5 Things You May Not Know About 529s (But Should)

Mar 5, 2024

They're tax friendly, flexible and available to anyone. Yet, 529 education investment plans are still underused. Here are five things that parents, grandparents and anyone hoping to get a leg up on education costs need to know.

Key Takeaways

  • While commonly used for college expenses, 529 plans can also be used for K-12 tuition, post-secondary programs and student loan repayments.
  • 529 plans can offer significant tax advantages, including tax-free growth and tax-free withdrawals for qualified education expenses.
  • Contributions to a 529 plan can be a strategic part of estate planning, as contributions can count towards your annual gift tax exclusion. 

How are some families planning for future education expenses? According to Sallie Mae’s “How America Saves for College” 2023 report, 30% of families used a college savings account like a 529 to pay for college.1 But did you know a 529 plan can be used for more than just paying for college? They’re tax-advantaged investment plans that can help families save for an array of educational costs and provide other significant benefits. For all their features, 529 plans are still often misunderstood and under-utilized. Here's what you may not know:

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  1. 1
    They Can Offer Considerable Income Tax Benefits to The Account Owner

    529 plans offer federal and state tax-free compounding for as long as funds are invested within the plan. A bonus: there's never a required minimum distribution. Withdrawals for qualified educational expenses are federally tax-free and free of most states' income taxes. Further, most states offer various levels of income tax deductions or credits for contributions to one or more 529 plan to further encourage saving and investing. Check with your tax advisor to see what your state may offer.

  2. 2
    They're More Flexible Than You Think

    There are no income or age limitations, meaning any adult can open an account for any person's future educational expenses. Account owners may change the designated beneficiary for any reason, at any time. They can even name themself as a beneficiary.


    Some states require a minimum initial investment, sometimes as low as $15, to start a 529 plan. Additionally, the maximum account contribution limits are generous, ranging from $235,000 up to over $500,000 per beneficiary.2 The plans are state-sponsored, but you can participate in mostly any state's plan. However, you should first consider your home state’s plan as it may offer tax or other benefits exclusive to state residents, such as creditor protection, scholarships and matching contributions.


    Funds from a 529 plan may be used tax-free for most expenses at traditional undergraduate and graduate schools. They can also be used for many kinds of post-secondary institutions, such as art or cooking institutes, community colleges, trade and vocational schools and eligible international school expenses. You may even be able to use 529 funds for up to $10,000 in elementary and high school tuition annually.3 Additionally, you can now use up to $10,000 to repay qualified student loans and to cover certain costs for qualifying apprenticeship programs. Connect with your tax advisor to learn more about any state tax implications associated with paying these costs from a 529 account.


    Further, effective January 1, 2024, 529 account owners may be able to transfer their qualified leftover funds to a Roth IRA—for the designated beneficiary, without any tax or penalty and with no income limits—making 529 plans an even more robust solution for long-term financial planning.4

  3. 3
    529 Accounts Provide Unique Estate Planning Benefits

    One of the great features of a 529 plan is that, as you fund these accounts for future education expenses, you also are reducing the size of your taxable estate. 529 accounts are generally excluded from your taxable estate and not subject to estate taxes. It’s important to note that you still control the assets and can access your money at any time.


    This important benefit of 529 plans allows grandparents and other family members to pass on assets to subsequent generations while enjoying certain tax advantages. With no withdrawal requirement, as owner with full control, you can designate who the account should be transferred to upon your passing. Further, you may change such successor owner at any time, without any tax, cost, penalty, or fee, similar to the ability to change the account’s designated beneficiary.


    Anyone, including grandparents, can contribute up to $18,000 per year ($36,000 for married couples) to any individual’s 529 account, utilizing the annual gift tax exclusion.5 Additionally, you can bundle five years of gifts in one year for a total of $90,000 contribution ($180,000 for married couples), provided you make the required election on a gift tax return for the year of the contribution.6 The Unified Lifetime Gift Credit is also available to fund your account up to each 529 plan’s maximum account limit set by the state sponsor, often in excess of $500,000. The credit could be reduced at the end of 2025. Connect with your Financial Advisor about planning for the potential change.  

  4. 4
    529 Accounts Have Minimal Impact on Financial Aid

    The impact of a 529 account on financial aid is typically minimal. The short explanation: As long as a parent is the account owner, the student’s needs-based financial aid award will decrease by no more than 5.64% of the account value.A 529 account opened by a grandparent has no impact on needs-based financial aid awards. 

  5. 5
    Not All 529 Plans Are the Same

    Morgan Stanley offers a variety of 529 plans to help you save while taking advantage of all the benefits. The Morgan Stanley National Advisory 529 Plan offers fiduciary oversight of your account within the context of your broader assets, portfolio and life goals.8 Additionally, other plans offered are backed by some of the nation’s leading investment management companies. Work with your Morgan Stanley Financial Advisor to learn more about which 529 plan may work best for you. 

Invest for the Future

When it comes to education costs, every dollar counts.


Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor to help you invest for future education expenses within the context of your overall wealth strategy.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.