529 Plans, Trump Accounts And Saving For College Early

Tax News You Can Use | For Professional Advisors

Jane Ditelberg, Director of Tax Planning
Paul Scrocco, Associate Wealth Advisor

August 15, 2025

A common objective for many families is to help pay for a child’s or grandchild’s education. This is not surprising in an era when college costs have been rising much faster than inflation. State-sponsored 529 plans are a tax-advantaged way to save for college (and more recently other education) costs since their creation in 1996, and recent changes have made them even more flexible than in the past, including an expansion of the types of expenses that can be paid on a tax-free basis. This edition of Tax News You Can Use explores the uses of 529 plans, recent changes, and why families may want to consider funding them sooner rather than later.

What Is a 529 Plan and Why Are They So Popular?

A 529 College Savings Plan is a tax-advantaged vehicle for saving for future education expenses. They have grown in popularity since their creation in 1996, when section 529 of the Internal Revenue Code was enacted as part of the Small Business Jobs Protection Act. Funds contributed to a plan account can grow federal income tax free, and withdrawals used for “qualified higher education expenses” are not subject to federal income tax when distributed. In 2017, certain tuition expenses for elementary and high school were added to the list of qualified higher education expenses. New tax legislation effective July 4, 2025 has expanded the list of qualifying education expenses, making 529 plans an even more valuable tool.

As the chart below illustrates, when you compare making annual exclusion gifts to a 529 plan with contributions to a taxable investment account, the amount available for college expenses after 10 years is significantly larger in the 529 plan at the end of the period. While it is unlikely that an account will have solely ordinary income or solely capital gains, the projections show that there will be between 6% to 10% fewer assets available for college in a taxable savings account than if the same gifts were made to a 529 plan account. Note that taxpayers who have already started saving for education in a trust or UTMA account may still be able to invest those assets in a 529 account and obtain the associated tax benefits.

Comparison of 529 Plan and Taxable Savings for Annual Exclusion Gifts Assuming 5% Annual Growth

The Power of Early

Given that tax-free growth and accumulation drive the benefits of saving in a 529 plan, the time to start saving is always as soon as possible. The New York Times has reported that research by Morningstar found that the average age of a child for whom a 529 plan account is opened is seven years old. And while starting to save for higher education when a child is in elementary school is a great start, the way to maximize the benefit of the tax-free growth inside the plan is to start even earlier if you have the opportunity to do so. Consider the following comparison of assets available for college based on making a gift of $19,000 to a 529 account when the child is age one compared with the same gift at age seven and age 13.

Value at Age 19 of a Single $19,000 Contribution to a 529 Plan Assuming 5% Annual Growth

How To Maximize Savings In A 529 Plan Account

As shown above, 529 balances grow bigger the earlier you start, and donors to 529 plan accounts have a secret weapon not available to those who choose alternative ways of giving funds for education. The Internal Revenue Code allows a donor to elect to apply five years' worth of annual exclusions to a single gift on their gift tax return. This would allow a donor to contribute $95,000 today to a 529 plan and apply the annual exclusions for 2025, 2026, 2027, 2028 and 2029 to it so that it does not use up the donor's basic exclusion amount. A married couple could contribute $190,000 in a single year using this method. With exposure to growth over a longer period, a $190,000 contribution at age one would generate significantly more wealth than five separate annual exclusion gifts in consecutive years by the time the beneficiary reaches age 18. Moreover, if a $190,000 gift is made at age one, another gift of $190,000 could be made at age six and another at age 11.

Is A 529 Only For College Education?

Under some but not all state plans, up to $10,000 of plan assets in 2025 or up to $20,000 beginning in 2026 can be used without penalty to pay qualified expenses for K-12 education for a beneficiary. These funds can be used for tuition and for the costs of books and instructional materials, online courses, tutoring, AP and dual enrollment coursework, achievement tests, college admission exams, and educational therapies for students with disabilities. If the beneficiary’s account is under a state plan that does not permit distributions for these purposes, withdrawals can lead to state-level taxes or penalties. To avoid this, the assets may be moved to a different state’s plan that permits withdrawals for these purposes.

What If I Overfund?

One of the concerns expressed by parents and grandparents who have the means to maximize contributions to a 529 plan is what happens if the funds are ultimately not needed for qualified education expenses. This could happen if the child does not go to college, the child becomes disabled, the child receives scholarships, or the child's education expenses are less than the amount in the plan. Withdrawals that are not for qualified education expenses are generally subject to federal income tax and an additional 10% penalty on the earnings. These concerns have led some families to avoid using 529 plans.

Congress and the IRS have considered these issues, and both the initial enactment and later amendments have created certain safety valves for these situations. These include the following:

1. There is an unlimited ability to change the beneficiary of the 529 plan account to another family member. This means that the funds not needed for a particular beneficiary's education can be made available for the educational expenses of siblings, parents, cousins or even the beneficiary's own children. Note that changing the beneficiary can be treated as a gift by the original beneficiary to the new beneficiary.
2. If a beneficiary receives certain kinds of scholarships (tax-free grants or employer assistance, for example) or attends a United States service academy, the beneficiary can withdraw an amount equal to that scholarship from the 529 plan account without penalty (although income tax is due if the amount is not used for education expenses).
3. Beginning July 4, 2025, costs of post-secondary accreditation programs, certifications, tests and preparation are included in the definition of qualified higher education expenses that can be paid from a 529 plan. These include apprenticeships, vocational degrees, licensing preparation and certification programs. This would appear to include those programs pursued immediately after high school as well as post-degree credentials such as obtaining a teacher’s license, becoming licensed as an architect or engineer, bar exams, medical boards, and CPA programs. There is also reference to covering continuing education to maintain licensing.
4. If the beneficiary of a 529 plan is a disabled person, the owner can roll-over up to $19,000 tax-free into an ABLE account for the disabled beneficiary (this was set to expire at the end of 2025 but has been extended indefinitely by the OBBBA).
5. Under the federal rules and the rules of some states, a beneficiary can withdraw up to $10,000 for the repayment of certain student loans without tax or penalties. Note that the $10,000 is per borrower, so separate distributions can be made for loans owed by the student and loans owed by the parent. The ability to change the beneficiary of the 529 plan account applies in this context too.
6. If the 529 plan has been open for 15 years or more, the beneficiary can transfer up to $35,000 tax-free to their Roth IRA. The $35,000 is a lifetime limit on transfers, and it will have to be done over several years based on each year's limitations for contributions to a Roth. In 2025, that contribution level is $7,000, so it would take five years to move the whole $35,000 from the 529 to the Roth IRA, assuming no other retirement contributions by the beneficiary.

Comparison To Trump Accounts

The OBBBA created new tax-deferred savings vehicles for minors called Trump Accounts (TA). These accounts are treated similarly to a traditional individual retirement account. Beginning July 5, 2026, up to $5,000 (adjusted for inflation starting in 2027) can be contributed to a minor child’s TA from parents, relatives and other individuals. In addition, TAs may receive contributions from employers as well as non-profit and governmental entities, including a one-time $1,000 contribution from Treasury for each child born to U.S. parents from 2025 through 2028. Investments are limited to low-cost index funds tracking U.S. equity markets until the beneficiary reaches age 18.

As with a traditional IRA, the assets in TAs will be taxed upon withdrawal as ordinary income. Generally, no distributions will be allowed until the beneficiary turns 18, and, like an IRA, withdrawals before age 59 ½ that are not for qualified purposes will carry an additional 10% early withdrawal penalty. The penalty does not apply to withdrawals for higher education expenses, certain emergency or disaster recovery expenses, or for up to $10,000 (or $20,000 for a married couple) for the purchase of a first home.

When comparing TAs to 529 plans, there are several key factors to consider. Unlike 529 plans, which offer tax-free distributions if funds are used for qualified education expenses, the earnings on TAs are taxed as ordinary income, even if used for education. 529 plans offer the donor the ability to contribute up to the annual gift-tax exclusion amount ($19,000 for 2025) or to pre-fund up to five years’ worth of annual exclusion gifts, compared to the $5,000 annual contribution limit for TAs. 529 plan account funds can be rolled over to a Roth IRA for tax-free savings, but only up to $35,000, while any and all funds in a TA can accrue for retirement on a tax-deferred basis. It’s important for advisors to be familiar with both 529 plans and TAs, as they can be used in tandem to accomplish a client’s goals.