Understanding the Tax Advantages of 529 Plans
With the cost of higher education continuing to climb, it’s no surprise that families are looking for smart ways to save. Parents planning for their children's future and grandparents helping out can use a great tool: the 529 plan. These state-sponsored savings plans offer a range of tax benefits that can make a significant difference over time.
But how do the tax rules work—and can you deduct your contributions? The answers vary depending on where you live, so let’s break it down.
The Basics: What Is a 529 Plan?
A 529 plan is a tax-advantaged savings account specifically designed to help pay for qualified education expenses. Each plan is managed by the state. They may have different investment options and rules. However, the federal tax treatment is the same.
Earnings grow tax-free. Withdrawals for qualified education costs are not taxed at the federal level.
Federal Tax Benefits for Beneficiaries
The most notable advantage of a 529 plan is that withdrawals used for qualified educational expenses—such as tuition, fees, books, and certain room and board costs—are not taxed at the federal level. But that’s not where the benefits end.
Thanks to recent legislation, 529 plans have become even more flexible:
K–12 tuition: Up to $10,000 per year can be used to pay tuition for elementary or secondary school—public, private, or religious—without triggering federal taxes. However, some states don’t align with this rule, so check your plan’s details.
Student loan repayment: Beneficiaries can use up to $10,000 from a 529 plan. This money can help pay off qualified student loans without federal tax penalties.
Apprenticeship programs: The SECURE Act expanded the definition of qualified expenses to include certain costs related to registered apprenticeships.
Roth IRA rollovers are now possible. The SECURE 2.0 Act lets beneficiaries transfer up to $35,000 from a 529 plan to a Roth IRA. This can be done without taxes or penalties if the 529 account has been open for at least 15 years. These rollovers are subject to the annual Roth IRA contribution limits.
Contributors Also Reap Tax Perks
While federal tax deductions for 529 contributions aren’t available, contributors can still benefit:
Estate and gift tax benefits: Money you put into a 529 plan is not counted in your taxable estate. In 2025, you can gift up to $19,000 per person each year without using your lifetime gift exemption. With “superfunding,” you can contribute up to five years’ worth of gifts at once—up to $95,000 in a single year—without triggering gift tax.
State income tax benefits: Many states offer a deduction or credit for contributions to their own 529 plan. Some even provide this benefit for contributions to out-of-state plans, a practice known as "tax parity."
State Tax Treatment Varies
When it comes to deducting 529 contributions, state laws make all the difference. Over 30 states and the District of Columbia provide tax incentives for contributions, although limits and eligibility can vary.
Here are a few notable cases:
Tax parity states: States like Arizona, Kansas, and Pennsylvania allow you to deduct contributions to any state’s plan.
No state income tax: States such as Florida, Texas, and Washington don’t have a state income tax, so they offer no deduction—but you also aren’t paying tax on wages to begin with.
States with no deduction or credit: A few states—like California, North Carolina, and Hawaii—do tax income but offer no tax benefit for contributing to a 529 plan.
Before choosing a plan, it’s worth researching your own state’s tax rules and whether contributing to your state’s plan makes financial sense.
Choosing the Right Plan
You don’t have to stick with your home state’s 529 plan. Some families pick out-of-state plans. These plans may have lower fees, better investment returns, or more flexible options. If your state gives a tax deduction or credit for using its own plan, staying local may be the best choice.
Also, pay attention to deadlines. Most states require contributions by December 31 to get tax benefits for that year. However, some let you contribute until Tax Day in April.
Reporting and Documentation
When you take money out of a 529 plan, the IRS will receive a Form 1099-Q. This form details how much was distributed and to whom. If the distribution matches qualified education expenses, it likely won’t impact your taxes. But if the withdrawn amount exceeds eligible expenses, the excess may be taxable and subject to penalties.
Final Thoughts
529 plans are one of the best ways to save for education. They offer flexibility, investment growth, and great tax benefits. By knowing the federal rules and your state’s benefits, you can get the most from every dollar you save.
Sources:
https://www.fidelity.com/learning-center/smart-money/529-contribution-deduction
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.