What a 529 plan can pay for, and where the money goes if college never happens

The short answer: more than tuition, and leftover money is not trapped

A 529 plan pays for qualified education expenses: college tuition and fees, required books, supplies and equipment, computers and internet used by the student, and room and board for a student enrolled at least half-time. Under current IRS rules it can also cover registered apprenticeship costs, up to $10,000 of student loan repayments over a lifetime and up to $20,000 a year of K-12 expenses. If your child does not go to college, you can keep the account for later, change the beneficiary to another family member without tax, roll a limited amount into the child's Roth IRA, or withdraw the money and pay income tax plus a 10% additional tax on the earnings.

Families usually ask me which account to open first, and I compared the Texas prepaid plan with 529 savings plans in saving for college as a Texas family. This guide picks up after the account is open: what the money can be spent on, and what happens if plans change.

College costs that count as qualified

IRS Publication 970 describes qualified higher education expenses as costs related to enrollment or attendance at an eligible postsecondary school. That covers virtually all accredited colleges, universities and vocational schools that can take part in federal student aid programs, including certain schools outside the United States. Some expenses must be required by the school, and room and board only counts for a student enrolled at least half-time.

Room and board is where families get caught. Publication 970 limits it to the greater of the housing and food allowance the school includes in its cost of attendance, or the actual amount charged for school-owned housing. If your student rents an apartment off campus, ask the financial aid office for the allowance before you withdraw, and keep the withdrawal at or below it.

• Tuition and fees required for enrollment
• Books, supplies and equipment the school requires
• A computer, software and internet access used primarily by the student while enrolled
• Room and board for a student enrolled at least half-time, within the school's allowance
• Special needs services for a special needs beneficiary

K-12, apprenticeships, credentials and student loans

The list has grown well beyond a four-year degree. IRS Topic 313 says a 529 plan can pay K-12 expenses up to a total of $20,000 per year across all of the beneficiary's 529 plans, compared with a $10,000 limit before December 31, 2025. Those expenses include tuition, curriculum and curricular materials, books and other instructional materials, and fees for dual enrollment in college classes. Publication 970 adds items such as tutoring by a qualified instructor who is not related to the student, fees for standardized and college admission tests, and educational therapies for students with disabilities. Plan materials can lag behind federal changes, so check the IRS figure and ask your plan how it handles K-12 withdrawals.

For a child who wants a trade, Publication 970 counts the fees, books, supplies and equipment required for an apprenticeship program registered and certified with the Secretary of Labor. It also describes qualified postsecondary credentialing expenses, including testing fees and continuing education required to obtain or keep a recognized credential such as a state occupational license.

Student loans are covered with limits. According to Publication 970, no more than $10,000 paid as principal or interest on qualified student loans counts, for the beneficiary or a sibling, and Topic 313 describes it as a $10,000 lifetime limit per individual. Interest paid with tax-free 529 earnings cannot also be deducted as student loan interest.

Where families slip when they take money out

Most problems come from matching, not from the expense itself. Publication 970 explains that you compare the total of all 529 distributions for the tax year with the year's adjusted qualified education expenses. Those expenses are reduced by tax-free help such as the tax-free part of scholarships, Pell grants, veterans' benefits and employer-provided educational assistance.

The same dollar of expense also cannot count twice. If you claim the American opportunity or lifetime learning credit, the expenses used for the credit must be subtracted before you figure how much of the 529 withdrawal is tax free. Coordinating the two can be worth real money, which makes it a good question for your tax preparer before tuition is due.

• Withdraw in the same tax year you pay the expense
• Keep receipts and the school's cost-of-attendance figures
• Subtract scholarships and grants before deciding how much to take
• Decide with your tax preparer which expenses go to an education credit and which to the 529
• Expect a Form 1099-Q that splits each withdrawal into earnings and contributions

If your child does not go to college

The Texas College Savings Plan FAQ lists three basic options when a beneficiary does not go to college: keep the money in the account, change the beneficiary, or make a nonqualified withdrawal. A fourth, the Roth IRA rollover, is covered in the next section. Keeping the account open is often the simplest choice, because, as the FAQ puts it, the money remains available if the beneficiary changes their mind about school, and the list of qualified expenses now includes apprenticeships and credentials that suit a child who chooses a trade.

Changing the beneficiary is the most common move. Publication 970 says there are no income tax consequences when the beneficiary is changed to a member of the beneficiary's family, and the account can simply be renamed without moving money. The family is defined broadly: the beneficiary's spouse, children and grandchildren, brothers and sisters including half and step siblings, parents and grandparents, stepparents, nieces and nephews, aunts and uncles, in-laws, first cousins and the spouses of any of these relatives. The Texas plan's FAQ suggests asking a tax advisor whether a change could count as a taxable gift.

Rolling leftover money into a Roth IRA

Since 2024, some leftover 529 money can move into the beneficiary's own Roth IRA. IRS Topic 313 and Publication 970 set the conditions, and all of them must be met.

Because the transfer counts against the annual Roth limit, which the IRS lists as $7,500 for 2026 for someone under 50, reaching the $35,000 lifetime cap takes several years. The Texas College Savings Plan notes that it accepts rollover requests on paper. For a young adult starting out, this can turn an unused college fund into a head start on retirement; I explain how a Roth compares with a traditional IRA in traditional or Roth: which IRA fits.

• The money goes to a Roth IRA for the same beneficiary, by direct trustee-to-trustee transfer
• The 529 account has been open for at least 15 years
• Only contributions made more than five years earlier, and their earnings, can move
• Each year's rollover counts toward the beneficiary's Roth IRA annual contribution limit
• Total rollovers are capped at $35,000 over the beneficiary's lifetime

Taking the money out for something else

You can always take the money out, but the tax treatment depends on what it pays for. Publication 970 explains that the part of a withdrawal that represents your contributions comes back without tax, because it is a return of your investment. The earnings part of a withdrawal that is not used for qualified expenses is taxable income, and the IRS generally adds a 10% additional tax on that amount.

There are exceptions to the 10% additional tax, though income tax on the earnings still applies. Publication 970 lists withdrawals made after the beneficiary's death or because of disability, amounts up to a tax-free scholarship, veterans' assistance or employer-provided educational assistance, costs of attending a U.S. military academy, and amounts taxed only because the expenses were used for an education credit. The Texas plan's FAQ gives the scholarship case plainly: you can withdraw an amount equal to the scholarship without the additional 10% federal tax, though the earnings are taxed at the owner's rate.

Texas plan details worth knowing

A few rules come from the plan rather than the IRS. The Texas College Savings Plan FAQ states a maximum contribution limit of $500,000 per beneficiary, an opening minimum of $25, and that the money can be used at accredited public or private postsecondary schools in the United States and abroad, not only in Texas.

On financial aid, the FAQ says assets in the account may not be considered for Texas-sponsored student aid, that federal aid eligibility depends on the beneficiary's relationship to the account owner, and that the effect on a school's own aid varies. Families around Dallas weighing aid should ask each school's financial aid office early. The plan also states that an account could lose money, including the principal invested.

Building a 529 into your family's plan

I help families fit college savings into the rest of their finances: an emergency fund and retirement first, then education funded at a monthly amount they can keep up. I explain that order in a savings plan for a working family. When we open a 529, we talk through what it can pay for, how the investments should change as the child gets older and what happens if the plan changes, so nobody is surprised at eighteen.

I am a registered representative of PFS Investments Inc. and an investment adviser representative with Primerica Advisors, licensed for investments in Texas and several other states, and most of the families I work with live in Dallas and the surrounding area. Investments carry risk, and no return is promised. This is general information, not tax advice. If you are still deciding whether to work with anyone, these are the questions to ask a financial advisor before hiring. A first conversation carries no obligation.

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