Some Interesting Things You May Not Know About 529 Savings Plans

Here at Send Your Kids to College, we’re in the business of helping Western New York families plan for their college future. It’s a massive undertaking, but when properly planned for and positioned with experienced professionals, you can trust that you won’t feel alone when working with our organization. We provide solutions for when families and students have problems. One big problem you, as parents and/or grandparents, can start solving today is saving for college. 529 Plans provide unique tax-advantaged opportunities to help invest money that benefits your family for years to come. 

Today on the blog, we want to cover a few unique aspects of 529 savings plans that you may not know about. There are some updates and evolutions to the rules on these plans, and some little-known benefits of the plans that we feel are important to highlight. Remember, you can always get more tips and tricks to college planning over on our Facebook, Instagram, & LinkedIn! 

So Why Do 529 Plans Work So Well?

If you were not aware, a 529 plan is an investment account that is designed solely for education expenses. If you’re wondering why you can’t accomplish the same with a basic savings account, CD, IRA, or other financial product, here are some of the tax advantages. 

No Annual Growth Taxes- When you put money into your 529 plan, investments are not subject to annual taxes taking from your growth.

State Tax Benefits- New York State taxpaying individuals can deduct up to $5,000 of their annual contributions from their NYS taxable income, while married couples filing jointly can deduct up to \$10,000.

No Tax on Withdrawal- You need to use a 529 for “qualified higher education expenses,” yes, however, when you do withdraw, it will always be entirely federal tax-free.

What Types of Things Can You Use the Funds for?

Understanding that “qualified higher education expenses” is somewhat vague, let’s go over some things that 529 plans can be used for. It’s often misunderstood that 529 plans can only go to 4-year universities, or that you might lose money if your kid ends up not wanting to go into college. Let’s get some misconceptions out of the way.

Misconception 1 - My Kid might not go to college, so why would I put it into a college savings plan? 

Well, as of 2024, unused 529 plans can be rolled over into a Roth IRA for the beneficiary (subject to rules), which can be a great retirement savings start!!

Misconception 2 - You can’t use a 529 to pay student loans 

The SECURE Act allows you to be able to use up to a $10,000 lifetime limit to pay down a beneficiary’s student loans (& $10,000 for siblings)

Misconception 3 - 529 Plans can only be used to pay tuition

There are plenty of associated costs of college that you may not be considering. Things like room and board, textbooks (required by the professor), course fees, and even computers can be considered “qualified,” but you should always check with your college planning specialist to make sure any alternative purchases are safe.

Misconception 4 - My kid might want to go to a trade school instead of college.

Some people think that 529 plans are strictly for 4-year colleges, but that’s not the case. You can use a 529 plan to help pay for community college, trade schools, grad schools, and even K-12 private school tuition. (up to $10,000/year)

Some 529 Expert Tips You May Not Know About

Lastly, let’s go over a few strategies that you may not be aware of when it comes to 529 plans!

Grandparents Can Contribute!

FAFSA rules have changed, and one of those changes in the Student Aid Index is that 529 plans owned by grandparents NO LONGER count against a student’s eligibility for need-based financial aid. This helps families who have extended family who want to help, but do not get dinged on taxes or penalties. 

Front-loading a 529

If grandparents want to reduce their total taxable estate, it’s possible to “front-load” 5 years' worth of gift-tax exclusions into a single year. In 2025, an individual was able to contribute up to $95,000 at once ($190,000 married) without triggering gift taxes. Ask us about what you can superfund this year!

Scholarships???

If you were worried about a child earning a scholarship and losing savings, don’t. If a child beneficiary of a 529 plan earns a scholarship, you don’t lose the money. You can withdraw an amount equal to the scholarship without the 10% penalty. (Income tax will need to be paid on the earnings portion)

When is the best time to start a 529 plan?

Today! No, seriously. If you have kids and you haven’t at least looked at this plan for a safe college savings plan, it’s not a bad idea to start. It’s never too early to start, but it can be too late. Having flexible, tax-advantaged strategies in place can make college financial planning less stressful, but also, most importantly, less expensive! If you have questions about planning for college, give us a call or reach out via our contact form to speak with Jeff, Kayla, or AJ!