardless of the method, it is essential to keep clear records and receipts in case documentation is needed later.
If funds are withdrawn and not used for qualified education expenses, the earnings portion of the withdrawal will be subject to income tax and a 10 percent penalty. There are exceptions to this penalty if the beneficiary receives a scholarship, attends a U.S. military academy, becomes disabled, or passes away. You also have the flexibility to change the beneficiary to another qualifying family member, which helps keep the funds in the family if one student does not use them.
Over the past several years, Congress has expanded the flexibility of 529 plans. In 2017 and 2019, legislation allowed up to $10,000 per year to be used for K–12 private school tuition, and up to $10,000 total to be used for student loan repayment. Now, new federal changes passed in mid-2025 take that flexibility even further.
Effective for distributions after July 4, 2025 (OBBBA), the list of eligible K-12 expenses is being expanded. Previously, only tuition qualified. Going forward, tax-free withdrawals can also be used for curriculum materials, books, online educational content, tutoring services from licensed or accredited providers, standardized test fees, and even dual enrollment fees for college-level courses taken while in high school. Beginning in tax year 2026, the annual withdrawal limit for K-12 expenses will increase from $10,000 to $20,000. This change provides much-needed breathing room for families choosing alternative or more comprehensive educational paths outside of traditional public schools.
Another notable update includes clarification on the student loan provision. The law still allows a lifetime limit of $10,000 per individual (including the 529 beneficiary or a sibling) to be used for student loan repayment.
Starting in 2024, the SECURE Act 2.0 introduced a new option for unused 529 funds: Roth IRA rollovers. This allows families to roll over up to $35,000 from a 529 account into the beneficiary’s Roth IRA, provided certain conditions are met. The 529 account must have been open for at least 15 years, and any contributions made in the last five years are ineligible. The rollover amount is subject to the annual Roth IRA contribution limit and can only be made if the beneficiary has earned income in the same year. This gives families a powerful “Plan B” by allowing education savings to pivot into retirement savings.
One final enhancement worth highlighting affects financial aid. In the past, grandparent-owned 529 accounts could unintentionally reduce a student’s aid package when distributions were counted as untaxed income. Starting in the 2024-25 academic year, those distributions are no longer be reported on the FAFSA. This change removes a longstanding penalty for grandparents and makes multi-generational education funding easier to plan.
This growing list of options makes the 529 plan more compelling than ever. You are no longer just saving for tuition. You are building a flexible, tax-advantaged pool of resources that can adapt as your child’s educational journey unfolds and even support them beyond the classroom.
As an adviser, I believe every family should have a plan for education savings that balances today’s financial demands with tomorrow’s opportunities. Whether you are opening a 529 for the first time, planning upcoming withdrawals, exploring the new Roth IRA rollover feature, or using expanded K–12 benefits, these plans give you the flexibility to support your child’s future without compromising your own. Although we do encourage parents to strongly consider in impact of education savings on their longer-term goals before prioritizing saving for education for their children. Of course, this depends on family goals and values. Either way, it is a conversation worth having.
As the school year begins, this is the perfect time to sharpen your financial plan along with those freshly sharpened pencils. If you are ready to take the next step or want a second opinion on your strategy, let’s talk. The sooner you begin, the more time your money has to grow and the more confident you can feel about what comes next.
