Advisors weigh pros and cons of 529 plans

With the school year ending and "529 Day" coming up on May 29, many parents are considering how to plan for one of life's biggest expenses: college tuition. Education savings plans called 529 plans are a well-liked way to save for school-related expenses while receiving tax benefits, but advisors say there are some downsides — and alternatives — to consider.

Section 529 plans, or qualified tuition programs, are state-sponsored investment accounts that allow contributors to cover beneficiaries' qualified educational expenses, such as higher education tuition and schooling from kindergarten through 12th grade. Earnings grow tax free in the account, and distributions aren't taxable unless they're used for nonqualified expenses.  Qualified expenses are limited to $20,000 per year, and contributions are subject to the annual gift tax limit of $19,000. Many states offer deductions for 529 contributions.

The savings plans have remained popular, growing in number and assets over the past decade. As of Dec. 31, 2025, there were about 17.7 million accounts with nearly $603 billion in assets under management, according to the College Savings Plans Network.

Financial Planning spoke with advisors about pros and cons of the accounts.

Why clients might opt for 529 plans

"They're basically considered a wonderful thing," Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting, said in an interview. 

One advantage of 529 plans, especially for high net worth clients, is that they have no income limits, unlike Roth IRAs, for example. Another advantage is flexibility in plan selection, though clients often misunderstand what's available to them.

"The biggest fallacy I see out there is people think they have to use their own state's 529 plan," Frani Feit, senior wealth advisor at Ridgewood, New Jersey-based Advisors Capital Management, said in an interview. "That is not accurate."

Some states' plans are available to residents of any state, giving parents flexibility to look at differences between specific programs and select the best fit for their situation.

Another point of flexibility is if the beneficiary does not fully use the funds in the 529 plan, another family member, such as a younger sibling, can be made the beneficiary.

Multiple people can fund an account but should coordinate with each other to avoid overcontributing.

"You have to be careful and have all this coordinated because, if the grandparent is doing it, and the parent is doing it … and not coordinating with each other, you might exceed some of these caps," which vary by state, Luscombe said.

READ MORE: "Ask an advisor: Our baby is coming with a windfall. How should we invest?"

A federal law passed in July 2025 expanded eligible K-12 expenses for 529s. Previously, one downside of the plans was that families could end up with leftover funds and limited ways to use them without penalty. Expanding the eligible uses helps diminish that problem. Contributing a smaller total amount to the 529 could also help.

If a client is invested in a savings plan they're unhappy with, an advisor can investigate whether it's possible to roll funds to a different 529 plan. And if a beneficiary develops a disability, the funds may be moved to an ABLE account, which are meant to support those with disabilities, Luscombe said.

Though 529 plans have many upsides for clients, there are other options for advisors to consider. There are multiple tax benefits related to educational expenses, Luscombe said, such as the American opportunity tax credit, the lifetime learning credit, a student loan interest deduction and a tax break for savings bonds used for education.

READ MORE: "How planners say parents should prepare kids for the cost of college"

When a 529 plan might not be the best choice

Despite expansions in recent years, 529 plans still have limitations.

For example, there may be restrictions on using 529 funds for public universities within the state where the account was established, Luscombe said.

"If the student wants total flexibility on where they go to school, they might want to opt for a plan that doesn't have those state restrictions," he said.

Broader options for saving money to benefit children include taking advantage of the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).

"A lot of my clients lately are shying away [from 529s] and using UTMA ... because they want the money to be able to be used for additional things," Feit said. "UTMA can be used for day camp, overnight camp, swim lessons, this, that, anything. There's no limits on the UTMA. The child is the owner, but the parent or grandparent is the custodian."

A downside to an UTMA account, however, is the so-called kiddie tax, which is intended to prevent parents from avoiding higher tax brackets by shifting investments to children. A child's unearned income above certain thresholds can be taxed at the parents' marginal tax rate.