Saving for College: Financial Strategies and Best Practices

Key Takeaways

• There is no federal annual contribution limit for 529 plans. The federal gift tax annual exclusion is the practical guideline, and families who want to make a larger contribution can use a special five-year election. 

• Money left in a 529 plan doesn’t necessarily go to waste. You can change the beneficiary, use certain exceptions, or potentially roll a limited amount into the beneficiary’s Roth IRA. 

• Starting later than you’d hoped is okay. Depending on your timeline and goals, a taxable brokerage account may offer more flexibility than a 529 plan. 

• Grandparent-owned 529 plans are treated differently under the current FAFSA rules than they were under previous rules, making ownership a planning consideration rather than an automatic financial-aid concern. 

Saving for college means planning for a future you can’t fully predict. Tuition costs can change, financial aid can be difficult to anticipate, and your own financial priorities may shift along the way. A thoughtful college savings strategy starts with deciding when to begin, how much you can afford to save, and which account best fits your situation. 

When to Start Saving for College 

The earlier you start saving for college, the more time your money has to grow. Even smaller contributions made when your child is young can add up over time, potentially making a meaningful difference compared with waiting until high school to save larger amounts. 

To set a target, picture what college might look like for your family: public or private, in-state or out of state, and how long the program might last. A college savings calculator can help turn those assumptions into a monthly savings goal. From there, consider setting up automatic transfers from your checking account to your college savings account so contributions happen consistently without requiring a monthly decision. 

Your plan should also evolve as your circumstances change. Review your college savings strategy periodically and adjust it as your income, anticipated college costs, or your child’s educational goals change.

Comparing College Savings Account Options 

No single account is best for everyone. Each option offers a different balance of flexibility, investment choices, and tax considerations. The useful question is which trade-off best fits your timeline and financial situation. 

• 529 college savings plans are designed specifically for education savings. Investment earnings can grow tax-free, and withdrawals are generally tax-free when used for qualified education expenses.¹ Some states also offer a state tax deduction or other tax benefit for contributions, subject to state-specific rules. If your child doesn’t attend college, you may be able to change the beneficiary to another qualifying family member. Certain scholarship-related withdrawals may also qualify for an exception to the additional federal tax on earnings.¹ 

• Taxable brokerage accounts can be used for a wide range of goals, giving you more flexibility than a 529 plan. That flexibility generally comes with fewer tax advantages. Investment income and realized gains may be taxable. If you’re starting later in your child’s life or aren’t sure how much you’ll ultimately need for education, a taxable brokerage account may be an option worth considering. 

• Custodial accounts (UGMA/UTMA) can be used for expenses that benefit the child, not just education. Investment income may be taxable, and these assets are generally treated as the student’s assets for federal financial aid purposes. Once the child reaches the applicable age under state law, they gain control of the account.² 

• High-yield savings accounts and CDs can provide a place to hold college savings with less market risk than an investment account. They may be more appropriate for money you’ll need in the near term, particularly as college approaches. 

529 Plan Contribution Limits and Gift Tax Rules 

Many people assume a 529 plan has an annual contribution limit, similar to an IRA. Federal law does not set an annual contribution limit for 529 plans. Instead, the federal gift tax annual exclusion can be an important consideration when making larger contributions. In 2026, the annual exclusion is $19,000 per donor, per beneficiary, or $38,000 for a married couple when gift splitting applies. Contributions above the annual exclusion may require a federal gift tax return, although that does not necessarily mean gift tax is owed.³ 

A five-year election can allow you to spread a larger 529 contribution over five years for federal gift tax purposes. In 2026, that can allow an individual to contribute up to $95,000 for a beneficiary, or up to $190,000 for a married couple when the applicable requirements are met.³ 

It’s also important to distinguish between federal gift tax rules and a 529 plan’s own account limits. Each state-sponsored 529 plan sets an aggregate account limit for a beneficiary, and state tax deductions or credits may have separate contribution limits. Check your state’s rules before making a larger contribution. 

If you’re considering a larger gift, work with your advisor to coordinate education funding with the rest of your financial and estate plan.

Options for Unused 529 Funds 

Families often hesitate to use a 529 plan because they’re worried about what happens if their child doesn’t use all the money. Fortunately, there are several options. 

Change the beneficiary. You can generally change the beneficiary to another qualifying family member, allowing the money to remain available for education. 

Use the scholarship exception. If your child receives a scholarship, you may be able to withdraw an amount up to the scholarship without the additional federal tax on earnings that can apply to nonqualified withdrawals.¹ 

Roll the money into a Roth IRA. SECURE 2.0 created a limited opportunity to roll unused 529 funds into the beneficiary’s Roth IRA. Several requirements apply: 

• The 529 account generally must have been open for at least 15 years, and amounts attributable to contributions made during the preceding five years, including related earnings, are not eligible for the rollover.⁴ 

• The lifetime rollover limit is $35,000 per beneficiary. The amount that can be rolled over in a given year is also limited by the annual Roth IRA contribution limit.⁴ 

• For 2026, the annual IRA contribution limit is $7,500, subject to the individual’s taxable compensation and other applicable IRA rules.⁵ 

• The Roth IRA must be maintained for the 529 beneficiary, and the rollover must be made through a direct trustee-to-trustee transfer.⁴ 

Take a nonqualified withdrawal. This is generally the least tax-efficient option. The earnings portion of a nonqualified distribution may be subject to federal income tax and an additional 10% tax, subject to exceptions.⁶ 

Because tax treatment can vary based on the circumstances, consider discussing a nonqualified withdrawal with your tax professional before taking one.

Financial Aid and Scholarship Planning 

Encourage your child to complete the Free Application for Federal Student Aid (FAFSA) as early as possible. The FAFSA is used to determine eligibility for federal student aid, and states and schools may also use FAFSA information when determining their own aid.⁷ 

At the same time, look for scholarships and grants from private organizations, community groups, and academic institutions. Unlike loans, scholarships and grants generally do not need to be repaid. 

How you save can also affect financial aid. For example, under the FAFSA rules, a parent-owned 529 plan is generally reported as a parent asset when parent information is required, while UGMA and UTMA accounts are treated as student assets.² 

Finally, bring your child into the process. Understanding what college costs can give them a stronger sense of ownership over their education, and researching scholarships can be part of their role in preparing for college. 

Grandparent-Owned 529 Plans and Estate Planning 

Grandparents can play an important role in funding a grandchild’s education, but account ownership comes with its own planning considerations. 

Under the FAFSA rules that took effect with the 2024–25 FAFSA, distributions from grandparent-owned 529 plans are no longer reported as untaxed student income in the way they were under the previous FAFSA methodology. Grandparent-owned 529 assets also are not reported as parent or student assets on the FAFSA.⁸ 

A few other factors still matter when deciding who should own the account: 

• State tax benefits. A state tax deduction or credit for 529 contributions may depend on who owns the account, and rules vary by state. 

• Control. The account owner generally controls the account and can make decisions about distributions and beneficiary changes. 

• Estate planning. Contributions to a 529 are generally treated as completed gifts for federal gift and estate tax purposes.⁹ For families incorporating education funding into a broader estate plan, ownership can therefore be part of a larger gifting strategy. 

That last point turns a college savings question into a multigenerational planning conversation. If you’re weighing how education funding fits with gifting and estate goals, your advisor can help you look at the whole picture. 

Start early when you can, choose an account that fits your timeline and goals, and revisit your college savings strategy as your family’s circumstances change. 

Frequently Asked Questions

How much can you contribute to a 529 plan in 2026? 

There is no federal annual contribution limit for a 529 plan. However, the federal gift tax annual exclusion is $19,000 per donor, per beneficiary in 2026. A five-year election can allow an individual to contribute up to $95,000 for a beneficiary, subject to the applicable rules.³ 

Is there a federal limit on how much you can put in a 529? 

No. Federal law does not impose an annual contribution limit on 529 plans. However, gift tax rules may affect how larger contributions are reported, and each state-sponsored 529 plan has its own aggregate account limit.³ 

What happens if my child doesn’t use their 529 plan? 

You may be able to change the beneficiary to another qualifying family member, take a scholarship-related withdrawal, or roll a limited amount into the beneficiary’s Roth IRA if the applicable requirements are met.⁴ 

Can you roll a 529 plan into a Roth IRA? 

Yes, but only under specific conditions. A 529 account generally must have been open for at least 15 years, the lifetime rollover limit is $35,000 per beneficiary, and the rollover is subject to the annual Roth IRA contribution limit and other requirements.⁴ 

Does a 529 plan affect financial aid eligibility? 

The FAFSA treatment changed beginning with the 2024–25 FAFSA. Distributions from grandparent-owned 529 plans are no longer reported as untaxed student income under the current FAFSA methodology, and the account itself is not reported as a student or parent asset.⁸ Other aspects of account ownership, including state tax treatment and control of the account, may still be relevant. 

Do grandparent-owned 529 plans hurt financial aid? 

Yes. How a 529 plan is owned can affect how it is treated on the FAFSA. A parent-owned 529 is generally reported as a parent asset when parent information is required, while a UGMA or UTMA account is treated as a student asset.² 

Citations

1. Internal Revenue Service, “Topic No. 313, Qualified Tuition Programs (QTPs).” 
2. U.S. Department of Education, Federal Student Aid, FAFSA guidance on reporting education savings accounts and UGMA/UTMA accounts. 
3. Internal Revenue Service, gift tax guidance and 2026 annual exclusion rules. 
4. Internal Revenue Service, “Topic No. 313, Qualified Tuition Programs (QTPs)” and Publication 590-A, including 529-to-Roth IRA rollover requirements. 
5. Internal Revenue Service, 2026 IRA contribution limits. 
6. Internal Revenue Service, Publication 970, Tax Benefits for Education. 
7. U.S. Department of Education, Federal Student Aid, FAFSA guidance. 
8. Saving for College, “FAFSA Simplification Act Makes Grandparent-Owned 529 Plans More Attractive.” 
9. Saving for College, “Are 529 plan assets subject to estate tax or inheritance tax?”