Is a 529 Plan On Your Back To School List?
With summer coming to a close, students are back in the classroom – and some headed off to college. The cost of higher education continues to rise, and many of you are considering how to support your children and grandchildren. This is an opportune time to dive deeper into 529 plans – what they are, the benefits they provide, and how they work.
Plan Basics
A 529 Plan is a state-sponsored savings program designed to encourage education funding through tax benefits and investment opportunities. Each state (except Wyoming) selects a financial services company to manage its plan, much like how your 401(k) is administered through your employer.
A 529 account involves three key roles: the owner, the successor owner, and the beneficiary.
The owner—typically a parent or grandparent—establishes the account, maintains full control, and makes all decisions. Each account can have only one owner, similar to an IRA. The successor owner takes over if the owner passes away, often a spouse or trusted relative. The beneficiary is the student the funds are intended to support.
You can change the beneficiary, allowing flexibility if one child doesn’t need the funds—perhaps due to scholarships or other plans. Contributions aren’t limited to parents; grandparents, relatives, and friends can all help build the account.
A unique benefit of 529 Plans is that you’re not required to use the plan offered by your state. For instance, a Kentucky resident can choose Virginia’s plan if it better fits their needs. Since each plan is managed by a different provider with different investment options, it’s important to compare carefully. Sequoia can help evaluate your state’s plan and others to find the best fit for your goals.
Tax Benefits
529 Plans are funded with after-tax dollars, so there’s no immediate tax deduction. However, the account grows tax-free—and qualified withdrawals aren’t taxed. Some states also offer additional tax incentives. For example, Indiana provides a tax credit of up to $1,000 per household for contributions up to $5,000. This benefit is only available if you reside in and pay taxes to that state.
That’s why, prior to investing in a 529 Plan, investors should always consider whether the investor's or designated beneficiary's home state offers any state tax 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.
Qualified Educational Expenses
To maintain tax advantages, funds must be used for qualified educational expenses (QES).
These include obvious costs like tuition and on-campus housing, but also many less traditional expenses. Eligible institutions include not only colleges, but also many trade and vocational programs. Sequoia can help you confirm what qualifies, to keep within the plan rules.
Important Note: If you use funds for non-qualified expenses, you’ll pay income tax on the earnings portion of the withdrawal, plus a 10% penalty.
Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Investment Opportunity
529 Plans offer a menu of diversified investment options, giving your contributions the chance to grow. Options range from aggressive to conservative investments, and many plans offer Target Date funds, which automatically adjust risk as the beneficiary approaches college age. The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.
Sequoia can help align your investment strategy with your educational savings goals.
Recent 529 Law Changes
Several legislative changes in recent years have expanded the flexibility of 529 Plans:
Secure Act – 2019
Allows up to $10,000 in 529 distributions to repay qualified student loans
Many apprenticeship programs registered with the Department of Labor are now eligible
Secure Act 2.0 – 2022
Permits rolling up to $35,000 into a Roth IRA for the beneficiary, within contribution limits and specific eligibility rules
One Big Beautiful Bill Act – 2025
Doubles the K-12 annual limit from $10,000 to $20,000
Rollovers from 529s to ABLE accounts, set to expire in 2025, made permanent
Should You Have a 529?
This overview highlights the key features and benefits of 529 Plans, but there are many additional rules and considerations. Education is just one piece of your financial puzzle, and it’s important to evaluate how a 529 fits into your broader plan. Sequoia is here to help you understand your options and see the full picture.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.