Quick guide · 3 min read
529 plans
Money in a 529 plan grows tax-free, and withdrawals for qualified education costs are tax-free too. Many states also give a deduction or credit for contributions to their own plan (California does not).
- Who it fits
- Families saving for school, from kindergarten through college.
- Figures
- 2026 tax year
The key rule
College costs have no annual limit. Up to $20,000 a year can be used for K-12 tuition and related costs starting in 2026.
5 steps
Choose a plan
Check your state's plan first for a deduction. Otherwise choose a low-cost plan from any state.
Fund it efficiently
The 2026 gift exclusion is $19,000 per giver, per child. You can front-load five years ($95,000, or $190,000 for a couple) in one year by filing a gift tax return.
Invite family to contribute
Most plans offer gifting links for grandparents and others.
Match withdrawals to expenses
Tuition, fees, books, computers and, for students enrolled at least half-time, room and board. Withdraw in the same calendar year you pay.
Plan for leftovers
Change the beneficiary to another family member, or roll up to $35,000 over a lifetime into the beneficiary's Roth IRA if the account has been open at least 15 years.
Example 1
Starting early
Parents put $19,000 into a 529 in their child's first year and add $5,000 a year after that. At 6% growth, the account could reach about $195,000 by age 18, with all growth tax-free when used for college.
Example 2
Grandparents superfunding
Two grandparents each give five years of gifts at once, $190,000 together, to a grandchild's 529. They file gift tax returns electing to spread the gift over five years, so no gift tax or use of their lifetime exemption.
Common mistakes
- Withdrawals for non-qualified costs are taxed on earnings, plus a 10% penalty.
- Using the same expense for a 529 withdrawal and an education tax credit.
- Withdrawing in January for tuition paid in December.
Key dates
- December 31
- Withdrawals should match expenses paid in the same calendar year.
Questions we hear
What if my child gets a scholarship?
You can withdraw up to the scholarship amount without the 10% penalty, though earnings are still taxed.
Can I change the beneficiary?
Yes, to another family member, including yourself, a sibling or a cousin, without tax.
What to send us
- 1099-Q
- Tuition statements (1098-T)
- Receipts for other qualified expenses
Upload them to your client portal.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.