529 Plans

How they work

You contribute after-tax dollars to a 529 account. Contributions grow tax-free inside the account. Qualified withdrawals (tuition, room and board, books, required fees, computers, certain K–12 tuition up to $10,000/year, apprenticeship programs, and up to $10,000 lifetime in student loan repayment per beneficiary) are completely tax-free — federal and usually state.

Each state sponsors its own plan (sometimes more than one), and you can usually invest through any state's plan regardless of residence. Many states also offer a state income tax deduction for contributions to the in-state plan, which is often the deciding factor in plan choice.

Contribution limits

There is no annual federal contribution limit specifically for 529 plans, but:

• Contributions above $19,000 per beneficiary per year (2026) trigger federal gift tax filing requirements (though no tax is typically owed unless cumulative lifetime gifts exceed $15M).
• 5-year front-loading: You can contribute up to 5 years of annual exclusion at once — $95,000 per beneficiary per individual ($190,000 per couple) — without triggering gift tax, treated as if spread over 5 years.
• Each state's plan has a total contribution cap, usually $400,000–$600,000 per beneficiary.

The 5-year rule makes 529s powerful estate-planning tools: grandparents can move significant money out of their estate while retaining control over when it's disbursed.

Investment options

Most 529 plans offer:

• Age-based / target-enrollment portfolios — analogous to target-date funds, automatically shifting from aggressive to conservative as the beneficiary approaches college age.
• Static portfolios — a fixed aggressive, moderate, or conservative mix.
• Individual fund options — specific index or actively managed funds.

Fees vary significantly across states. Low-cost plans have total expenses under 0.20%; high-cost plans approach 1%. Generally look for plans with expense ratios under 0.25% and low or no administrative fees.

What counts as qualified

• College: tuition, fees, required supplies, room and board (for students enrolled at least half-time), computers and peripherals.
• K–12: tuition up to $10,000/year per beneficiary (since 2018).
• Apprenticeships: registered apprenticeship programs.
• Student loans: up to $10,000 lifetime per beneficiary and $10,000 per beneficiary's sibling (principal + interest).

Non-qualified withdrawals are taxed on the earnings portion at ordinary income rates plus a 10% federal penalty. The principal portion is not taxed (you already paid tax when you contributed).

The unused-funds problem (and the SECURE 2.0 fix)

Historically, the biggest 529 fear was "what if my kid doesn't go to college?" Non-qualified withdrawals meant losing the tax advantage.

SECURE 2.0 created a new option starting in 2024:

• 529-to-Roth rollover. You can roll up to $35,000 lifetime from a 529 to a Roth IRA for the beneficiary, subject to:
  • The 529 must be open at least 15 years.
  • Contributions from the past 5 years can't be rolled.
  • The rollover counts toward the beneficiary's annual IRA limit ($7,500 in 2026).
  • The beneficiary must have earned income at least equal to the rollover amount.

This means overfunded 529s can now partially convert into retirement savings — a significant improvement in flexibility.

Beneficiaries can also be changed to another family member with no tax consequences, so an unused 529 can fund a younger sibling, a grandchild, or even yourself if you go back to school.

State tax deductions

Most states with income tax offer a deduction or credit for contributions to their in-state 529 plan. The value varies widely:

• States with high income tax rates (CA, NY) — deduction is large but NY, for example, only allows deduction for contributions to the in-state plan.
• Some states offer a deduction for contributions to any state's plan.
• Seven states (including FL, TX, WA) have no income tax, so there's no deduction to chase.

Generally, if your in-state plan offers a decent tax deduction and reasonable fees, use it. If the in-state plan has no benefit or poor fees, shop other states' plans.

529 alternatives

• Roth IRA — Contributions can be withdrawn anytime penalty-free; earnings can be withdrawn for qualified higher-education expenses without penalty (but taxed on earnings portion). Less flexible than 529s for education specifically.
• Coverdell ESA — $2,000/year limit; phases out for higher incomes. Largely obsolete since 529s can now fund K–12.
• UGMA/UTMA — Custodial accounts with no restrictions but also no tax preferences. The child gains full control at 18 or 21.

How Horizons uses this

529 plans in Horizons can be modeled as a Savings-strategy asset with tax-free treatment. Future education expenses can be funded via the "savings" funding strategy pointing at the 529, and the engine will draw down the balance as tuition comes due.