529 Tuition Programs – What You Need to Know

Qualified tuition programs, also called 529 plans, are tax-advantaged plans designed to encourage saving for future education costs. These plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code (surprise!). Speaking of surprises, 2025 research shows that 52 percent of Americans don’t know what 529 plans are and only 14 percent say they have or plan to use a 529 plan. In this article, we’ll discuss what 529 plans are and the pros and cons of creating one.

There are two types of 529 plans: prepaid tuition plans and educational savings plans. States are permitted to offer both types. Qualified educational institutions can only offer a prepaid tuition type of 529 plan.

Prepaid tuition plans allow parents, grandparents, and others to prepay tuition at today’s tuition rates for a student’s use in the future. In general, these plans require that either you or your child be a resident of the state offering the plan, and the student must attend an  eligible in-state university. Most states guarantee that the funds you put into the prepaid plan will keep pace with tuition increases. Typically, prepaid tuition plans do not cover other education expenses such as room and board.

529 saving plans are designed to help save for “qualified college expenses” which generally include tuition, fees, room, board, textbooks, and computers. Generally, savings plans do not limit a student to in-state universities. These plans may also be used to pay for K-12 expenses, but rules for use of the funds for this purpose vary by state. 529 savings plans don’t lock in tuition prices, so there’s a risk that the plan might not grow enough to pay for college.

Tax legislation passed by Congress in July 2025 (Freedom to Invest in Tomorrow’s Workforce Act) expanded the list of qualified 529 expenses to include a broader range of workforce training and credentialing costs. Beginning with distributions made after July 4, 2025, 529 funds can be used for:

• Skilled trades and vocational programs such as HVAC certification, welding, plumbing, electrical work, cosmetology, and others.
• Professional license and certification fees including CPA exam prep and testing fees, bar exam review and registration, and other licensing exams in law, accounting, and finance.
• Required continuing education courses needed to maintain licensure or certification for CPAs, lawyers, nurses, social workers, teachers, real estate agents, financial advisors, and others.
• Books, supplies, and equipment required as a part of qualified credentialing or licensing programs.

Both prepaid tuition and education savings plans are tax-advantaged because:

• After the plan has been established but is not yet being used, earnings on the account are not subject to federal income tax. Earnings may be subject to federal tax on distribution.
• Distributions of funds from the plan used to pay qualified education expenses are not included in a student’s income.
• When 529 savings plan funds are used for college or K-12 qualified expenses, any earnings that are included in distributions are not subject to federal income tax.
• Even if a 529 plan is used to finance a student’s education, the student or the student’s parents may still be eligible to claim the education credits – the American opportunity credit or the lifetime learning credit.
• Although there is no federal tax deduction for contributions to 529 plans, many states, including Arizona, offer a tax deduction for contributions.

The non-tax advantages of 529 plans include the following:

• While a contribution to a 529 plan is considered a gift, you retain a great deal of control over the gift. You can change the beneficiary to certain family members with no tax consequence. You can even take the funds back (subject to income tax and a 10 percent penalty on earnings).
• Anyone can set up a 529 plan. Grandparents, parents, siblings, or even friends can contribute to a 529 plan. You can contribute to a 529 plan even if you are not the owner.
• You can contribute to a 529 plan in any state, not just the state you live in.

The disadvantages of 529 plans include:

• If not used for qualifying educational expenses, you must pay income tax plus a 10 percent penalty on the earnings. All earnings subject to the 10 percent penalty are treated as ordinary income, even if the earnings were capital gains.
• Management fees for a 529 account are typically higher than the fees for comparable investments.
• 529 plans don’t make sense for many families because their savings must be available for multiple uses. For example, you may have to be more focused on saving for retirement than your child’s education. 529 plans don’t allow for flexibility in the use of savings.
• Recreational classes, general career development, or programs without a formal credential typically aren’t included in the definition of qualifying educational expenses.
• Not all states will allow tax-free withdrawals of 529 funds used for postsecondary credentialing expenses as defined by the 2025 federal legislation mentioned above. Be sure to check whether your state has elected to conform with the federal legislation before setting up a 529 plan for your student planning on attending trade school rather than college. Arizona law did not automatically adopt the federal 529 changes, but the Arizona Legislature will likely address conformity in future sessions.
• If your 529 plan is a prepaid tuition plan, you must attend college in the state where your plan was established.
• A 529 plan may adversely affect a student’s ability to qualify for financial aid. 529 savings must be reported as part of a family’s assets on a federal application for student aid (FAFSA). The good news is that starting in 2024-2025, funds in a 529 plan started by a grandparent are no longer required to be reported on the FAFSA.

Like anything having to do with the IRS or taxes, there are many rules and requirements related to establishing and using a 529 plan. We have only mentioned a few here but hope we have given you enough information to allow you to consider whether a 529 plan would be useful to you or your student. If you would like to learn more about setting up and using a 529 plan, please contact us. We would be happy to share our expertise with you.