Are 529 Contributions Tax Deductible in California?

Contributions to a 529 plan are not tax-deductible on a California state income tax return. While an immediate deduction on your state tax filing is not available in California, 529 plans still offer significant tax advantages. The primary benefits are realized when the funds grow and when they are withdrawn for qualified education costs, rather than when they are contributed.

Federal Tax Benefits of a 529 Plan

The main appeal of a 529 plan is its federal tax advantages. The first benefit is tax-deferred growth, meaning that earnings from investments within the account are not subject to annual federal income taxes. This allows the account’s value to compound more rapidly over time.

This tax-deferred status becomes tax-free when the money is used for qualified educational costs. Withdrawals from a 529 plan are exempt from federal income tax as long as they are used for qualified higher education expenses. These expenses include tuition and fees, room and board for students enrolled at least half-time, books, supplies, and required equipment.

Under federal gift tax rules, an individual can contribute up to $19,000 per beneficiary in 2025 without incurring gift taxes. A feature of 529 plans allows for “superfunding,” where you can make five years’ worth of contributions at once—up to $95,000 for an individual or $190,000 for a married couple—without triggering the gift tax. This is provided no other gifts are made to that beneficiary during the five-year period.

California’s Tax Treatment of 529 Plans

California’s state tax law aligns with federal rules regarding the growth and withdrawal of 529 plan funds. Although the state does not offer a deduction for contributions, investment growth is not subject to California state income tax. When you withdraw funds for qualified higher education expenses, those distributions are also free from California state income tax.

California’s state-sponsored plan, the ScholarShare 529 Plan, also does not provide a deduction for contributions. Because California does not offer a state tax deduction, residents are not financially penalized for choosing an out-of-state 529 plan. This gives Californians the flexibility to shop for plans with the best investment options or lowest fees, regardless of the sponsoring state.

Tax Consequences of Non-Qualified Withdrawals

Using 529 plan funds for non-qualified expenses triggers tax consequences. These penalties apply only to the earnings portion of the withdrawal, not the original contributions, which can be withdrawn tax- and penalty-free. The tax treatment for a non-qualified distribution applies at both the federal and state levels.

At the federal level, the earnings portion of a non-qualified withdrawal is subject to ordinary income tax. In addition, the IRS generally imposes a 10% penalty on these earnings. This federal penalty is waived in certain circumstances, such as the death or disability of the beneficiary, or if the beneficiary receives a scholarship. In these cases, the earnings are still subject to income tax, but the additional 10% penalty does not apply.

California imposes its own taxes on non-qualified distributions. The earnings are subject to California’s ordinary income tax rates, and on top of this, California adds a 2.5% state penalty on the earnings. The combined federal and state taxes and penalties can substantially reduce the net amount received from a non-qualified withdrawal.