How a 529 Plan Works in 2026: Tax Benefits & Rules

For parents and grandparents who want to help the next generation with education costs, a 529 plan is one of the most tax-efficient tools available. The money grows tax-free, withdrawals for qualifying expenses are tax-free, and Ohio residents may be eligible for a state income tax deduction on contributions.

A rule change that took effect in recent years has also addressed one of the most common concerns about 529 plans: what happens to the money if the beneficiary does not use it for education. Under certain conditions, unused funds can now be rolled into a Roth IRA for the beneficiary.

This post covers how 529 plans work, what has changed, and what families in Ohio should know before opening or contributing to an account.

How does a 529 plan work?

A 529 plan is a tax-advantaged savings account designed for education expenses. Contributions are made with after-tax dollars, meaning there is no federal tax deduction for contributions. However, the money grows tax-free inside the account, and withdrawals used for qualifying education expenses are also tax-free at the federal level.

Qualifying expenses include tuition, fees, room and board, books, and certain other costs at accredited colleges, universities, and vocational schools. Up to $10,000 per year per beneficiary can also be used for K-12 tuition at private or religious schools, following a federal law change in 2019.

Each state administers its own 529 program, though account holders are not required to use their home state's plan. Ohio's plan is called CollegeAdvantage.

What are the tax benefits of a 529 plan in Ohio?

Ohio residents who contribute to the CollegeAdvantage 529 plan may deduct contributions from their Ohio taxable income, up to a limit set by the state. As of 2026, Ohio allows a deduction of up to $4,000 per beneficiary per year, with no limit on carryforward for excess contributions. Confirm current limits with a tax advisor or at ohio529.com, as these figures are subject to change.

Federal tax benefits apply regardless of which state's plan you use. Earnings grow tax-free, and qualified withdrawals are tax-free at the federal level.

For Ohio families, using the CollegeAdvantage plan rather than another state's plan is generally worth considering because of the state deduction.

Can grandparents contribute to a 529 plan?

Yes. Anyone can contribute to a 529 plan for any beneficiary. Grandparents frequently use 529 contributions as part of a gifting and legacy strategy.

Contributions to a 529 qualify as present-interest gifts for annual gift tax exclusion purposes. In 2026, a grandparent can contribute up to $19,000 per grandchild per year without filing a gift tax return. A grandparent couple can contribute up to $38,000 per grandchild per year combined.

There is also a strategy called superfunding that allows a contributor to elect to front-load five years of annual exclusions into a 529 in a single year. In 2026, a single contributor could put up to $95,000 into a grandchild's 529 account at once, treating it as five years of annual exclusion gifts, as long as no additional gifts are made to that beneficiary during the five-year period.

What happens to a 529 if my child does not go to college?

This is the question that has historically made some families hesitant about 529 plans. The concern is reasonable: what if the beneficiary gets a scholarship, chooses not to attend college, or pursues a path that does not require the funds?

There are several options. The beneficiary can be changed to another family member, including a sibling, cousin, or even the account owner. Funds can be held in the account indefinitely in case the beneficiary changes their mind.

And beginning in 2024, under the SECURE 2.0 Act, unused 529 funds that have been in the account for at least 15 years can be rolled into a Roth IRA for the beneficiary.

Can unused 529 funds be rolled into a Roth IRA?

Yes, under certain conditions established by the SECURE 2.0 Act. Beginning in 2024, 529 account owners can roll unused funds into a Roth IRA for the beneficiary without incurring income tax or the 10 percent penalty that would otherwise apply to non-qualified withdrawals.

The conditions include:

• The 529 account must have been open for at least 15 years

• The rollover is subject to annual Roth IRA contribution limits

• The lifetime maximum rollover amount is $35,000 per beneficiary

• The beneficiary must have earned income equal to or exceeding the rollover amount in that year

• Contributions made within the last five years are not eligible

This rule change makes 529 plans more flexible than they have historically been, and reduces the concern about money being trapped if it is not used for education. Consult a tax advisor for guidance specific to your situation.

How does a 529 fit into a retirement and estate plan?

For families approaching retirement, 529 contributions can serve two purposes simultaneously. They provide a tax-advantaged vehicle for supporting a grandchild's education, and they reduce the size of a taxable estate through annual exclusion gifting.

At MPM Wealth Advisors, we often discuss 529 plans as part of a broader legacy and estate planning conversation. The decision of whether to contribute, how much, and through which mechanism works best when it is coordinated with a complete picture of retirement income, estate documents, and other gifting strategies.

If you are thinking about opening or contributing to a 529 and want to understand how it fits into your plan, we are happy to walk through it with you.

529 Plans and College Savings in Toledo, Ohio

Ohio's CollegeAdvantage plan is consistently rated among the stronger state 529 programs nationally, in part because of the state tax deduction available to Ohio residents. For families in Toledo and Northwest Ohio thinking about education savings and legacy planning, it is a practical starting point.

For more information on the CollegeAdvantage plan, visit ohio529.com. For questions about how a 529 fits into your broader financial plan, the MPM team is here to help.

Thinking about a 529 for your family?

Whether you are a grandparent looking to help with education costs or a parent thinking about college savings as part of a legacy plan, we are happy to walk through whether a 529 makes sense for your situation.

Schedule a conversation with the MPM team.