As the cost of education continues to climb, many families are searching for smart ways to prepare to fund their children’s education. According to the Education Data Initiative, the average U.S. college tuition cost for the academic year 2025–2026 is $10,634 (in-state resident) and $31,009 (out-of-state student) at public four-year institutions.1 Saving early for these rising costs of education and room/board is key to ensuring you can make a meaningful contribution toward higher education expenses—especially if your loved one plans on attending an out-of-state institution.
The 529 plan offers a powerful combination of saving for future education expenses while taking advantage of valuable tax benefits—making it a cornerstone of many families’ education funding strategy. However, as with any financial tool, it’s important to understand both the advantages and the limitations before you decide if it fits your family’s needs.
What Is a 529 Plan?
A 529 plan is a tax-advantaged savings vehicle designed to help pay for education expenses. There are two main types: prepaid tuition plans, which let you lock in today’s tuition rates at participating schools, and education savings plans, which allow funds to grow in investment accounts.
Earnings in a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses—such as tuition, fees, and room and board.
However, withdrawals used for non-qualified expenses are subject to income tax and a 10% federal penalty on earnings, which can reduce the overall benefit if funds are needed for other purposes. In addition, investment options are typically limited to those offered by the specific state plan, and performance can vary depending on market conditions.
Tax Benefits of 529 Contributions
While contributions to a 529 plan aren’t deductible on your federal tax return, the earnings grow tax-deferred and withdrawals for qualified expenses are federally tax-free.
At the state level, some states offer deductions or credits for contributions—though rules vary, so it’s important to confirm what applies where you file. If you move to a different state or invest in an out-of-state plan, you may not be eligible for your home state’s tax benefits.
529 plans can also play a role in gifting strategies. Individuals can “front-load” contributions by giving up to five years’ worth of annual gifts at once without triggering gift taxes. This can be a useful way for parents or grandparents to make a significant early contribution to a child’s education fund.
Keep in mind that once contributions are made, they’re considered completed gifts and cannot easily be reversed if the donor’s financial situation changes.
Expanded Use of 529 Funds
The flexibility of 529 plans has grown in recent years. In addition to college and university costs, funds can be used for:
- K–12 tuition (up to $10,000 per year, per student)
- Student loan repayment (up to $10,000 per beneficiary)
- Registered apprenticeship programs (certified by the Department of Labor)
These expanded options make 529 plans more versatile than ever, allowing families to support a variety of educational paths.
That said, it’s still important to plan carefully—some expenses that families might assume are covered, such as transportation or student health insurance, are not considered qualified and could result in taxes and penalties if paid with 529 funds.
Education Tax Credits (Can You Double-Dip?)
Two key education credits—the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC)—can further reduce education costs. However, you can’t claim these credits for expenses paid with tax-free 529 withdrawals.
To maximize your benefits, consider paying a portion of qualified expenses out-of-pocket so you can still claim an education credit. Coordinating 529 withdrawals with eligible expenses can make a meaningful difference at tax time.
Planning Opportunities
Beyond saving for tuition, 529 plans can serve as a flexible family planning tool.
- Coordinating with gifting strategies can help transfer wealth efficiently.
- Grandparents’ contributions may no longer reduce a student’s financial aid eligibility under the updated FAFSA rules, creating new planning opportunities.
- Rollover options are expanding too—starting in 2024, certain unused 529 funds may be rolled over to a Roth IRA for the beneficiary, within limits and conditions.
Still, not all unused funds will qualify for a Roth IRA rollover, and there are restrictions on lifetime limits and contribution eligibility. Families should also be mindful that investment returns in 529 accounts are not guaranteed and may fluctuate with market performance.
Potential 529 Plan Pitfalls
As with any investment product, there’s also some downsides that might need to be considered when investing in a 529 Plan which includes a 10% federal penalty and income tax on the earnings if not used for qualified education expenses, limited investment options, high fees in some plans, and possible reduced financial aid eligibility if the plan is under the custody of the parent.
Conclusion
A 529 plan is more than just a college savings account—it’s a versatile, tax-advantaged tool that can support your broader financial and legacy goals. However, like all investment and tax strategies, it has rules, limits, and potential drawbacks to consider.
To determine whether a 529 plan is the right fit for your family, work with your Ciccarelli financial advisor to evaluate your education savings goals, tax situation, and overall financial strategy.
[1]www.educationdata.org; “Average Cost of College by State” by Melanie Hanson 9/28/2025