American households looking to save for their children's education are increasingly turning to tax-advantaged 529 accounts, which offer a flexible and powerful way to make their savings go further. These accounts, typically established by parents, guardians, or grandparents for minor children, allow savings to grow on a tax-deferred basis. Crucially, funds can be withdrawn tax-free when used for qualified educational expenses, a feature that can significantly boost the amount available for tuition and other costs. Individuals can also open 529 accounts to save for their own educational pursuits.
Thomas Psaltis, director of education savings programs at Bank of America Merrill Lynch, emphasized the importance of these plans, stating, "529s are the optimal vehicle for education savings," as told to FOX Business in an interview. He further elaborated on the benefits, noting, "That growth in earnings, if used tax-free, can have a really significant impact on providing more money for education in the future for children and grandchildren, but also help combat the rising tuition costs," he said. This tax-free growth is a key differentiator compared to standard taxable savings accounts.
Since their introduction 30 years ago, 529 plans have seen substantial growth. The industry now boasts approximately 17 million accounts, collectively holding over half a trillion dollars in assets. This expansion reflects a growing awareness of the benefits these plans offer, as well as their increasing versatility.
Beyond the core tax advantages, 529 accounts provide features not always available with other tax-advantaged savings vehicles. Psaltis noted that aside from the core tax-free growth feature, 529 accounts offer other benefits that may not be available to those who use other tax-advantaged savings accounts, as he said. While initially designed for four-year college expenses, the scope of qualified uses has expanded significantly. Recent legislative changes, including provisions within the SECURE 2.0 Act and President Trump's One Big Beautiful Bill, have broadened the definition of qualified expenses. Psaltis explained that these legislative updates now permit the use of 529 funds for K-12 tuition, which has since been expanded under the One Big Beautiful Bill from $10,000 annually to $20,000 to be used for K-12 in private education, even if not used directly for college.
Furthermore, registered apprenticeships and credentialing programs are now recognized as qualified expenses, aligning 529 plans with the growing trend of vocational and trade education. This development is particularly relevant as career paths evolve and more individuals question the value proposition of traditional four-year college degrees.
Advisors at Merrill Lynch encourage clients to prioritize early planning, asserting that 529 plans can effectively meet the education savings needs of individuals across all income levels, as Psaltis said. Despite their long-standing availability, common misconceptions about 529 plans persist. One prevalent myth is the necessity of fully funding a college education before a 529 plan becomes worthwhile. Psaltis cautioned against this belief, stating, "There's this misconception that you have to fully fund college for a 529 plan to be worthwhile, and sometimes that perception can create unnecessary pressure and cause families to delay in getting started," he said.
This delay can lead to missed opportunities for tax-free growth. Families opting for taxable savings instead of a 529 plan may forgo substantial long-term returns that could otherwise be accessed without tax implications. "Families who end up using taxable savings instead of a 529 may be giving up meaningful long-term returns that could be used tax-free," Psaltis said.
Contributions to 529 accounts are treated as taxable gifts, but there are generous limits. Individuals can contribute up to $19,000 per year per beneficiary without incurring gift tax liability. 529 accounts also allow for a strategy known as
