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6 Smart Ways a 529 Can Help Pay for Education (Not Just College)

Education costs are climbing fast. Here are several ways 529 Plans can help—tax-advantaged growth, expanded qualified expenses and new flexibility that may surprise you.

Key Takeaways

  • Rising education costs have made paying for it a greater challenge, but investing in a 529 Plan can help.
  • Investments in 529 Plans grow tax-deferred, and some states also offer deductions or credits for such contributions.
  • You can annually transfer certain unused 529 Plan assets into a Roth IRA without triggering a tax bill or penalty.

Of all the things that keep parents awake at night, looming education costs may be among the most daunting. For the 2025-2026 school year, the average estimated cost of attendance for a full-time, on-campus student at a private nonprofit four-year college was $65,470 per year, including tuition, fees, housing and food, books and supplies, transportation and other expenses. That amounts to more than $260,000 to cover a four-year degree. And that’s for just one child.1

 

With costs so high, many students and parents are taking on significant student loan debt. Roughly half (47%) of students who graduated between 2023 and 2024 from a private university had debt averaging $29,560.2

 

Within the context of your financial plan, saving for your loved one’s education may be top of mind as you continue to track toward other goals such as retirement. Starting an education savings fund early may limit how much your child, grandchild, niece or nephew may have to borrow in the future. Consider putting those funds into a 529 education savings plan, a tax-advantaged way to invest now, toward future expenses.

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What is a 529 Plan and Why Consider One?

Named after Section 529 of the Internal Revenue Code, a 529 Plan is an investment account that offers a convenient, flexible and tax-advantaged way to prepare for future education expenses.

 

So, how can a 529 Plan actually help your family, today and down the road? Here are six key features you won’t want to miss.

  1. 1
    Tax-advantaged growth for education

    A 529 Plan creates an incentive for families to invest toward education costs because earnings in the plan are tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if funds are used for qualified expenses, such as tuition, fees, room and board, and supplies. Many states provide additional benefits, such as creditor protection, scholarships, state tax deductions or tax credits.
  2. 2
    Estate planning advantages

    Additionally, assets in a 529 Plan remain outside of the account owner’s estate for estate-tax purposes. This can be especially helpful for grandparents and other family members who want to support a loved one’s education while also reducing the size of their taxable estate.
  3. 3
    Owner control and decision-making flexibility

    If you open a 529 Plan, as the owner of the account, you can continue to make all the decisions and retain control over the assets. For example, if your daughter earns a scholarship and won’t fully draw down the money in the account, you can choose a different beneficiary within the same family, use the funds for your own education needs, or withdraw up to the amount of the scholarship without paying the usual 10% federal penalty. However, income tax may still apply to any investment earnings if the withdrawal is not used for qualified education expenses.3
  4. 4
    Increased K-12 tuition withdrawals starting in 2026

    Under the One Big Beautiful Bill Act (OBBBA), starting in 2026, 529 Plans offer expanded flexibility for education expenses. Plan funds up to $20,000 per beneficiary per year can be withdrawn federally tax-free to pay for eligible K-12 tuition educational expenses, up from the prior $10,000 annual limit. It’s important to note that state tax treatment varies.4
  5. 5
    Broader set of qualified education expenses

    In addition, under OBBBA changes, 529 Plan funds can be used for a broader range of qualified education expenses, helping families support learning at multiple stages.

     

    The K-12 annual limit of $20,000 covers education expenses beyond tuition. Expanded K-12 uses may include:

     

    • Curriculum materials, books, online educational materials and supplemental learning tools
    • Tutoring and test preparation expenses
    • Fees to take standardized tests, such as the SAT or ACT
    • Dual enrollment fees
    • Educational therapy and services for students with disabilities
       

    Career credentialing and eligible job training programs are now also qualified expenses. Examples include:

     

    • Tuition, fees, books, supplies and equipment for recognized credential programs 
    • Testing fees required to obtain or maintain a credential
    • Continuing education, licensing and renewal fees
    • Skilled trades programs
    • Professional certifications

     

    Separately, under prior law, you may also be able to use 529 Plan money to repay student loans for the 529 account beneficiary and/or a sibling, up to a $10,000 lifetime limit per individual. Fees, books, supplies and required equipment for Registered Apprenticeship Programs are also available.
  6. 6
    Potential Roth IRA rollover for leftover funds

    If money remains in the account after education expenses are covered, you may be able to move up to $35,000 into a Roth IRA for the beneficiary, subject to applicable federal rules and annual contribution limits.5

Igniting a Movement to Save for Education

Still, many are unaware of 529 Plans and their expanding benefits. Just over a third of families currently use 529 Plan funds to pay for their children’s education.6 Many people want to save and invest for college, but don’t know where to start, says Jennifer Tierney, Executive Director, Morgan Stanley Wealth Management Investment Solutions and Co-Head of Product Development for Traditional Investment Products.

 

“Many of our clients are grandparents looking to put themselves in a position to help with their grandchildren’s future education expenses,” Tierney says. “We encourage them to take a look at 529 Plans, which may not have been on their radar the last time they were looking at how to pay for college.”

529 Contribution Limits Are Considered Gifts for Tax Purposes

In 2026, annual contributions to each 529 account of up to $19,000, or $38,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. Additionally, 529 Plans employ a special rule: An upfront contribution in one year of up to $95,000 for single filers, or $190,000 for married couples filing jointly—the equivalent of five years’ contributions—may be made without any gift tax consequences.7

 

Larger contributions may also be possible, subject to the applicable state plan’s aggregate contribution limit, which is about $500,000, on average. That may require filing a gift tax return and using a portion of your lifetime gift and estate tax exemption. For 2026, the federal exemption is $15 million per individual and is indexed for inflation going forward.

Investing Early for Future Education Costs

When it comes to investing in a 529 Plan, typically the earlier you can start putting money away, the better to allow for more tax-free compounding.

 

Still, it’s never too late to start saving and investing for education. Money set aside as late as when a child is 16 will still have several years to grow, assuming you use those funds to pay for the latter years of undergraduate expenses, or even graduate school. Funding can continue while the student is in school, and beyond, as well.

 

Your Financial Advisor can help you choose a 529 Plan and the investment options therein best for you as part of your wealth strategy. They can also offer valuable guidance as it relates to any tax changes and during times of market volatility.

 

Morgan Stanley offers a robust platform of investment options, including the Morgan Stanley National Advisory 529 Plan, a first-of-its-kind advisory 529 Plan that enables you to benefit from fiduciary oversight of your education funding strategy within the context of your broader portfolio and life goals.

 

If you have questions or need more information about 529 Plans available through Morgan Stanley, contact your Financial Advisor or Private Wealth Advisor today.

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Footnotes:

1 College Board, Trends in College Pricing and Student Aid 2025, published November 2025, https://research.collegeboard.org/media/pdf/Trends-in-College-Pricing-and-Student-Aid-2025-final_1.pdf

2 College Board, Trends in College Pricing and Student Aid 2025,published November 2025, https://research.collegeboard.org/media/pdf/Trends-in-College-Pricing-and-Student-Aid-2025-final_2.pdf

3 Internal Revenue Service, Publication 970, Tax Benefits for Education, “Qualified Tuition Program (QTP),” including sections on qualified education expenses, taxable distributions, exceptions to the 10% additional tax and changing the designated beneficiary, published January 27, 2026, https://www.irs.gov/publications/p970. See also 26 U.S.C. § 529, “Qualified tuition programs,” https://uscode.house.gov/view.xhtml?req=(title:26%20section:529%20edition:prelim).

4 Pennsylvania CPA Journal (PICPA), “The OBBBA and Tax Filing Season: What You Need to Know about Personal Income Tax Changes” April 2026. https://www.picpa.org/professional-resources/research-publications/pennsylvania-cpa-journal/journal-articles/2026/03/05/obbba-and-tax-filing-what-you-need-to-know-about-income-tax-changes 4

5 529 Qualified Expenses: What Can You Use 529 Money For, January 15, 2026, https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan?

6 Sallie Mae (conducted by Ipsos), How America Pays for College 2025, https://www.salliemae.com/content/dam/slm/writtencontent/Research/HAP_2025.pdf

7 Internal Revenue Service (IRS), 2025 Instructions for Form 709 November 2025, https://www.irs.gov/instructions/i709

Disclosures:

Morgan Stanley Smith Barney LLC (“Morgan Stanley”) and its Financial Advisors and Private Wealth Advisors do not provide any tax/legal advice. Consult your own tax/legal advisor before making any tax or legal-related investment decisions.

This material has been prepared for educational purposes only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC (“Morgan Stanley”) recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Investors should consider many factors before deciding which 529 Plan is appropriate. Some of these factors include: the Plan’s investment options and the historical investment performance of these options, the Plan’s flexibility and features, the reputation and expertise of the Plan’s investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should determine their home state’s tax treatment of 529 Plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information. Morgan Stanley Smith Barney LLC does not provide tax and/or legal advice. Investors should review a Plan Program Disclosure Statement, which contains more information on investment options, risk factors, fees and expenses, and possible tax consequences.

The North Carolina State Education Assistance Authority (the "Authority") is an instrumentality of the State of North Carolina sponsoring the Morgan Stanley National Advisory 529 Plan, and the Morgan Stanley National Advisory 529 Plan is a component of the Parental Savings Trust Fund established by the General Assembly of North Carolina. Neither the Authority, the State of North Carolina nor any other affiliated public entity or any other public entity is guaranteeing the principal or earnings in any account. Contributions or accounts may lose value and nothing stated herein, the Plan Description and Participation Agreement or any other account documentation shall be construed to create any obligation of the Authority, the North Carolina State Treasurer, the State of North Carolina, or any agency or instrumentality of the State of North Carolina to guarantee for the benefit of any parent, other interested party, or designated beneficiary the rate of return or other return for any contribution to the Parental Savings Trust Fund.

If an account owner or the beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An account owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”). In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an account owner rollover or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 Plan, they are important to an account owner’s investment return and should be taken into account when selecting a 529 Plan.

Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. Morgan Stanley Smith Barney LLC and its Financial Advisors do not provide tax or legal advice. Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 Plans, Education Savings Accounts, and other tax-advantaged investments.

Investments in a 529 Plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money.

The 529 Plan Program Disclosure contains more information on investment options, risk factors, fees and expenses, and potential tax consequences. Investors can obtain a 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing.

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