Despite these uncertainties, many families are passionate about investing in the education of their children, grandchildren, and future generations. 529 College Savings Plans are one effective tool for funding future education expenses. Originally designed for funding college expenses, these accounts now provide greater flexibility for funding a wider range of education and training expenses while retaining valuable tax benefits.
In this report, we answer common questions about 529 plans, discuss recent legislative changes, and explain strategies families can use to save and invest for family members' education expenses. We have grouped these accounts into four key sections:
- Getting started,
- Using the account,
- Managing the investments, and
- Managing uncertainty.
At the end of this report, we will also share some insights into how families should consider other savings account options—such as Section 530A "Trump accounts" and custodial accounts—and provide a quick reference guide to key 2026 contribution limit and tax thresholds.
Getting started
1. Why use a 529 plan to save for college?
529 plans, which are available in all 50 states, offer two key tax benefits:
- Contributions may be eligible for state income-tax deductions or credits, depending on where you live and which plan you use.
- Investment earnings grow free of federal income tax, and distributions are generally free of federal income tax when used for qualified education expenses.
These benefits can compound meaningfully over time. For example, consider a hypothetical $10,000 contribution invested for 15 years at a 7% annualized total return, consisting of 5% price appreciation and a 2% dividend yield. In a 529 account, the investment would grow to approximately $27,600 for qualified education expenses, approximately 24% more than the $22,250 of after-tax distribution from a $10,000 investment in a taxable account subject to a 23.8% tax on dividends and capital gains.
In "How to give kids an investing head start," a CIO Global IM report published 26 May 2026, we show that 529 accounts have a similar after-tax growth advantage over Trump accounts when the funds are used for college expenses.
The 529 advantage may be even greater if state tax benefits are available or if future tax policy becomes less favorable to taxable investing.
Some employers also offer matching contributions to employees’ 529 plans, although this remains a relatively uncommon benefit.
2. How much do I need to save?
There is no universal college-savings target. The amount a family should save depends on several factors:
- How many beneficiaries will need education funding?
- What types of schools or programs might they attend?
- How much of the cost does the family intend to cover?
- Will graduate education be included?
- Might the beneficiaries receive financial aid or scholarships?
- How quickly might education costs rise?
Rather than aiming for a specific account balance in isolation, families should build an education-funding strategy that reflects their goals without compromising retirement savings or other priorities. A financial advisor can help families evaluate these trade-offs and adjust the strategy as their circumstances evolve.
Figure 1 - College costs vary significantly by school and programUndergraduate costs for the 2025-26 school yearSource: College Board, UBS, as of 10 September 2026. The four-year degree cost estimate assumes a 4.5% annual increase in college costs.
3. How much can I contribute?
There is no dollar limit on annual 529 contributions. However, each plan imposes an aggregate account limit intended to prevent contributions from exceeding the amount reasonably needed for the beneficiary’s qualified education expenses.
Federal gift-tax rules also apply because a 529 contribution is generally treated as a completed gift to the beneficiary. In 2026, an individual may give up to $19,000 per beneficiary under the annual gift-tax exclusion, or $38,000 for a married couple electing to split gifts.
529 plans also allow an accelerated-gifting election. An individual can contribute up to five times the annual exclusion and elect to treat the contribution as having been made evenly over five years. In 2026, that permits a contribution of up to $95,000 for an individual or $190,000 for a married couple electing to split gifts. A federal gift-tax return (Form 709) is generally needed to make the five-year election; for example, a contribution made in 2026 could be allocated across 2026–30 for gift-tax purposes.
Figure 2 - 2026 gift-tax exclusions for 529 contributionsAmount per beneficiarySource: UBS.
In addition to providing an early start on future education expenses, lifetime gifting can remove the contributed assets and their future growth from the contributor’s taxable estate. If a contributor who elects five-year treatment dies during that period, a portion of the contribution may be included in the contributor’s estate.
Using the account
4. Which 529 distributions are qualified?
529 plans can fund more than traditional college tuition. Under current federal law, qualified uses include the following expenses.Figure 3 - What expenses can 529 funds cover?Federally qualified expenses and key conditions for 2026Source: IRS, UBS, as of 10 September 2026.
Beginning in 2026, qualified K-12 expenses are subject to a federal annual limit of $20,000 per beneficiary. Eligible expenses extend beyond tuition and can include curriculum and instructional materials, books, qualifying tutoring, certain testing fees, dual-enrollment fees, and qualifying educational therapies for students with disabilities.
529 assets may also be used for qualifying expenses associated with registered apprenticeships and eligible post secondary credentials, including certain trade and professional programs. Covered credentialing costs may include tuition, fees, testing, books, supplies, equipment, and qualifying continuing education. See IRS Publication 970 for more information on what expenses are considered "qualified education expenses."
Up to $10,000 may be used over a beneficiary’s lifetime to repay qualified education loans. An additional $10,000 lifetime limit is available for each of the beneficiary’s eligible siblings. Student-loan interest paid with a tax-free 529 distribution cannot also be claimed for the student-loan interest deduction.
529 contributions are made on an after-tax basis, so they can always be withdrawn income tax- and penalty-free. However, if a distribution is not qualified, the earnings portion is generally subject to federal income tax and a 10% additional tax. Exceptions to the 10% additional tax can apply in cases such as death, disability, or receipt of a scholarship. State taxes, penalties, or recapture of prior state tax benefits may also apply.
Important note: Federal and state rules may differ. Federal recognition of an expense does not guarantee the same treatment in every state. In fact, according to this article from Savingforcollege.com, some states—California, Colorado, Connecticut, Hawaii, Illinois, Michigan, Minnesota, Montana, Nebraska, New Mexico, New York, Oregon, and Vermont—do not allow for qualified distributions to pay for K-12 expenses. Families should review applicable state rules before taking a distribution.
5. How do 529 plans affect financial aid?
529 plans generally receive favorable treatment under the federal financial-aid formula, but the result depends on account ownership.Figure 4 - Free Application for Federal Student Aid (FAFSA) treatmentSource: Studentaid.gov, UBS, 10 September 2026.
Institutional aid methodologies can treat 529 accounts and distributions differently. Schools using the CSS Profile or another institutional methodology may request information not required by FAFSA.
Families should review the methodology used by each institution before making ownership or distribution decisions solely for financial-aid purposes.
6. Do I need to invest in my state’s 529 plan? What if I move?
Families do not need to use their home state’s plan, and beneficiaries do not need to attend school in the state that sponsors the plan.
When comparing plans, consider:
- State income-tax deductions or credits
- Whether the tax benefit requires using an in-state plan
- Investment options
- Fees and expenses
- Account and distribution features
- State treatment of federally qualified expenses and rollovers
There are currently nine states that offer "tax parity," allowing residents to claim a state benefit for contributions to any state’s 529 plan: Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania. The other states reserve their benefit for contributions to the home-state plan.
Moving does not ordinarily require a family to close an existing 529 account. The family may retain it, roll it into another state’s plan, or open an additional account. However, a rollover or nonqualified distribution may trigger state tax consequences or recapture a prior deduction or credit.
Managing the investments
7. How should I invest my 529?
529 plans typically offer four broad types of investment options:
- Age-based or target-enrollment portfolios begin with a larger allocation to growth-oriented assets and automatically become more conservative as the beneficiary approaches the expected enrollment date.
- Risk-based portfolios maintain an allocation consistent with a selected risk level, such as conservative, moderate, or aggressive.
- Individual investment options target particular asset classes, such as US stocks, international stocks, or bonds.
- Principal-protected options may include stable-value, money-market, or FDIC-insured deposit options with cash-like risk and return characteristics.
For many families, an age-based portfolio is a practical starting point. After all, funds invested for a newborn’s college expenses have ample time to enjoy significant growth from an aggressive portfolio over the next two decades. As enrollment approaches, it may make sense to reduce portfolio risk to help protect funds from a market decline shortly before they are needed.
As a general guideline, funds earmarked for spending in the next three to five years are often described as being in the "danger zone" for investors, as this is the time horizon in which past bear market losses have been the largest. It may make sense for these assets to be considered within a Liquidity strategy focused on capital preservation. Assets intended for later years may maintain greater exposure to growth-oriented investments.
The appropriate allocation also depends on the family’s broader financial circumstances. A family with few resources outside the 529 may have less capacity to recover from a shortfall than a family able to supplement education expenses from other assets.
Figure 5 - An age-based "glidepath" approach to investing 529 assetsAllocation to growth-oriented investments (e.g., stocks) and safe investments (e.g., cash and bonds)Source: UBS. For illustration purposes only.
Managing uncertainty
8. What if I save too much?
Saving early can maximize the potential value of tax-free growth, but it also increases the possibility that the account will exceed the beneficiary’s education needs. A scholarship, lower-cost education path, or decision not to attend college could leave unused assets.
Families have several options.
Diversify education savings
In addition to funding a 529 plan, families may hold some education savings in Roth IRAs or taxable accounts that offer greater flexibility.
For families who satisfy the applicable age and five-year holding requirements, Roth IRA earnings may be withdrawn free of federal income tax. Before then, distributions for qualifying higher-education expenses may avoid the 10% additional tax, although income tax can still apply to taxable earnings. Using retirement assets for education can reduce the funds available for retirement, so families should evaluate this strategy carefully.
Use the funds for other qualified education expenses
Broader K-12, apprenticeship, and credentialing provisions give families additional ways to use 529 assets without taking a nonqualified distribution.
Roll eligible assets into the beneficiary’s Roth IRA
Up to $35,000 may be rolled from a 529 plan to a Roth IRA for the beneficiary over the beneficiary’s lifetime, subject to several restrictions:
- The 529 account must generally have been maintained for at least 15 years.
- The beneficiary must have compensation at least equal to the rollover.
- The rollover and the beneficiary’s other IRA contributions cannot exceed the applicable annual IRA limit.
- Contributions made to the 529 during the preceding five years, and earnings attributable to those contributions, are ineligible.
- The rollover must be made directly to a Roth IRA for the 529 beneficiary.
- The normal Roth IRA upper-income limitations do not apply.
For 2026, the standard IRA contribution limit is $7,500, or the beneficiary’s taxable compensation if lower. This limit applies to the combined total of the beneficiary’s regular traditional IRA contributions, Roth IRA contributions, and eligible 529 rollovers.
Important note: State income tax treatment may differ from the federal tax treatment. Some states may not fully conform to the federal tax treatment of 529-to-Roth IRA rollovers or may recapture previously claimed state tax deductions or credits in certain circumstances. Before completing a rollover, families should review their state's current rules and consult a qualified tax advisor. For current state-specific guidance, visit Saving for College's state conformity guide.
Change the beneficiary
The account owner can generally change the beneficiary to another qualifying family member without federal income tax or the 10% additional tax. This can allow unused funds to support a sibling or another eligible relative.Figure 6 - What if the 529 plan is overfunded?Options for using excess 529 funds to help other family membersSource: UBS. For illustration purposes.
9. Is college worth the cost?
Questions about the value of college have become increasingly prominent as tuition rises and artificial intelligence changes how work is performed.
Despite these concerns, research shows that a college degree can still be worth the cost.
The New York Federal Reserve found that a bachelor's degree adds about $1 million to a worker's median lifetime income compared to workers with only a high school diploma, which is equivalent to an average annualized return on investment of 14%.
In addition to earning more than workers whose education ended after high school, college graduates generally have access to careers with better workplace benefits, tend to experience fewer and shorter-lived bouts of unemployment, and have greater capacity to earn a return on their savings due to greater financial security.
These benefits compound over time to support the possibility for a more comfortable working career and allow for college graduate workers to reach financial freedom earlier.
Figure 7 - College graduates tend to earn moreDistribution of annual wages, full-time workers age 22 to 27Source: US Census Bureau, US Bureau of Labor Statistics, UBS, as of 10 September 2026.
Figure 8 - College graduates have faced less unemployment riskSource: US Bureau of Labor Statistics, UBS, as of 10 September 2026.
The benefits of college are not uniform. Outcomes vary by institution, field of study, and the net cost of college after accounting for financial aid and scholarship programs. Completing college is also a key factor—families who borrow for college but do not complete a degree are often at a financial disadvantage even relative to families with no college at all.
In conclusion, families should focus on making the college decision like any other major financial decision—weighing the costs against other alternatives and focusing on programs that are likely to deliver a high return on investment.
College is not the only path to building valuable skills, and rapid technological change may increase the importance of continuing education throughout a worker’s career. Nevertheless, post-secondary education remains an important driver of lifetime earning potential and financial security.
To learn more about which college majors have the best post-graduation employment statistics, visit the New York Federal Reserve's website, The Labor Market for Recent College Graduates.
10. What recent changes have made 529 plans more flexible?
Recent legislation expanded the range of expenses that may qualify for federal tax-free 529 distributions.
Beginning in 2026, the annual federal limit for qualified K-12 expenses increased from $10,000 to $20,000 per beneficiary. The definition now extends beyond tuition to cover specified materials, tutoring, tests, dual enrollment, and certain educational therapies.
Federal law also recognizes certain postsecondary credentialing expenses, creating more flexibility for beneficiaries pursuing trades, professional licenses, and other qualifying credentials. Rollovers from 529 plans to qualifying ABLE accounts were also extended beyond 2025.
Together with the 529-to-Roth IRA rollover provisions that took effect in 2024, these changes reduce the risk that families will be left without a tax-advantaged use for unneeded 529 assets.
Because state treatment may not conform to federal law, families should confirm their state’s rules before making a distribution or rollover.
Figure 9 - Key 529 College Savings Plan enhancementsSource: IRS, SEC, UBS, as of 10 September 2026
Additional reading
Choosing the right account for a child
529 plans are often among the most tax-efficient vehicles for education savings, but they are not the only option. The appropriate account depends on the family’s goals, the child’s earned income, the intended use of the funds, tax considerations, and the desired level of control and flexibility. Some families may even decide to use a combination of accounts to fund their education savings goals. For a comparison of 529 plans, Trump Accounts, custodial accounts, Roth IRAs, ABLE accounts, and taxable investment accounts, see the CIO IM report "How to give kids an investing head start," published 26 May 2026.
Conclusion
529 College Savings Plans offer families a flexible, tax-advantaged way to prepare for future education costs. Recent changes have broadened the range of qualified expenses and expanded the options available when funds are not needed for their original purpose.
By starting early, coordinating education savings with other financial priorities, and understanding both federal and state rules, families can improve their ability to fund education without undermining retirement or other long-term goals.
A financial advisor and tax professional can help families develop a strategy suited to their circumstances.
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Figure 10 - Quick reference guide to key 2026 tax and contribution limitsSource: IRS, UBS, as of 10 September 2026.
529 Disclaimer
529 Plans are sold via Program Descriptions (sometimes called Program Brochures), which contain detailed information regarding the plan, risks, charges and tax treatment. Clients can obtain a free Program Description of their choice from the investment management company sponsoring a 529 Plan or a Financial Advisor. Read the Program Description carefully before investing.
529 College Savings Plans are issued by individual states. Tax implications, as well as investment choices, of 529 Plans may vary significantly from state to state. Most states offer their own tuition programs which may provide advantages and benefits exclusively for their residents and taxpayers. By contributing to the plan issued by the state in which the client is a resident, clients may gain state, as well as federal, income tax advantages. However, taxes are only one issue to consider. Different 529 Plans impose different fees, offer different investment approaches, and have a range of past performance records. Withdrawals not used for qualified education costs will trigger state and federal tax as well as withdrawal penalties. The ability to withdraw earnings free of federal taxes may be affected by changes in the tax exemptions. Neither UBS Financial Services nor its Financial Advisors provide tax or legal advice. Clients should be advised to contact their personal tax and/or legal advisors regarding their individual situations.
Purpose of this document: This report is provided for informational and educational purposes only. It should be used solely for the purposes of discussion with your UBS Financial Advisor and your independent consideration. UBS does intend this to be fiduciary or best interest investment advice or a recommendation that you take a particular course of action.
Personalized recommendations or advice: If you would like more details about any of the information provided, or
personalized recommendations or advice, please contact your UBS Financial Advisor.
Important additional information applicable to retirement plan assets (including assets eligible for potential rollover, distribution or conversion): This information is provided for educational and discussion purposes and are not intended to be fiduciary or best interest investment advice or a recommendation that you take a particular course of action (including to roll out, distribute or transfer retirement plan assets to UBS). UBS does not intend (or agree) to act in a fiduciary capacity under ERISA or the Code when providing this educational information. Moreover, a UBS recommendation as to the advisability of rolling assets out of a retirement plan is only valid when made in a written UBS Rollover Recommendation Letter to you provided by your UBS Financial Advisor after a review of detailed information that you provide about your plan and that includes the reasons the rollover is in your best interest. UBS and your UBS Financial Advisor do not provide rollover recommendations verbally. With respect to plan assets eligible to be rolled over or distributed, you should review the IRA Rollover Guide UBS provides at ubs.com/irainformation which outlines the many factors you should consider (including the management of fees and costs of your retirement plan investments) before making a decision to roll out of a retirement plan. Your UBS Financial Advisor will provide a copy upon request. No tax or legal advice: UBS Financial Services Inc., its affiliates, and its employees do not provide tax or legal advice. You should consult with your personal tax and/or legal advisors regarding your particular situation.
