May 29 is National 529 Day—a good reminder to take a closer look at how these savings accounts can support education goals while delivering meaningful tax advantages. While many families are familiar with the basic features of 529s, there are several planning strategies and lesser-known provisions that can make these accounts a powerful part of your long-term financial plan.
Strategic Tax Advantages
The primary tax benefit of a 529 plan is that investment earnings grow tax-deferred and withdrawals are federally tax-free when used for qualified education expenses. But beyond this, there are several additional benefits worth highlighting:
- State-level deductions and carryforwards: In Ohio, you can deduct up to $4,000 per beneficiary per year from your state income taxes. Contributions over this limit can be carried forward indefinitely, making it possible to frontload savings while maximizing deductions over time.
- Gift tax efficiency: Contributions qualify for the annual federal gift tax exclusion ($18,000 per donor per beneficiary in 2025). In addition, 529s allow a special election to “superfund” the account—contributing up to five years’ worth of exclusion in a single year ($90,000 per donor, $180,000 per couple) without triggering gift tax, provided no additional gifts are made to that beneficiary during the five-year period.
- Rollover to Roth IRA: Starting in 2024, unused 529 funds may be rolled over into a Roth IRA for the beneficiary, up to a lifetime limit of $35,000, provided the 529 account has been open for at least 15 years. This provision offers a unique way to jumpstart retirement savings without generating taxable income.
Planning Considerations
- Owner vs. Beneficiary Impacts: The account owner retains full control of the assets, which can be important in financial aid considerations and estate planning. Changing the beneficiary or account owner does not trigger tax consequences as long as the new beneficiary is a family member.
- Grandparent-owned 529s: Historically, distributions from grandparent-owned 529s were treated as untaxed student income for FAFSA purposes. However, recent updates to the FAFSA (effective for the 2024–2025 school year) eliminate this issue, making grandparent-funded 529s a more attractive strategy.
- Legacy and estate planning: 529 plans can be part of a broader wealth transfer strategy. Superfunding allows substantial contributions outside the estate while retaining control over assets. Additionally, 529s are generally excluded from the account owner’s estate once contributed, unless death occurs during the five-year gift averaging window.
Ultimately, 529 plans have evolved well beyond their original purpose, offering families and individuals a flexible, tax-smart tool for meeting education goals—while creating opportunities for broader wealth transfer. As federal and state rules change, staying informed about these versatile accounts can help you unlock their full potential and tailor your strategy to suit your family’s unique needs