How are some families planning for future education expenses? According to Sallie Mae’s “How America Saves for College” 2025 report, 32% 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 qualifying 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:
5 Things You May Not Know About 529s (But Should)
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 qualifying college expenses, 529 plans can also be generally used for K-12 tuition, post-secondary programs, apprenticeships, student loan repayments, to fund retirement, and now for credentialing programs.
- 529 plans offer significant tax advantages, if operated in compliance with applicable tax rules, including tax-free growth and tax-free withdrawals for qualified purposes, such as eligible education expenses.
- Contributions to a 529 plan can be a strategic part of estate planning, as contributions can count toward your annual gift tax exclusion. A unique accelerated gifting option can also be available.
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1They Can Offer Considerable Income Tax Benefits to The Account Owner
Named after section 529 of the Internal Revenue Code, 529 plans can 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 (rules vary by state and by the type of expense--please consult with your Tax Advisor.) 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, and to discuss the tax rules governing 529 plans, as tax-advantaged treatment of 529 plan assets are subject to compliance with all applicable 529 plan rules.
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2They're More Flexible Than You Think
Generally, there are no income or age limitations, meaning any adult can open an account for any person's future qualifying 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 $25, to start a 529 plan. Additionally, the maximum account contribution limits are generous, ranging from $235,000 up to more than $600,000 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.
In order to receive tax-advantaged treatment, including tax-free distributions, 529 plan funds can only be used for qualifying education expenses, which includes most expenses at traditional undergraduate and graduate schools. You can also use them for many kinds of post-secondary education, such as art or cooking institutes, community colleges, trade and vocational schools. You can even use them for qualified apprenticeship programs and eligible international school expenses. Additionally, you can use up to $10,000 over your lifetime to repay qualified student loans. Non-qualified withdrawals may be subject to federal and state taxes and penalties
Under the One Big Beautiful Bill Act, you may be able to use 529 funds for up to $20,000 in elementary, middle, and high school tuition annually, up from a $10,000 limit previously.3 And effective now, 529 plan uses cover a broader range of qualifying K–12 educational expenses, including:
- curriculum materials,
- books,
- online resources,
- tutoring,
- test preparation,
- standardized test fees,
- dual enrollment fees and,
- educational therapies for students with disabilities.
Career credentialing and job training programs are also now qualified expenses, with ongoing costs for continuing education required to maintaining professional credentials eligible. And on top of that, rollovers from 529 plans to Achieving a Better Life Experience (ABLE) accounts for individuals with disabilities and their families are now permanent.
Note that these expanded uses under the OBBBA apply federally, and state conformity may vary. Connect with your tax advisor to learn more about any state tax implications associated with paying these costs from a 529 account.
Further, subject to all applicable rules, 529 account owners may be able to transfer qualified leftover 529 funds (lifetime maximum of $35,000) from the 529 plan for a designated beneficiary to a Roth IRA owned by that same designated beneficiary, without any tax or penalty and no income limits. The transfer amount must come from contributions made to the 529 account at least 5 years prior to the transfer date, and annual rollovers are limited to the yearly Roth IRA contribution limit ($7,500 in 2026, or $8,600 for those 50+), and 529 account must have been maintained for the designated beneficiary for at least 15 years.4
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3529 Accounts Can 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 for qualifying educational expenses at any time, subject to applicable tax rules (including tax penalties and income taxation for distributions for ineligible expenses). Consult your tax advisor. 5
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 the gift tax exclusion limit per donor and per beneficiary per year, meaning, for 2026 $19,000 per year ($38,000 for married couples) to any individual’s 529 account, utilizing the annual gift tax exclusion.6 Additionally, you can bundle five years of gifts in one year for a total of $95,000 contribution ($190,000 for married couples) per beneficiary, provided you make the required election on a gift tax return for the year of the contribution.7
The Unified Lifetime Gift Credit, set at $15 million per person for 2026 (and resuming inflation adjustments starting in 2027) 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.
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4529 Accounts Have Minimal Impact on Financial Aid
The impact of a 529 account on financial aid is typically minimal, subject to changes and financial aid rules. The short explanation: If 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.8 A 529 account opened by a grandparent has no impact on needs-based financial aid awards.
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5Not All 529 Plans Are the Same
Most 529 plans have fairly flexible investment options, but there are differences between plans. 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.9 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. Morgan Stanley and its affiliates do not provide tax or legal advice, and you should also consult your own tax or legal advisor to discuss all tax implications.
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.
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1 How America Pays for College 2025 | Sallie Mae https://www.salliemae.com/about/leading-research/how-america-pays-for-college/
2Maximum contribution limit varies by state.Consult your tax advisor. Source: Saving for College, Maximum Contributions, https://www.savingforcollege.com/compare_529_plans/maximum-contributions/
3Assets can accumulate and be withdrawn federal income tax-free only if they are used to pay for qualified expenses. Qualified expenses include tuition, fees, room and board, books and supplies at virtually any accredited post-secondary school. Effective January 1, 2018, the definition of qualified education expenses expanded to include tuition for K-12 schools, as a result of the 2017 Tax Cuts and Jobs Act. The new tax law limits qualified 529 withdrawals for eligible K-12 tuition to $10,000 per beneficiary per year and state tax treatment will vary on a state by state basis. The state tax treatment of K-12 withdrawals is under review by many states. Account owners should consult with a qualified tax advisor prior to making such withdrawals as they may be subject to adverse tax consequences. Earnings on non-qualified distributions will be subject to income tax and a 10% federal income tax penalty. Note, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 signed into law Friday, December 20, 2019, expands the definition of qualified higher education expenses for federal income tax purposes to include certain costs associated with qualifying apprenticeship programs and up to $10,000 (lifetime limit per individual) in amounts paid towards qualified student loans of the 529 plan designated beneficiary (or such beneficiary’s sibling). Note, however, using 529 plan distributions to repay qualified student loans may impact the deductible of student loan interest. This new provision applies to 529 plan distributions made after December 31, 2018. The state tax treatment of 529 plans (including the state tax treatment of contributions and distributions) may be different from the federal tax treatment and may vary based on the particular 529 plan in which you participate and your state of residence. If the applicable state tax law does not conform with the federal tax law, 529 plan distributions used to pay certain expenses, such as principal and interest on qualified student loans and/or qualifying apprenticeship costs, may not be considered qualified expenses for state tax purposes and may result in adverse state tax consequences to the account owner or designated beneficiary.
4 This change to 529 plan assets is effective January 2024. Please consult with your tax advisor.
5 This material does not address the impact of state and local income taxes. The state and local income tax treatment of a 529 plan may differ from the federal tax treatment. You should consult with and rely on your own independent tax advisor.
6 IRS Internal Revenue Bulletin (Rev. Proc. 2025-45) states that the law “amends § 2010(c)(3) by increasing the basic exclusion amount to $15,000,000 for calendar year 2026” and that the amount “will be adjusted for inflation for calendar year 2027 and future years.” (irs.gov)
7Do You Have to Pay Gift Taxes on 529 Plan Contributions?
8If the donor were to die before the five-year period is done, a prorated portion of the contribution would be “recaptured” into the estate for estate tax purposes.
9Although the rules may vary slightly by state, generally, a 529 account owned by a parent for a dependent student is reported on the federal financial-aid application (FAFSA) as a parental asset and is assessed at a (maximum) 5.64% rate in determining the student’s expected family contribution. Source: Saving for College, Does a 529 Plan Affect Financial Aid? By Jeffrey Trull, Sept. 8, 2025 https://www.savingforcollege.com/article/yes-your-529-plan-will-affect-financial-aid
For more information on the Morgan Stanley National Advisory 529 Plan clients need to see the applicable ADV brochure available at www.morganstanley.com/ADV.
Disclosures
The Morgan Stanley National Advisory 529 Plan Description contains more information on investment options, risk factors, fees and expenses, and potential tax consequences, which should be carefully considered before investing. Investors can obtain a 529 Plan Description from their Financial Advisor and should read it carefully before investing.
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 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 529 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 and the 529 Plan.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”) is the manager of the 529 Plan and is responsible for its administration, distribution and investment management. Morgan Stanley does not provide tax and/or legal advice to investors in the 529 Plan. Investors should consult their personal tax advisor for tax-related matters and their attorney for legal matters. For more information, please see the applicable Morgan Stanley ADV brochure at https://www.morganstanley.com/wealth-investmentsolutions/advbrochures.
The Morgan Stanley National Advisory 529 Plan is a proprietary offering available exclusively to Morgan Stanley advisory account clients. The Plan is not transferable to other intermediaries.
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.
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.
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. Investors should review a Program Disclosure Statement, which contains more information on investment options, risks factors, fees and expenses and possible tax consequences. Investors should read the Program Disclosure Statement carefully before investing.
When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
Consolidation is not right for everyone, so you should carefully consider your options. Before deciding whether to retain assets in a retirement plan account through a former employer, roll them over to a qualified retirement plan account through a new employer (if one is available and rollovers are permitted), or roll them over to an IRA, an investor should consider all his or her options and the various factors including, but not limited to, the differences in investment options, fees and expenses, services, the exceptions to the early withdrawal penalties, protection from creditors and legal judgments, required minimum distributions, the tax treatment of employer stock (if held in the qualified retirement pan account), and the availability of plan loans (i.e., loans are not permitted from IRAs, and the availability of loans from a qualified retirement plan will depend on the terms of the plan). For additional information, visit the FINRA Website
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