529 Plan Best Practices: What CPAs Should Know

As higher education costs continue to rise, 529 plans remain a leading tax-advantaged way for families to save for education. Understanding how they work helps CPAs identify planning opportunities that offer both short-term tax benefits and long-term tax efficiency. 

529 plans are established under Section 529 of the Internal Revenue Code and administered by the states. All 50 states and the District of Columbia sponsor at least one plan, and taxpayers are generally free to invest in any state’s program regardless of where they live. This allows families to evaluate plans based on investment options, fees and tax benefits.

The Core Federal Tax Advantage

The structure is straightforward: contributions are made with after-tax dollars, assets grow tax-deferred and withdrawals are tax-free when used for qualified education expenses.

Traditionally, those expenses included tuition, fees, books, supplies, computers, and room and board for students enrolled at least half-time. Federal legislation has since expanded eligible uses. Beginning in 2026, the maximum tax-free distribution for K-12 expenses increased from $10,000 to $20,000 per beneficiary per year, and eligible expenses now include curriculum materials, tutoring, standardized testing fees and certain online educational tools. Funds may also be used for registered apprenticeship programs, certain vocational and credentialing programs and up to $10,000 of student loan repayment.

However, state tax treatment may differ. Many states have not conformed to the expanded federal definition, meaning withdrawals that are federally tax-free could still trigger state income tax or penalties. Families should review both federal and state rules before using 529 funds for expenses outside traditional college costs. In practice, most planners still recommend preserving the account primarily for college funding. 

State Tax Benefits and Why Plan Selection Matters 

Many states offer deductions or credits for contributions to their in-state plan. New Jersey joined that group with the New Jersey College Affordability Act: beginning in tax year 2022, taxpayers with gross income of $200,000 or less may deduct up to $10,000 per year in contributions to the NJBEST plan. The deduction applies only to the New Jersey-sponsored plan. By contrast, Pennsylvania allows residents to deduct contributions to any 529 plan. 

Estate Planning and Funding Strategies

529 plans can also play a role in estate planning. Contributions are treated as completed gifts for federal gift-tax purposes, yet the owner can still change beneficiaries, adjust investments or withdraw funds. The ability to remove assets from the contributor’s taxable estate while the account owner retains control is an unusual combi nation in planning. 

For those looking to accelerate savings, the tax code permits front-loading up to five years of annual gift-tax exclusions into a single contribution. In 2026, that means up to $95,000 per beneficiary or $190,000 for married couples using gift-splitting. If the contributor dies within the five-year window, a prorated portion would be pulled back into the estate. 

Managing the Risk of Overfunding 

Some families hesitate to contribute heavily out of concern about overfunding. If funds are withdrawn for non-qualified purposes, the earnings portion is subject to ordinary income tax and a 10% federal penalty. However, the following relief valves exist:

• Beneficiaries can be changed to a qualifying family member without tax consequences, allowing funds to shift to siblings, cousins or future generations. 
• Beginning in 2024, up to $35,000 of unused 529 assets can be rolled into a Roth IRA for the beneficiary, with the following conditions: the account has to be open for at least 15 years, contributions made within the last five years are excluded and transfers remain subject to annual Roth IRA contribution limits.

Current IRS guidance has not clarified whether changing the beneficiary resets the 15-year clock.

A Final Planning Perspective

529 plans remain one of the most tax-efficient ways to save for education, but they work best within the broader financial picture. For New Jersey taxpayers, three considerations stand out: whether the taxpayer qualifies for the NJBEST deduction, whether retirement savings are adequately funded before prioritizing education savings and whether the strategy preserves flexibility if plans change.

Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. Depending on your state of residence and the state of residence of the beneficiary, the plan may or may not be eligible for state tax benefits. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal or financial advisor for more information prior to investing. Securities and Investment Advisory Services offered through Osaic Wealth, Inc., Member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth.

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Justin W. Rice Justin Rice, CFP®, CSLP®, is a financial advisor at Personal Wealth Strategies. More content by Justin W. Rice: Don’t Fall Off the Cliff: Helping Clients Understand Tax Cliffs in Income Planning Strategic Expansion: Case Studies in Integrating Financial Planning Services for CPA Firms Learn more from Justin W. Rice: 1/12/27 - Wealth Management 1/28/27 - Wealth Management