529 Plans

If you have children and have considered saving for their future college education, you have likely heard of the 529 plan. The name of this college savings plan is taken from Internal Revenue Code § 529. It offers a tax-advantaged way to save now for the future cost of your child’s education.

It is important to note that, while a 529 plan is most often set up to save for a child’s future education, it can be set up for almost anyone, whether that be a grandchild, niece, or even yourself.

There are two main types of 529 plans: prepaid plans and savings plans.

Types of 529 Plans

The first type is the prepaid plan. A prepaid plan allows donors to purchase credits or hours from a university or a state in advance. These types of plans lack the flexibility of the savings plan described below in that they lock the beneficiary into attending a specific group of schools approved by the state administering the plan.

These types of plans do, however, offer protection against tuition inflation, which has significantly outpaced broader inflationary rates over the last several decades. The returns can therefore, in that sense, be quite significant.

The second type of 529 plan is the savings plan, which allows the donor to invest money to be used later for qualified educational expenses. These types of plans generally function as an investment savings account, with the underlying investments being made by the state or institution running the plan.

These plans also offer significant tax advantages. While the federal government does not allow deductions for contributions to the plans, many states—including Arkansas—do. In addition, the federal government allows the savings to grow tax-free, so long as the funds are eventually used for qualified educational expenses.

Setting up a 529 plan should be done carefully, as many states condition a state tax benefit on the use of a specific in-state plan. I therefore recommend consulting your state plan’s website or, preferably, a competent tax advisor before setting up a plan.

Qualified Expenses

The range of qualified 529 expenses has expanded considerably since the account type was created in 1996. Under current federal law, a tax-free distribution can be used for:

• Higher education tuition, fees, books, supplies, and equipment required for enrollment at an eligible institution (§ 529(e)(3)(A)(i));
• Computer, software, and internet access used primarily by the beneficiary during enrollment (§ 529(e)(3)(A)(iii));
• Room and board, subject to published cost-of-attendance limits for students enrolled at least half-time;
• Registered apprenticeship program fees, books, supplies, and equipment (§ 529(c)(8));
• Student loan repayment, up to a $10,000 lifetime cap per beneficiary, plus up to $10,000 for each of the beneficiary’s siblings (§ 529(c)(9));
• K-12 tuition and related expenses, up to $10,000 per beneficiary per year through tax year 2025 and up to $20,000 per beneficiary per year beginning in tax year 2026 under the One Big Beautiful Bill Act; and
• Postsecondary credentialing programs (e.g., welding, aviation mechanics, and other industry certifications), newly eligible under the 2025 One Big Beautiful Bill Act.

Funds withdrawn for any other purpose are subject to ordinary income tax and a 10% additional tax on the earnings portion only. The contributions themselves—because they went in after federal tax—are not subject to the 10% penalty when withdrawn.

Changing the Beneficiary

Saving for a child’s college early may result in a rather fortunate dilemma if the child receives a significant or full scholarship. The beneficiary of a 529 plan is not set in stone. If the original beneficiary does not need the funds, the account holder—usually the person who established the plan—can change the beneficiary to a member of the beneficiary’s family without triggering tax. Under § 529(e)(2), the beneficiary’s family includes:

• The beneficiary’s spouse;
• Children, grandchildren, and more remote descendants;
• Stepchildren and legally adopted children;
• Parents, grandparents, and more remote ancestors;
• Siblings (including half-siblings) and stepsiblings;
• Nieces and nephews;
• Aunts and uncles;
• First cousins; and
• In-laws (the spouse of any of the above).

So if your first child earns a full scholarship, you can simply make another relative the beneficiary—or roll a portion of the balance to a Roth IRA under the new SECURE 2.0 rules discussed below.

Recent Changes to 529 Plans

Congress has repeatedly expanded 529 plans in recent years. The result is that much of what was written about these accounts a decade ago is now out of date. Four recent changes are particularly important:

• Tax Cuts and Jobs Act (2017). K-12 tuition became a qualified expense, initially capped at $10,000 per year per beneficiary (§ 529(c)(7)).
• SECURE Act (2019). Registered apprenticeship program expenses became qualified (§ 529(c)(8)), and up to $10,000 in student loan repayment per beneficiary—plus another $10,000 per sibling—became a qualified distribution (§ 529(c)(9)).
• SECURE 2.0 Act (2022). Section 126 of SECURE 2.0 authorized 529-to-Roth IRA rollovers. Beginning in 2024, unused 529 funds can be rolled directly into the beneficiary’s Roth IRA, subject to four requirements: the account must have been open for at least 15 years; the contributions being rolled (and their earnings) must be at least 5 years old; the rollover counts against the beneficiary’s annual IRA contribution limit ($7,500 in 2026 per IRS Notice 2025-67); and the lifetime rollover cap is $35,000 per beneficiary.
• One Big Beautiful Bill Act (2025). Signed into law on July 4, 2025, the OBBBA raised the annual K-12 tuition cap from $10,000 to $20,000 beginning in tax year 2026, added postsecondary credentialing programs as a qualified expense, and made 529-to-ABLE rollovers permanent.

A caution for state tax planning: not every state has conformed to every federal expansion. Some states still do not treat K-12 tuition or the 529-to-Roth rollover as a qualified expense for state income tax purposes, which can trigger state-level tax or recapture of a prior state deduction. Check your state plan’s disclosure before assuming a federally qualified distribution is also state-qualified.

Gift and Estate Tax Benefits

A 529 plan also qualifies for special estate and gift tax benefits. In particular, five years’ worth of annual gift exclusions may be front-loaded as a single gift into the plan. So, assuming the 2026 annual exclusion amount of $19,000, you could make a $95,000 contribution to the plan upfront without owing any gift tax. (A married couple who elects gift-splitting can front-load up to $190,000.) In addition, donations to a 529 plan are not included in your estate at death for estate tax purposes, unless you die in the middle of a front-loaded gift period.

So, for example, if you were to give a $95,000 front-loaded gift to a 529 plan and then die later that year, only one year’s worth of the annual exclusion amount would be excluded from your estate. The remaining four years are prorated, so $76,000 of the gift would still be included in your gross estate. If you lived for another five years, however, none of the gift would be included in your estate.

State aggregate account limits vary widely by state—ranging from roughly $235,000 in the lowest states to $575,000 or more in the most generous—and apply per beneficiary rather than per account owner. Arkansas’s Brighter Future 529 currently caps contributions at $500,000 per beneficiary across all Arkansas-sponsored accounts.

Frequently Asked Questions

What happens if my kid gets a full scholarship?

You have a few options. First, you can change the beneficiary to another family member without any tax consequence (see the family-definition list above). Second, you can withdraw the scholarship amount without incurring the 10% additional tax—ordinary income tax still applies to the earnings portion, but the penalty is waived to the extent of the scholarship. Third, you can leave the money in the account for graduate school, a future grandchild, or the 529-to-Roth rollover described below.

Can I roll unused 529 money into a Roth IRA?

Yes, subject to the SECURE 2.0 § 126 rules that took effect in 2024. The 529 account must have been open for at least 15 years, the contributions being rolled (and their associated earnings) must be at least 5 years old, the rollover counts against the beneficiary’s annual IRA contribution limit ($7,500 for 2026 under IRS Notice 2025-67), and the lifetime rollover cap is $35,000 per beneficiary.

Does Arkansas still offer a state income tax deduction for 529 contributions?

Yes. Arkansas allows a state income tax deduction of up to $5,000 per year for a single filer and up to $10,000 per year for a married couple making a proper election who contribute to the Arkansas Brighter Future 529 Plan. Contributions above the annual cap can be carried forward to the next four tax years. The deduction is generally limited to the in-state Brighter Future plan; contributions to out-of-state 529 plans are not typically deductible for Arkansas purposes.

Can I use 529 money for K-12?

Yes. For tax year 2025 and earlier, up to $10,000 per beneficiary per year of 529 funds could be used for K-12 tuition. Beginning in tax year 2026, the One Big Beautiful Bill Act raises that federal cap to $20,000 per beneficiary per year and broadens qualifying K-12 expenses to include curriculum materials, tutoring, standardized test fees, dual enrollment fees, and educational therapies for students with special needs. Watch state conformity carefully—not every state has adopted the federal K-12 treatment.

What counts as a qualified higher education expense?

Tuition and required fees; books, supplies, and equipment required for enrollment; a computer, peripheral equipment, software, and internet access used primarily by the beneficiary during enrollment; room and board up to the school’s published cost-of-attendance figure for students enrolled at least half-time; registered apprenticeship program fees; and up to $10,000 lifetime per beneficiary in student loan repayment (plus another $10,000 per sibling). Under the 2025 OBBBA, qualifying postsecondary credentialing programs—welding, aviation mechanics, and various industry certifications—also count.

---

This post is a general overview of federal and Arkansas 529 plan law as of April 2026 and is not legal or tax advice. 529 plan rules vary by state, and federal law has changed repeatedly in recent years. Before contributing, withdrawing, changing a beneficiary, or rolling funds to a Roth IRA, consult a competent tax advisor familiar with your state’s plan.