Every tax-favored account for a child's education or a family's health care gives a tax break in exchange for a restriction. Your job is to match the restriction to the client: who controls the money, what it may pay for, and what happens when plans change.
Parents saving for college want tax-free growth. They also want the power to redirect the money if the child takes another path. A 529 plan, named for Internal Revenue Code (IRC) Section 529, offers both. IRC 529(b) allows two forms:
- Education savings plan: A state sponsors an investment account. You choose among the plan's portfolios, and the value moves with the markets.
- Prepaid tuition plan: A state or an eligible college sells tuition credits now that pay tuition later. Colleges may offer only this form.
The tax deal. A 529 is funded with after-tax money, in cash. There is no federal deduction, although many states give their own residents a state income tax deduction. Growth is tax-deferred, and withdrawals for qualified expenses are tax-free.
Common mistakes
- Coverdell cap per giver: The $2,000 limit covers one beneficiary from all contributors combined. Two grandparents giving $2,000 each create a $2,000 excess that owes 6% every year it stays.
- HSA catch-up at 50: The $1,000 HSA catch-up starts at 55, not at 50, the age for retirement-plan catch-ups.
- Kiddie tax ends at 18: It also reaches 18-year-olds and full-time students under 24 whose earned income doesn't cover half their support. The 2024 figures of $1,300 and $2,600 are stale; 2025 and 2026 use $1,350 and $2,700.
Bottom line
- 529 plan: after-tax money, no federal deduction, no income or federal annual limit, tax-free qualified withdrawals; the owner controls it, changes investments twice a year, can't pledge it; interests are municipal fund securities.
- 529 expenses: college costs, room and board at half time or more, apprenticeships, $10,000 lifetime loans, credentials, and K-12 up to $20,000 per beneficiary per year from 2026.
- 529 exits: earnings taxed plus 10% unless death, disability, military academy or scholarship; Roth rollover after 15 years, $35,000 lifetime, within $7,500 less other IRA contributions.
- 529 gifts: completed gift out of the estate; $19,000 exclusion or five-year election up to $95,000 ($190,000 split), with post-death years added back.
Exam shortcut
Ask three questions before reading the choices: who owns it, what does it pay for, and how old is someone? "Grandparent," "estate" or "owner keeps control" points to a 529. "Uniforms," "individual stocks" or a $2,000 limit points to a Coverdell. "Irrevocable" or "the child gets it at 21" points to UGMA or UTMA.
The full lesson (about 3,872 words, 26 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C26
Browse all free Series 65 lessons or jump into free Series 65 practice questions.