529 Plans: A powerful tool to save for education

Key Takeaways:

• Rising education costs have made paying for it a greater challenge but investing in a 529 Plan can help.
• Investments in 529 Plans grow tax-deferred, and some states also offer tax deductions or credits for such contributions.
• You may transfer certain unused 529 Plan assets into a Roth IRA without triggering a tax bill or penalty, subject to certain limitations and requirements.

Of all the things that keep parents awake at night, looming college costs may be among the most daunting. For the 2024-2025 school year, the costs for a four-year private college averaged $56,390 per year for tuition, fees, room and board, books and supplies, transportation, and other expenses.¹ That amounts to more than $225,000 to cover a four-year degree. And that’s for just one child.

With costs so high, many students and parents are taking on significant student loan debt to pay for college. Half of those who graduated college in 2023 did so with loans, with an average debt burden of $29,300.²

If you’re on track with your retirement savings, starting the process of saving for the education costs of a child or grandchild early may limit how much your future student will have to borrow. Consider putting those funds into a 529 education plan, a tax-advantaged way to invest now, toward future education expenses.

Named after Section 529 of the Internal Revenue Code, a 529 Plan is an account you can use to invest for future education expenses. A 529 Plan creates an incentive for families to invest toward education costs because earnings in the plan are tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board, and supplies.

Many states provide additional benefits, such as state tax deductions or tax credits. Additionally, assets in a 529 Plan may remain outside of the account owner’s estate for estate-tax purposes.

A 529 Plan can also offer flexibility. Some (Uniform Transfer to Minors “UTMA” accounts) investment account types used for education funding require the assets therein to be turned over to the named beneficiary when the beneficiary reaches a certain age provided under relevant state law. If you open a 529 Plan, as the owner of the account, you continue to make all the decisions and retain control over the assets. For example, if your daughter earns a scholarship and won’t fully drawdown the money in the account, you can choose a different beneficiary within the same family, or even use the funds for your own education needs. Scholarship money earned can be redeemed from the 529 without penalty; and would be taxed only on the earnings portion of the withdrawal.

You may also be able to use proceeds up to $10,000 to pay down student loans or to transfer up to $35,000 in unused assets into a Roth IRA account established for the designated beneficiary. In addition to college costs, up to $10,000 per beneficiary per year can be withdrawn federally tax-free to pay for eligible K-12 tuition. Note: State tax treatment varies.³

Still, many are unaware of 529 Plans and their expanding benefits. Just over a third of families currently use 529 Plan funds to pay for their children’s education.⁴ Many people want to save and invest for college, but don’t know where to start, says Jennifer Tierney, Executive Director, Morgan Stanley Wealth Management Investment Solutions and Co-Head of Product Development for Traditional Investment Products.

“Many of our clients are grandparents looking to put themselves in a position to help with their grandchildren’s future education expenses,” Tierney says. “We encourage them to take a look at 529 Plans, which may not have been on their radar the last time they were looking at how to pay for college.”

In 2025, annual contributions to each 529 account of up to $19,000, or $38,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. Additionally, 529 Plans employ a special rule: an upfront contribution in one year of up to $95,000 for single filers, or $190,000 for married couples filing jointly—the equivalent of five years' contributions—may be made without any gift tax consequences.⁵

When it comes to investing in a 529 Plan, typically the earlier you can start putting money away, the better to allow for more tax-free compounding.

Still, it’s never too late to start saving and investing for college. Money set aside as late as when a child is 16 will still have several years to grow, assuming you use those funds to pay for the latter years of undergraduate expenses, or even graduate school. Funding can continue while the student is in school, and beyond, as well.

Additional Resources:

Morgan Stanley "Understanding 529 Plans", https://www.morganstanley.com/content/dam/msdotcom/en/wealth-investmentsolutions/pdfs/529plan.pdf

Article Footnotes

¹ College Board “Trends in College Pricing and Student Aid 2024”, accessed March 20, 2025, https://research.collegeboard.org/media/pdf/Trends-in-College-Pricing-and-Student-Aid-2024-ADA.pdf

²  Ibid

³ Saving For College “Using 529 Savings Plans for Private School Tuition”, https://www.savingforcollege.com/article/529-savings-plans-and-private-school-tuition

⁴ IRS, “IRS provides tax inflation adjustments for tax year 2025”, https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025

⁵ The filing of IRS form 709 is required to validate the five-year election. For more information, please see the applicable Morgan Stanley ADV brochure: www.ms.com/adv

The source of this Morgan Stanley article, 529 Plans: A Powerful Tool to Save for Education, was published on May 1, 2025.

CRC# 4507838 05/2025