What Happens to a 529 When Your Child Turns 21?

A 529 plan is a tax-advantaged savings plan designed to help families save for education expenses. This article clarifies the mechanics of 529 plans and outlines the choices available to account owners when a beneficiary reaches adulthood.

529 Plan Control and Qualified Expenses

A 529 plan is owned by the “account owner,” typically a parent or grandparent, not the beneficiary. The account owner maintains full control over the funds, including investment decisions and the ability to withdraw money, regardless of the beneficiary’s age. Reaching age 21 does not automatically transfer control to the beneficiary, nor does it impose federal age limits or trigger mandatory distributions or penalties.

Funds held within a 529 plan must be used for “qualified education expenses” (QEE) to maintain their tax-advantaged status. QEE include tuition and fees at eligible educational institutions, which encompass colleges, universities, vocational schools, and other postsecondary institutions eligible for federal student aid programs. Books, supplies, and equipment, including computers and related technology, are also considered qualified expenses.

Room and board expenses qualify if the student is enrolled at least half-time, with the amount limited by the institution’s cost of attendance. Up to $10,000 per year per beneficiary can be used for K-12 tuition. As of July 4, 2025, the definition of K-12 QEE expanded to include other expenses like books, materials, testing fees, and tutoring, with the total K-12 limit rising to $20,000 annually starting January 1, 2026.

Options for Remaining Funds

Account owners have several options for managing funds in a 529 plan if the original beneficiary no longer needs them for qualified education expenses or if funds remain after their education. One common approach involves changing the beneficiary to another eligible family member. The IRS defines eligible family members broadly to include siblings, stepparents, first cousins, and in-laws of the original beneficiary.

Funds can also be rolled over from one 529 plan to another. This may be done for the same beneficiary or a new one, potentially to access different investment options or state benefits. Rollovers are generally permitted once every 12 months for the same beneficiary and must be completed within 60 days of the withdrawal to avoid tax consequences.

Another option is rolling over 529 funds to an ABLE account for a beneficiary with a disability. This is permissible without tax or penalty, provided the beneficiary meets ABLE eligibility criteria, such as the disability’s onset occurring before age 26. The rollover amount is subject to the annual ABLE account contribution limit.

A newer provision allows for limited rollovers from 529 plans to a Roth IRA for the beneficiary. This option permits a lifetime maximum rollover of $35,000 per beneficiary. Specific conditions apply, including the 529 account needing to have been open for at least 15 years for the current beneficiary. Additionally, contributions and their earnings from the last five years are ineligible for this type of rollover.

Finally, an account owner can choose to take a non-qualified distribution, withdrawing the funds for purposes other than education. This action has specific tax implications.

Tax Treatment of Distributions

The tax treatment of distributions from a 529 plan varies depending on how the funds are used. Distributions applied toward qualified education expenses are tax-free at the federal level. This tax-free status extends to both the original contributions and any earnings within the account.

Non-qualified distributions have different tax consequences. The earnings portion of a non-qualified withdrawal is subject to federal income tax at the account owner’s or beneficiary’s ordinary income tax rate. A 10% federal penalty tax typically applies to these earnings. Exceptions to this 10% penalty include the beneficiary’s death or disability, or if the beneficiary receives a tax-free scholarship, attends a U.S. military academy, or receives employer-provided educational assistance.

Changing the beneficiary to another eligible family member generally does not trigger tax consequences. Similarly, rollovers between 529 plans for the same or a new eligible beneficiary are typically tax-free at the federal level. Rollovers from a 529 plan to an ABLE account are also tax-free and penalty-free.

The 529 to Roth IRA rollover option is tax-free and penalty-free if all specified conditions are met. Only the principal (contributions) can be rolled over, not the earnings, and the amount rolled over counts towards the beneficiary’s annual Roth IRA contribution limits. State tax rules can differ from federal guidelines, potentially imposing their own implications for non-qualified distributions or even certain rollovers.