The Steward's Desk · Education funding
The flexible reputation is earned, once you know the rules: what qualifies, what happens to leftovers, and where state taxes fit.
Jesse Plunkett, CEPA®, CRPC®
July 12, 2026 · Meet your advisor · 
Qualified expenses include college tuition and fees, required books and supplies, computers, and room and board for students enrolled at least half time. Federal rules also allow a capped amount of K-12 expenses each year and a lifetime-capped amount of student loan repayment. Spend on those, and withdrawals come out federally tax-free.
Both caps have numbers attached, and the K-12 one just changed. The One Big Beautiful Bill Act, signed July 4, 2025, doubled the annual K-12 limit from $10,000 to $20,000 per student beginning January 1, 2026, and widened what counts to include curriculum materials, tutoring, standardized test fees, dual-enrollment courses, and educational therapies for students with disabilities. The student loan provision, which came from the SECURE Act, is capped at $10,000 over a lifetime per beneficiary, and a separate $10,000 can go toward each of the beneficiary's siblings. One caution on the K-12 expansion: states set their own rules and not all of them have conformed, so a withdrawal that is federally clean can still be taxable at home. Check your state's treatment before you take the money.
The definition is broader than tuition. Room and board qualifies for students enrolled at least half time, including off-campus housing up to the school's published cost-of-attendance figure. Computers, software, and internet access count while the student is enrolled. And under the SECURE Act, fees, books, and equipment for registered apprenticeship programs qualify too, which widens the plan's usefulness beyond the traditional four-year path.
Execution has one rule worth underlining: match withdrawals to expenses in the same calendar year, and keep the receipts. A December tuition bill paid with a January withdrawal creates a mismatch that's annoying to defend. I have clients take the withdrawal in the year the bill is paid, documented, and done.
You have options, and none of them is losing the account. You can change the beneficiary to another family member, roll a capped amount into the beneficiary's Roth IRA under SECURE 2.0, hold the account for the future, or withdraw it. Only in that last case do taxes and a penalty apply, and only to earnings.
Here's how the choices compare.
| Option | How it works | Often better when... |
|---|---|---|
| Change the beneficiary | Name another member of the current beneficiary's family: a sibling, first cousin, parent, even yourself. | Another child or family member has school ahead of them. |
| Roll to a Roth IRA | SECURE 2.0 allows rollovers to the beneficiary's Roth IRA, up to a $35,000 lifetime cap, once the account is 15 years old. | The account is old enough and you want the leftover to become retirement money for your child. |
| Leave it invested | There's no deadline on a 529. It can wait for graduate school, a career change, or a future grandchild. | Plans are unsettled and you don't need the money elsewhere. |
| Withdraw it anyway | Contributions come back free. Earnings are taxed and penalized unless an exception applies, such as a scholarship. | The amount left is small or the family simply needs the cash. |
SECURE 2.0 lets money move from a 529 into a Roth IRA owned by the 529's beneficiary. The account must be at least 15 years old, the lifetime cap is $35,000 per beneficiary, and each year's rollover can't exceed that year's IRA contribution limit, so reaching the cap takes several years.
Two more wrinkles are built into the rule. Contributions made in roughly the last five years, and their earnings, have to season before they're eligible to move. And because the rollover happens in yearly installments, it works best as a patient, multi-year plan rather than a single transfer. I think of it as a graceful exit for leftover money, and a reason to stop fearing overfunding, rather than a reason to overfund on purpose.
Then the account splits in two for tax purposes. Your contributions come back free of tax and penalty; they were after-tax dollars going in. The earnings portion is taxed as ordinary income plus a 10% federal penalty, with exceptions for events like a scholarship or the beneficiary's death or disability. The bite is usually smaller than parents fear, because the penalty applies only to the earnings, never to what you put in. On a $30,000 account that grew from $24,000 of contributions, the penalty lands on $6,000, not on the whole balance.
Every withdrawal carries a proportional slice of contributions and earnings, so you can't cherry-pick the tax-free part. The scholarship exception deserves its own mention: if your child earns one, you can withdraw up to its amount without the penalty, paying only income tax on the earnings share. A 529 doesn't punish you for raising a kid who won a free ride.
State treatment is its own layer. Many states offer a deduction or credit for contributions, some only if you use your home state's plan, and a few offer no break at all. States can also treat K-12 tuition, loan repayment, or Roth rollovers differently from the federal rules, so check both layers before acting.
You can generally use any state's plan no matter where you live, so the choice comes down to your state's tax break, the plan's costs, and its investment menu. A recapture wrinkle exists too: some states claw back earlier deductions if you later move the account to another state's plan or take certain withdrawals. None of this should drive the whole decision, but it belongs on the checklist. And if you're weighing account types rather than plans, the Trump Account vs. 529 vs. UTMA comparison tool walks through the differences side by side.
That's a normal first project to do together. A short call is the place to start.
No. You can withdraw up to the scholarship amount without the usual penalty; you'll owe ordinary income tax on the earnings portion, but contributions come back untouched. You can also keep the money invested for graduate school, another child, or a future Roth rollover. A scholarship opens options rather than closing them.
Yes. You can move the account to a member of the current beneficiary's family, which includes siblings, first cousins, parents, and yourself, without federal tax consequences. Families use this to shift leftover money between kids. One open question: IRS guidance hasn't fully settled how a beneficiary change interacts with the Roth rollover's 15-year clock, so I plan around that carefully.
Federal rules allow both, each with a cap: K-12 tuition up to a yearly limit, and student loan repayment up to a lifetime limit per borrower. State tax treatment doesn't always follow the federal rules, so a withdrawal that's qualified federally can still trigger state tax. Check your state's rules first.
Usually far less than families fear. A parent-owned 529 is reported as a parent asset on the federal aid form, and the formulas assess parent assets at a much lower rate than student income or student assets. The picture shifts with account ownership, which is one reason to decide who owns what deliberately.