6 smart ways a 529 can help pay for education (not just college)

• Rising education costs have made paying for it a greater challenge, but investing in a 529 plan can help.
• Investments in 529 plans grow tax-deferred, and some states also offer deductions or credits for such contributions.
• You can annually transfer certain unused 529 plan assets into a Roth IRA without triggering a tax bill or penalty.

Of all the things that keep parents awake at night, looming college costs may be among the most daunting. For the 2025-2026 school year, the costs for a four-year private college averaged $65,470 per year for tuition, fees, room and board, books and supplies, transportation, and other expenses. That amounts to more than $260,000 to cover a four-year degree. And that’s for just one child.¹

With costs so high, many students and parents are taking on significant student loan debt to pay for college. Roughly half (47%) of students who graduated between 2023-2024 from a private university had debt averaging $29,560.²

Within the context of your financial plan, saving for your child’s education may be top of mind as you continue to track toward other goals such as retirement. Starting an education savings fund early may limit how much your child, grandchild, niece, or nephew may have to borrow in the future.

To help plan for future education costs, check out the Education Assessment calculator within E*TRADE’s Planning experience (login required). The tool helps estimate potential education expenses based on factors like when a student may enroll, how long they may attend, expected costs and current savings strategy—so you can better understand whether you’re on track to meet your education funding goals. 

You may consider putting funds into a 529 education plan, a tax-advantaged way to invest now, toward future education expenses.

Named after Section 529 of the Internal Revenue Code, a 529 plan is an account that offers a convenient, flexible and tax-advantaged way to invest for a child's future education expenses.

So, how can a 529 plan actually help your family, today and down the road? Here are six advantages you won’t want to miss.

1. Tax-advantaged growth for education

A 529 plan creates an incentive for families to invest toward education costs because earnings in the plan are tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board, and supplies. Many states provide additional benefits, such as state tax deductions or tax credits.

2. Estate planning advantages

Additionally, assets in a 529 plan remain outside of the account owner’s estate for estate-tax purposes. This can be especially helpful for grandparents and other family members who want to support a child’s education while also reducing the size of their taxable estate.

3. Owner control and decision-making flexibility

If you open a 529 plan, as the owner of the account, you can continue to make all the decisions and retain control over the assets. For example, if your daughter earns a scholarship and won’t fully draw down the money in the account, you can choose a different beneficiary within the same family, use the funds for your own education needs, or withdraw up to the amount of the scholarship without paying the usual 10% federal penalty. However, income tax may still apply to any investment earnings if the withdrawal is not used for qualified education expenses.3

4. Increased K-12 tuition withdrawals starting in 2026

Under the One Big Beautiful Bill Act (OBBBA), starting in 2026, 529 plans offer expanded flexibility for education expenses. Plan funds up to $20,000 per beneficiary per year can be withdrawn federally tax-free to pay for eligible K-12 tuition educational expenses, up from the prior $10,000 annual limit. It’s important to note that state tax treatment varies.4

5.   Broader set of qualified education expenses

In addition, under OBBBA changes beginning in 2026, 529 plan funds can be used for a broader range of qualified education expenses, helping families support learning at multiple stages. These may include:

• Tutoring
• Test preparation
• Test fees
• Dual enrollment
• Educational therapy for students with disabilities

You may also be able to use 529 plan money to repay student loans, up to $10,000.

6. Potential Roth IRA rollover for leftover funds

If money remains in the account after education expenses are covered, you may be able to move up to $35,000 into a Roth IRA for the beneficiary, subject to applicable federal rules and annual contribution limits.5

Still, many are unaware of 529 plans and their expanding benefits. Just over a third of families currently use 529 plan funds to pay for their children’s education.⁶ Many people want to save and invest for college, but don’t know where to start, says Jennifer Tierney, Executive Director, Morgan Stanley Wealth Management Investment Solutions and Co-Head of Product Development for Traditional Investment Products.

“Many of our clients are grandparents looking to put themselves in a position to help with their grandchildren’s future education expenses,” Tierney says. “We encourage them to take a look at 529 plans, which may not have been on their radar the last time they were looking at how to pay for college.”

In 2026, annual contributions to each 529 account of up to $19,000, or $38,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. Additionally, 529 plans employ a special rule: an upfront contribution in one year of up to $95,000 for single filers, or $190,000 for married couples filing jointly—the equivalent of five years' contributions—may be made without any gift tax consequences.⁷

When it comes to investing in a 529 plan, typically the earlier you can start putting money away, the better to allow for more tax-free compounding.

Still, it’s never too late to start saving and investing for education. Money set aside as late as when a child is 16 will still have several years to grow, assuming you use those funds to pay for the latter years of undergraduate expenses, or even graduate school. Funding can continue while the student is in school, and beyond, as well.

Article Footnotes

¹ College Board, Trends in College Pricing and Student Aid 2025, published November 2025, https://research.collegeboard.org/media/pdf/Trends-in-College-Pricing-and-Student-Aid-2025-final_1.pdf

² College Board, Trends in College Pricing and Student Aid 2025,published November 2025, https://research.collegeboard.org/media/pdf/Trends-in-College-Pricing-and-Student-Aid-2025-final_2.pdf

³ https://www.nextgenforme.com/wp-content/uploads/2025/08/Direct_08.14.2025_ADA.pdf Publication 970 (2025), Tax Benefits for Education, published January 27, 2026, https://www.irs.gov/pub/irs-pdf/p970.pdf

⁴ Pennsylvania CPA Journal (PICPA), “The OBBBA and Tax Filing Season: What You Need to Know about Personal Income Tax Changes” April 2026. https://www.picpa.org/professional-resources/research-publications/pennsylvania-cpa-journal/journal-articles/2026/03/05/obbba-and-tax-filing-what-you-need-to-know-about-income-tax-changes_4

⁵ 529 Qualified Expenses: What Can You Use 529 Money For, January 15, 2026, https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan?

⁶ Sallie Mae (conducted by Ipsos), How America Pays for College 2025, https://www.salliemae.com/content/dam/slm/writtencontent/Research/HAP_2025.pdf

⁷ Internal Revenue Service (IRS), 2025 Instructions for Form 709 November 2025, https://www.irs.gov/instructions/i709

CRC# 5787513 (08/2026)