The 529 Plan: Your Retirement Account’s Studious Sibling
A tax-advantaged way to fund education for you or a loved one
The 529 plan doesn’t get talked about nearly as much as it should. It offers the same tax advantages as a retirement account, tax-free growth, tax-free withdrawals, but the funds go toward education rather than retirement. For families planning ahead, it’s one of the more efficient tools available.
What is a 529?
A 529 plan is a state sponsored plan that provides tax benefits for educational expenses. You can think of it a bit like a retirement account but for schooling. Similar to a retirement plan, you have control over how your 529 savings are invested.
Who actually owns this account?
An important and unique aspect of the 529 plan is the ownership structure. Unlike a traditional investment account, where the account owner is generally the one receiving the funds, the recipient of the money from a 529 is the beneficiary. The beneficiary of a 529 can be the account owner, but since 529s are generally opened by parents or grandparents, the beneficiary is usually a young relative. Because the account grows tax-deferred, funding a 529 for a young child can be a great benefit 10-20 years down the line when they use it for education expenses!
Show Me the Money: Contributions and Qualified Withdrawals
Money mechanics worth knowing:
• Contributions into a 529 are treated as completed gifts by the IRS and are subject to the annual gift tax exclusion (in 2026, $19,000 per beneficiary if single or $38,000 if married). Contributions above that amount are still allowed but count against your lifetime gift tax exemption.
• Contributions to a 529 are after-tax (similar to Roth), the investments grow tax-deferred, and qualified withdrawals are tax free. Qualified withdrawals always cover higher education (which can include tuition, mandatory fees, books, supplies and certain room and board costs).
• Other qualified withdrawals differ from plan-to-plan but may include: K-12 tuition, apprenticeship programs (including fees, required equipment, books and supplies), and student loan repayment.
• There are no annual limits on withdrawals for higher education but other withdrawals may be subject to annual limits. For example, there’s a $20,000 annual cap on spending for K-12 expenses, and there’s a lifetime maximum of $10,000 for student loan repayment.
What if it doesn’t get used?
If the initial beneficiary doesn’t end up using the money, it can be repurposed.
- Pass it on. The beneficiary of a 529 can be transferred to another individual within the initial beneficiary’s family, like a spouse, sibling, cousin, etc.
- Roth Rollover. Any leftover funds in the 529 can also be transferred to a Roth IRA for the beneficiary as long as the 529 account has been maintained for the designated beneficiary for at least 15 years. The transfer is still subject to the annual Roth IRA contribution limits ($7,500 for 2026) up to a lifetime max of $35,000.
If none of the previous uses apply, an unqualified distribution can be made from the 529. This will likely incur taxes and a 10% penalty on any growth in the plan. The principal is not penalized or taxed, but any distribution from a 529 is pro-rata, which means your withdrawal is taken proportionally from both the principal and the earnings.
Choosing a 529 Plan: Yes, You Can Shop Around
Each state has their own 529 plan, and you’re allowed to shop around for different plans, even from states you don’t live in! However, many states offer tax deductions or credits for residents who invest in their in-state plan. The main differentiator between 529 plans is the tax advantages, fees, and investment options. For example, some states do not conform to the federal rules, so a withdrawal for a Roth rollover or K-12 education could still trigger state tax. Make sure you know what features the plan has before you sign up.
If you need any assistance or advice regarding setting up or contributing to a 529 plan, please reach out to one of our advisors.
529 Tips
- Make sure your money is actually invested. 529 Savings Plans are a good tool for college saving, but they need to be used correctly to get the maximum benefit. One of the biggest advantages of a 529 is tax-free growth on qualified expenses, but that only helps you if your money is actually invested, not sitting in cash. Depending on your 529 plan, your contributions may default into a cash equivalent, so make sure you check your plan to make sure the money you’re putting in there is invested.
- Start early. A 529’s superpower is tax-free compounding over time, as the lack of tax on the growth of the investments is what makes 529s special. If you’re funding a 529 just a few years prior to when you expect to use it, you won’t be capitalizing on the greatest benefit of the plan.
- Don’t overfund. On the other hand, be careful not to overfund the 529 plan. If the 529 goes unused, or if there are excess funds after the beneficiary goes to college/school, the only options that don’t involve a penalty are: rolling over to a Roth (with a $35,000 limit), repaying student loans, or changing the beneficiary. If there is no alternative beneficiary, and if the account has more than $35,000, there’s not much you can do with the excess funds. Try to only put away what you think you’ll use.
If you have any questions about 529 plans, whether it’s contributions, investments, or distributions, reach out to one of our advisors! You can email us at ShepFinTeam@Shepherdfin.com or call us at 844.975.4015. We look forward to hearing from you!
Participation in a 529 Education Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other education expenses or that a beneficiary will be admitted to or permitted to continue to attend an educational institution. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals. Check with your state’s guidelines prior to withdrawing the funds.
An investor should consider, before investing, whether the investor’s or designated beneficiary’s home state offers any favorable state tax treatment or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances.
For more complete information, including a description of fees, expenses and risks, see the offering statement or program description.