529 plan rules explained: contributions, withdrawals, and SECURE 2.0

How it’s calculated

529 Future Value (monthly contributions, compounded):

  r  = annual return ÷ 12        (monthly rate)
  n  = years × 12                (number of months)
  P  = monthly contribution

  FV = P × [ ((1 + r)^n − 1) ÷ r ]

Tax-free earnings (the core 529 advantage):

  Earnings    = FV − Total Contributions
  Tax Saved   = Earnings × Capital-Gains Rate
                (vs. the same money in a taxable brokerage account)

State deduction value (where offered):

  State Benefit = Annual Contribution × State Marginal Tax Rate

Worked example ($300/mo for 18 years at 6.5%):
  Total contributions      $300 × 216           = $64,800
  Future value (6.5%)                            ≈ $123,500
  Tax-free earnings        $123,500 − $64,800    ≈ $58,700
  Tax saved at 15% LTCG    $58,700 × 0.15        ≈ $8,800
  (plus any state deduction, year by year)

Assumptions:investment returns are assumptions, not guarantees — markets vary year to year and a 529 can lose value. Tax-free treatment of earnings requires that withdrawals go to qualified education expenses per IRC § 529; non-qualified earnings are taxed plus a 10% penalty. State deduction value varies — 34 states plus DC offer one, and most restrict it to their own plan. The 529-to-Roth rollover requires a 15-year-old account and the beneficiary’s earned income, with a $35,000 lifetime cap per SECURE Act 2.0. Capital-gains comparison uses the long-term rate (0/15/20% federally) that would otherwise apply in a taxable account. Read our full methodology, or run your own numbers in the 529 Plan Growth & Withdrawal Calculator.

The federal tax mechanics of a 529 plan

529 plans are established under IRC § 529 as ‘qualified tuition programs.’ The federal tax treatment:

Contributions: NOT federally deductible (unlike a 401(k) or traditional IRA). You contribute after-tax dollars.

Growth: tax-deferred — no federal tax on dividends, interest, or capital gains inside the account. This is the core advantage over a taxable brokerage account.

Qualified withdrawals: federally tax-free. The earnings portion of withdrawals for qualified education expenses are excluded from gross income under IRC § 529(c)(3)(B).

Non-qualified withdrawals: the earnings portion is subject to income tax plus a 10% additional tax (IRC § 529(c)(6)). Exceptions to the 10% tax (but not income tax on earnings): death, disability, receipt of a scholarship (penalty-free up to the scholarship amount), attendance at a U.S. military academy.

State tax treatment varies: 34 states plus DC offer some form of state income tax deduction for 529 contributions. Some states (AZ, KS, ME, MO, MT, PA) allow deductions for contributions to any state's plan; most restrict the deduction to contributions to their own state's plan.

Qualified education expenses: what counts and what doesn't

Per IRC § 529(e)(3) and IRS Publication 970:

Qualified expenses (federal level): - Tuition and mandatory fees at eligible educational institutions - Room and board (for students enrolled at least half-time; limited to the school's published room and board allowance or actual cost, whichever is lower) - Books, supplies, and required equipment - Special needs services (for students with special needs) - Computers, software, and internet access if required for enrollment - K-12 tuition: up to $10,000/year per beneficiary (since Tax Cuts and Jobs Act 2017; state conformity varies — 17 states don't conform as of 2024) - Apprenticeship programs: registered apprenticeship programs (since SECURE Act 2019) - Student loan repayment: up to $10,000 lifetime per beneficiary (and $10,000 per sibling) (since SECURE Act 2019)

Not qualified: transportation and commuting, health insurance, sports and recreation, personal expenses, college application fees, standardized test prep, room and board above the school's published cost-of-attendance allowance.

The SECURE Act 2.0 Roth IRA rollover: the rule that changed everything

SECURE Act 2.0 (Pub. L. 117-328, signed December 29, 2022, effective January 1, 2024) added IRC § 529(c)(3)(E), allowing rollovers from 529 accounts to Roth IRAs under specific conditions:

Key rules: - The 529 account must have been open for at least 15 years - Lifetime rollover limit: $35,000 per beneficiary (per the 529 account — so multiple 529 accounts for the same beneficiary share the $35,000 limit) - Annual rollover amount is limited to the Roth IRA contribution limit for that year (minus other Roth IRA contributions) — $7,000 in 2024 - The beneficiary of the 529 must have earned income at least equal to the rollover amount - Contributions made to the 529 within the past 5 years (and earnings on those contributions) cannot be rolled over

Why this matters: It eliminates the biggest fear for 529 oversavers — the money is stranded if the child doesn't use it for education. Now, unused 529 funds can flow tax-free into the child's retirement account, where they continue to grow tax-free. A $35,000 Roth IRA funded by age 22 grows to ~$560,000 by age 67 at 7% real return — one of the best head starts on retirement savings imaginable.

A worked example: $300/month from birth to college

In my experience, the gap between “529s sound complicated” and “529s are obviously worth it” closes the moment you run real numbers. So here is the example I keep coming back to when families ask whether it’s worth opening one.

Suppose you open a 529 at a child’s birth and contribute $300/month for 18 years — a total of $64,800 of your own after-tax money. At a 6.5% average annual return, that grows to roughly $123,500 by the time the child starts college. About $58,700 of that balance is earnings, and under IRC § 529 every dollar of those earnings comes out tax-free when spent on qualified expenses. Had you saved the same way in a taxable brokerage account, that $58,700 of gains would be exposed to long-term capital-gains tax — roughly $8,800 at the 15% federal rate, before any state tax. The 529 quietly hands that back to you.

I’ve found the state deduction is the most underrated part of the math. If you live in a state with, say, a 5% income tax and a deduction for your own plan’s contributions, that $3,600/year of contributions is worth about $180/year in state tax savings — an immediate, guaranteed return on the money before it earns a single dollar in the market. Over 18 years that’s another ~$3,200 on top of the federal tax-free growth.

And I’ve seen the “what if they don’t go to college?” objection dissolve since SECURE Act 2.0. Even in the worst case — a child who skips college entirely — you can change the beneficiary at no cost, or roll up to $35,000 into their Roth IRA once the account is 15 years old. The downside that used to scare families away is now mostly gone.

How to compare 529 plans across states

You are not required to use your home state's 529 plan. Any state's plan can be used for any school in any state. How to choose:

1. Start with your state's deduction: if your state offers a deduction for your own plan's contributions, calculate the after-tax value. Example: $10,000 contribution, 5% state tax rate, $500 state tax savings = effectively a 5% return on your contribution before the first day of investment.

2. Evaluate investment options: if your state's deduction equals the in-state plan's advantage, compare investment options and expense ratios. Low-cost index funds from Vanguard, Fidelity, or Schwab (via state plans that use them) are preferable to high-fee actively managed options.

3. If your state has no deduction (or allows out-of-state deductions): go directly to the lowest-cost plan with the best index fund options. Nevada's Vanguard plan and Utah's plan consistently rank highly on Morningstar's annual 529 ratings.

4. Consider state tax conformity for K-12: if you plan to use 529 funds for private K-12 tuition, verify your state conforms to the federal $10,000/year K-12 rule. If not, using 529 funds for K-12 tuition may trigger state income tax and penalties.

The 529 Growth & Withdrawal Calculator factors in your state's specific deduction (or lack thereof) to compute the true after-tax return on contributions.

Primary sources cited

• IRC § 529 — Qualified Tuition Programs
• IRS Publication 970 — Tax Benefits for Education
• SECURE Act 2.0 (Pub. L. 117-328) — 529 Roth IRA Rollover Provision