The Best Way to Save for Your Kids' Education (And What Happens If They Don't Go)
You want to help your kids or grandkids with education. Maybe it’s college, maybe trade school, maybe something you can’t even picture yet. You’ve heard of 529 plans but you’ve hesitated, because what if they don’t go? What if you save all this money and then it’s stuck?
I get it. That fear has kept a lot of people on the sidelines. But here’s the thing: there are real escape valves now. And once you understand them, the 529 becomes one of the most powerful savings tools available to you - not just for education, but potentially for retirement too.
Let me walk you through it.
A 529 plan is a tax-advantaged savings account designed for education expenses. You put in after-tax money - meaning you don’t get a federal deduction when you contribute - but then something valuable happens. The money grows tax-free. And when you take it out for qualified education expenses, it comes out tax-free too. No tax on the growth. No tax on the withdrawal. That’s the core benefit, and it’s a big one.
Qualified expenses include tuition, fees, books, room and board at any accredited college or university. But it’s broader than that now. You can use 529 funds for trade schools, vocational programs, apprenticeships, and even K-12 tuition - up to $20,000 per year starting in 2026. You can pay off up to $10,000 in student loans per beneficiary. The definition of “education” keeps expanding.
On top of the federal benefits, over 30 states offer tax deductions or credits for 529 contributions. In Massachusetts, where I live, you can deduct up to $1,000 for single filers or $2,000 for married filing jointly if you contribute to the U.Fund - the state’s designated plan through Fidelity. New York offers up to $5,000 single or $10,000 joint. Some states - New Mexico, South Carolina, West Virginia - offer unlimited deductions. Even if it seems small, I never like to turn away free money if I’m going to be saving for their future anyway.
Now let me tell you what changed my thinking on all this. I started saving in a 529 for my son Ben before he was born. College is expensive. I’ve seen the numbers, I get it, and I wanted to make sure he had a very different experience than I had, where I was working multiple jobs and paying for everything myself. This isn’t theoretical for me - I’ve been doing it for years.
I use the Massachusetts U.Fund specifically to get the state tax deduction. Most of my investments are at Charles Schwab, but I maintain this separate account just for the state benefit. It’s worth it.
And I keep it simple. I use the age-based portfolio - the one that automatically shifts from aggressive investments when they’re young to more conservative as they get closer to college. Pick the age-based option and forget it. That’s my philosophy for 529s, for 401(k)s, for most retirement accounts. Set it up once, let it do its job.
Let me make this concrete with the numbers.
Say you have a grandchild born this year. You open a 529 and contribute $100 a month for 18 years. That’s $21,600 in total contributions. At 7% average annual returns, that grows to approximately $43,000 by the time they’re ready for school. Taxes paid on that growth? Zero - if used for education.
Or imagine you contribute $50 a month - half as much. That’s $10,800 over 18 years, growing to roughly $21,500. Even modest contributions add up significantly when you give them 18 years to compound.
Now compare that to a regular savings account. At today’s rates, your $21,600 in contributions might grow to maybe $23,000 or $24,000 - and you’d owe taxes on the interest every year. The 529 wins by $15,000 or more. That’s real money.
But here’s the question everyone asks: what if they don’t go to college?
I’m going to give you the complete answer, because this is where the game has changed.
Option one: Change the beneficiary. You can transfer the 529 to a sibling, cousin, niece, nephew, or other family member - no penalties, no taxes. I know someone who did exactly this. Their first child got scholarships and didn’t need the money. They transferred it to the second child, who then had more funds for their education. The money wasn’t wasted. It just went to someone else in the family.
Option two: Pay off student loans. Up to $10,000 lifetime per beneficiary can go toward student loans. If your child or grandchild has loans from an earlier degree, you can help pay those down. You can also pay $10,000 toward each sibling’s loans.
Option three - and this is the big one: Roll it into a Roth IRA.
Under the SECURE 2.0 Act that took effect in 2024, you can now roll over up to $35,000 lifetime from a 529 into a Roth IRA for the beneficiary. Tax-free and penalty-free if you follow the rules.
The rules are:
The 529 must have been open for at least 15 years
Only contributions made more than 5 years ago are eligible
Annual rollovers are limited to the Roth IRA contribution limit - $7,500 for 2026, or $8,600 if the beneficiary is 50 or older
The beneficiary must have earned income equal to or greater than the rollover amount
The Roth IRA must be in the beneficiary’s name
Think about what this means. If you open a 529 when a child is born and they don’t use all the funds for education, you can start rolling it into their Roth IRA when they’re 18 or older - assuming they have earned income. They could move $7,500 a year until they hit the $35,000 lifetime cap. That money then grows tax-free in their Roth for 40+ years.
Let me run that math. $35,000 rolled over at age 22, earning 7% annually for 40 years, becomes approximately $524,000. All tax-free in retirement. The Roth is a very powerful vehicle. And now your education savings can become retirement savings if it’s not needed for school.
That’s why I say over-funding is not a bad idea anymore. It becomes yet another benefit if you want to build your child’s future.
Option four: Just withdraw it. If none of the above work, you can take the money out. You’ll pay income tax plus a 10% penalty on the earnings portion only - not on your original contributions. Your contributions come out tax-free because you already paid taxes on them when you put the money in. The 10% penalty isn’t the end of the world. It’s not ideal, but it’s not catastrophic either.
The bottom line: you have options now. The money isn’t trapped.
Let’s talk about financial aid, because this concern is often overblown.
A 529 owned by a parent or student counts as a parental asset on the FAFSA. Parental assets reduce aid eligibility by only 5.64% of the value. A $20,000 balance might reduce aid by about $1,128 per year. Worth knowing, but not a reason to avoid saving.
Here’s the better news for grandparents. Starting with the 2024-2025 academic year, grandparent-owned 529 plans are not reported on the FAFSA at all. Withdrawals from grandparent 529s no longer count as student income either.
This is huge. Under the old rules, a $10,000 distribution from a grandparent’s 529 could reduce aid eligibility by up to $5,000. Now? None of that. Grandparents can help pay for college without impacting need-based federal aid.
One caveat: about 200 private colleges use the CSS Profile instead of the FAFSA to award institutional aid. The CSS Profile does still ask about 529s owned by relatives other than parents. If your grandchild is applying to highly selective private schools, that’s worth considering.
Now, where does a 529 fit in the hierarchy of options?
My honest take: if your child or grandchild has earned income, a Custodial Roth IRA is actually the first choice - it’s even more flexible. But most kids don’t have earned income, and even those who do are limited to contributing what they actually earned, up to $7,500 in 2026.
The 529 is the practical choice for most families. No income requirement for the child. Anyone can contribute. Much higher limits - typically $300,000 to $500,000+ lifetime depending on the state. And now with the Roth rollover option, it’s not purely locked into education anymore.
A few things to watch out for.
Don’t let the state tax deduction trap you in a bad plan. Some state plans have high fees or limited options. If your state doesn’t offer a meaningful deduction, shop around - Fidelity, Vanguard, and Schwab all offer highly-rated plans available to any state’s residents.
Don’t overcomplicate the investments. Pick the age-based portfolio that matches your child’s birth year and let it ride. You don’t need to be a stock picker here.
Don’t forget that grandparents need to coordinate with parents. I’ve seen cases where someone opened a 529 without asking and it caused real friction - the parents felt like the relative was implying they couldn’t take care of their own kids. Have the conversation first. And if you’re a grandparent with a 529, make sure the parents know the details: how much, where it’s held, and what happens if you pass away.
Here’s how to run this play.
First, check your state’s plan. Search “[your state] 529 plan” and look at the tax deduction and fees. Compare to plans from Fidelity, Vanguard, or Schwab. Decide: your state plan for the deduction, or an out-of-state plan with better features.
Second, open the account - 15-20 minutes online. You’ll need your Social Security number and the beneficiary’s.
Third, pick the age-based portfolio that matches your child’s birth year. Done.
Fourth, set up automatic contributions. Even $50 or $100 a month makes a real difference over 18 years.
Fifth, tell family members. Instead of toys at birthdays, ask them to contribute to the 529. Most plans have gifting features that make this easy.
One more thing: the K-12 option.
You can use up to $20,000 per year from a 529 for K-12 tuition starting in 2026. If you’re already paying for private school, routing that money through a 529 can capture state tax benefits on the contributions. The growth period is shorter, so the tax benefit is smaller than for college savings - but if you’re paying for private school regardless, it helps.
So where does this leave you?
If you have kids or grandkids and haven’t opened a 529 yet, do it this week. Pick your state plan or a major brokerage plan. Choose the age-based option. Set up $50 or $100 a month. You can always adjust later.
If you’ve been avoiding 529s because of the “what if they don’t go” question - between changing beneficiaries, paying off loans, rolling into a Roth, or just withdrawing with a modest penalty, the money isn’t trapped anymore.
And if you’re a grandparent wondering how to help, the 529 is a great vehicle - especially now that grandparent-owned plans don’t hurt federal financial aid. Have the conversation with the parents first.
Open one this week. Pick the age-based portfolio. Automate the contributions. Then let time do the work.