529 Plans as a Tax Strategy: Q&A

by Alex Freedman, Senior Wealth Advisor

For high-net-worth (HNW) families, education funding often involves structuring wealth efficiently across generations.

While 529 plans are often seen as straightforward college savings tools, they can play a far more strategic role.

When used intentionally, 529 accounts can help reduce your taxable estate, enable tax-deferred growth, and serve as flexible vehicles for multigenerational wealth transfer.

What should I know about 529 plans?

529 plans are tax-advantaged savings accounts designed to help families prepare for future education costs, from K–12 tuition to post-secondary expenses. Contributions are invested and grow tax-deferred; withdrawals are tax-free when used for qualified expenses such as tuition, books, and supplies. Unlike custodial accounts, where the child assumes control upon reaching legal age, the account owner retains full control over a 529 plan’s assets.

What are the potential tax benefits of 529 plans?

One of the most compelling advantages of 529 plans is their favorable tax treatment —for both contributors and beneficiaries — when used strategically.

Key tax benefits for contributors include:

• Contributions are generally excluded from your taxable estate, which can support broader wealth transfer planning.
• In 2026, you can gift up to $19,000 per year ($38,000 for married couples), per beneficiary, without triggering federal gift taxes.¹
• Depending on your state of residence, you may qualify for a state income tax deduction or credit on contributions.

Key tax benefits for beneficiaries include:

• Earnings grow tax-deferred, and withdrawals are federally tax-free when used for qualified education expenses.
• Up to $20,000 per year can be withdrawn tax-free for K–12 tuition at eligible public, private, or religious schools.²
• Up to $10,000 can be used tax-free to repay qualified student loans for the beneficiary or their sibling.²
• Up to $35,000 can be rolled over into a Roth IRA for the beneficiary, subject to annual IRA contribution limits and other requirements.²

Do 529 plans impact financial aid?

Yes, but the impact depends on ownership. Parent or dependent student-owned 529s are generally counted as a parent asset on the FASFA, which can reduce eligibility. However, grandparent-or relative-owned 529 assets no longer need to be reported on the FAFSA, so distributions do not count as untaxed student income.

Are there age, income or annual contributions limits for 529 accounts?

While high-net worth families can be impacted by these types of restrictions with Coverdell Education Savings Accounts, 529 plans have no income, age, or annual contributions limits. 529 accounts also have high maximum aggregate (or lifetime) limits for contributions, ranging anywhere from $235,000 to over $550,000 depending on the state you live in.²

Can 529 plans complement estate planning?

Yes. 529 plans can be a powerful addition to your estate strategy. Consider discussing these approaches with your advisory team:

• Superfunding for potential estate tax reduction: You can accelerate 529 contributions by front-loading up to five years of annual gift exclusions at once. In 2026, that’s up to $95,000 per beneficiary for individuals or $190,000 for married couples.³ This strategy can remove significant assets from your taxable estate while accelerating tax-advantaged growth.
• Establishing a 529 within an irrevocable trust: If you would like to use a trust to fund a loved one’s education you may be able have it create and own a 529 plan. This can reduce tax drag (since trust income is taxed at higher rates) while allowing assets to grow tax-deferred within the 529. Availability depends on the trust’s structure and state law, so coordination with an estate planning attorney is essential.

What if my child doesn’t use all the funds in their 529 account?

There’s no need to be concerned if there are still leftover funds in your child’s 529 plan once they graduate. Viable options to use the money include:

• Changing the beneficiary. You can change the designated beneficiary to another qualified family member, including you or your spouse.
• Rollover the leftover funds into a Roth IRA. If the beneficiary qualifies, this option enables them to get a head start on retirement savings.
• Invest in professional development. 529 plans can now pay for eligible expenses for certain continuing education courses or professional certifications.

How can grandparents use 529 plans as a tax strategy?

Grandparents can use 529 plans as an efficient way to transfer wealth while funding education. Contributions are considered completed gifts, which can help  reduce your taxable estate and remove future growth from estate taxation. 529 accounts can also enable you to support your grandchildren’s education without making direct distributions that could impact financial aid.

Ready to start saving?

Our team of experts can help you integrate 529 plans into your broader wealth strategy, complementing estate planning, supporting multigenerational wealth transfer, and enhancing overall tax efficiency.

Let’s talk about your family’s needs and goals.

Sources
¹ https://www.irs.gov/newsroom/529-plans-questions-and-answers
² https://www.savingforcollege.com/intro-to-529s/name-the-top-7-benefits-of-529-plans
³ https://www.savingforcollege.com/article/10-rules-for-superfunding-a-529-plan