Blog

The question I keep hearing from parents right now is some version of this: "Is it even worth funding a 529 plan anymore?"

It's a fair question. A lot of families are watching the higher education landscape shift in real time. College costs keep climbing. AI is reshaping entire industries. And more young people are questioning whether a four-year degree is the path they want to take. Given all of that uncertainty, putting money into an account specifically earmarked for college expenses can feel risky.

But here's where I land on this: I still think 529 plans can make sense for a lot of families. Here is my reasoning.

The Fear Is Understandable (But Possibly Overblown)

I get it. Parents are asking themselves whether college will even look the same in ten or fifteen years. Will AI reduce the value of a traditional degree? Will alternative credentials or online programs replace the four-year university experience? These are legitimate questions.

What I will say is this: we've seen major economic and technological shifts before, and education has adapted. New credentials have emerged. Degree requirements in certain fields have loosened. And when the landscape changes, legislation tends to follow.

In fact, the 529 plan itself is a good example of this. It has already become significantly more flexible than it once was, and I expect that trend to continue if the education environment changes further.

529 Plans Are More Flexible Than Most People Realize

One of the biggest misconceptions I run into is that a 529 plan is a trap. That if you put money in and your child doesn't end up going to college, you're "stuck," or you'll face a huge penalty. That's not really the case.

Here's what a lot of people don't know: if you withdraw money from a 529 for non-qualified expenses, only the earnings portion of that withdrawal is subject to income tax and the 10% penalty. The contributions you made (the principal) come back to you tax-free (since you've already paid taxes on that portion).

So if you put in $30,000 and the account has grown to $40,000, and you need to take that money out for something other than education, only the $10,000 in earnings is the part that gets taxed and penalized. That's not ideal, but it's far from a disaster.

There's an important nuance, though. When you take a withdrawal from a 529 plan, the IRS doesn't let you choose whether you're pulling out contributions or earnings. Every withdrawal is treated as a pro rata mix of both. So if your account is 75% contributions and 25% earnings, then 25% of every dollar you withdraw is considered earnings, regardless of how much total you take out. That matters when calculating exactly how much of a non-qualified withdrawal will be taxable.

And honestly, when you factor in years of potential growth inside the account, you may still come out ahead even in a worst-case scenario.

The Scholarship Exception

Here's a rule that doesn't get nearly enough attention: if your child receives a scholarship, you can withdraw an amount from the 529 equal to the scholarship amount without paying the 10% penalty, even if that withdrawal isn't used for qualified education expenses.

This is a great safety valve. If your child earns a $15,000 scholarship, you can pull $15,000 out of the 529 penalty-free. The money is essentially freed up because the scholarship has covered that portion of the education costs.

That said, the tax treatment still applies in part. Because every withdrawal comes out as a pro rata mix of contributions and earnings, the earnings portion of that withdrawal is still subject to ordinary income tax. So you avoid the penalty, but you don't avoid income tax on the earnings that come out with it.

To put some numbers on it: if your 529 is 80% contributions and 20% earnings, and your child receives a $10,000 scholarship, you could withdraw $10,000 penalty-free. Of that withdrawal, $8,000 would be a return of contributions and would be completely tax-free. The remaining $2,000 represents earnings and would be included in income and taxed at your ordinary rate (but no penalty). That's a much better outcome than a standard non-qualified withdrawal.

The Roth IRA Rollover

The legislation I'm most excited to talk about when it comes to 529 plans is the SECURE 2.0 Act, specifically the provision that allows unused 529 funds to be rolled into a Roth IRA.

Starting in 2024, you can roll over up to $35,000 from a 529 plan into the beneficiary's Roth IRA over the course of their lifetime, subject to certain conditions. The 529 account must have been open for at least 15 years, and the rollover counts against the annual Roth IRA contribution limits.

But think about what this means in practice. If your child gets a scholarship, decides not to attend college, or simply doesn't use all the money you've saved, a significant chunk of those funds can become a head start on their retirement savings. You've essentially turned a concern about flexibility into a wealth-building opportunity for your child's future.

This one provision alone changes the conversation around 529 plans significantly, and it's a big part of why I continue to recommend them in many cases.

You Can Change the Beneficiary

Another flexibility feature that often surprises people is the ability to change the beneficiary on a 529 plan. If one child doesn't use the funds, you can reassign the account to another child, a niece or nephew, a grandchild, or even yourself.

This means the money doesn't have to sit idle or be withdrawn at a penalty. It can follow your family's actual needs over time. If one of your kids ends up going a different direction, but another one decides to pursue graduate school or a professional certification, that money can move with them.

This portability makes a 529 plan much more of a family education fund than a single-child account.

State Tax Deductions (Or Credits) Make the Math Even Better

One reason I often encourage families to at least partially fund a 529 plan is the potential for state income tax deductions or credits on 529 contributions.

Many states offer a deduction on your state income tax return for contributions you make to a 529 plan. Some states even offer a tax credit, which is a dollar-for-dollar reduction in your tax bill rather than just a deduction. The specifics vary significantly by state, but in many cases, you can put money into a 529 and immediately reduce your tax burden before the account has even had a chance to grow.

That's essentially a guaranteed return on a portion of your contribution before you factor in any investment growth at all. For families in states with tax benefits, this alone can make partial 529 funding a smart move.

I'd encourage you to check your specific state's rules, because the value of this benefit varies widely. But in states where it's substantial, it's hard to argue against at least capturing that immediate tax advantage.

Partial Funding Plus a Brokerage Account

Here's the approach I often suggest to families who are uncertain: don't feel like you have to choose between fully funding a 529 or skipping it entirely.

What I recommend for a lot of families is a split strategy. Fund the 529 at a level that feels reasonable given your expectations, possibly enough to capture state tax benefits and give the account growth potential. Then direct additional education savings into a taxable brokerage account.

The brokerage account gives you complete flexibility. There are no restrictions on how you use that money. If your child goes to college, you use it for education. If they don't, you use it for something else, no questions asked and no penalties involved. Yes, you give up the tax-free growth that a 529 provides, but you gain unrestricted optionality.

Just be aware of how taxable brokerage accounts are taxed, including how capital gains work.

This combination approach lets you take advantage of the 529's tax benefits while not feeling locked in. It's a way to plan for the likely scenario while staying prepared for the unexpected.

What If Everything Changes?

So what if AI fundamentally transforms higher education to the point where a 529 plan becomes obsolete?

Here's my take. If the higher education landscape changes so dramatically that 529 plans no longer serve their intended purpose, I fully expect Congress to act. We've seen this before. Financial vehicles get updated when the environment around them shifts. The SECURE Act and SECURE 2.0 are recent examples of exactly that kind of adaptation.

The Roth IRA rollover provision I mentioned earlier is itself evidence that legislators are willing to expand 529 flexibility when circumstances warrant it.

I'm not saying you should count on future legislation as your primary planning strategy. But I do think it's worth noting that the rules around these accounts have consistently evolved in a direction that benefits savers. That trend gives me confidence.

So, Is a 529 Plan Right for Your Family?

Here's how I'd frame it: if there's a reasonable chance your child pursues higher education, a 529 plan offers real benefits.

The tax-free growth is valuable. The state tax deductions or credits can be helpful. The Roth IRA rollover provision provides a safety valve. And the ability to change beneficiaries gives you flexibility you probably didn't know you had.

The question isn't really whether 529 plans are perfect. No single financial tool is. The question is whether the benefits are worth it, given your family's specific situation and outlook. For most families I work with, the answer is "probably" (at least for partial funding).

If you're uncertain, that split strategy of combining a 529 with a brokerage account might be the right middle ground. You capture the tax advantages without betting everything on one outcome.

As always, the right answer depends on your unique circumstances. If you'd like to talk through how a 529 plan might fit into your family's overall financial picture, I'd encourage you to reach out.

Frequently Asked Questions About 529 Plans

What happens if my child doesn't go to college and I have money in a 529?

You have several options. You can change the beneficiary to another family member, roll up to $35,000 into the beneficiary's Roth IRA (subject to conditions), or withdraw the funds and pay income tax and a 10% penalty on the earnings portion only. The contributions you made are returned to you tax-free.

Can I use a 529 plan for trade schools or vocational programs?

Yes. Funds in a 529 plan can be used at any eligible institution, which includes many trade schools, vocational programs, and community colleges, not just four-year universities.

What is the SECURE 2.0 Roth IRA rollover rule for 529 plans?

Under SECURE 2.0, starting in 2024, unused funds in a 529 plan can be rolled into the beneficiary's Roth IRA, up to a lifetime limit of $35,000. The 529 account must have been open for at least 15 years, and annual rollover amounts are capped by the Roth IRA contribution limit for that year.

Do all states offer a tax deduction for 529 contributions?

No. The availability and value of state tax deductions or credits for 529 contributions varies by state. Some states offer generous deductions, some offer credits, and a few offer no benefit at all. It's worth researching your specific state's rules or speaking with a financial advisor.

Can I change who the beneficiary of my 529 plan is?

Yes. You can change the beneficiary of a 529 plan to another qualifying family member, including siblings, cousins, parents, or even yourself. This makes it a flexible tool that can adapt to your family's changing needs.

If my child receives a scholarship, can I withdraw that amount from the 529 without penalty?

Yes. The IRS allows you to withdraw an amount equal to the scholarship from your 529 without the 10% early withdrawal penalty. However, the earnings portion of that withdrawal is still subject to ordinary income tax. Because 529 withdrawals always come out as a pro rata mix of contributions and earnings, only the earnings component is taxable -- the contributions come back to you tax-free.

What does pro rata mean when it comes to 529 withdrawals?

It means every withdrawal you take from a 529 plan is considered a proportional mix of your original contributions and the account's earnings. You cannot choose to withdraw only contributions or only earnings. If your account is 70% contributions and 30% earnings, then 30 cents of every dollar you withdraw is treated as earnings for tax purposes.

Is there a limit to how much I can contribute to a 529 plan?

There is no annual contribution limit for 529 plans, but contributions are considered gifts for tax purposes. In 2025, the annual gift tax exclusion is $19,000 per person, and there is a special rule called superfunding that allows you to front-load up to five years' worth of contributions at once without triggering gift tax.

What is the split strategy for 529 funding?

The split strategy involves partially funding a 529 plan to capture tax advantages and growth potential, while directing additional education savings into a taxable brokerage account. The brokerage account provides complete flexibility with no restrictions on how the money is ultimately used.