You can potentially use a 529 plan to pay for trade school, vocational school, and apprenticeships.

If you or your family have saved money for your education within a 529 plan, you can use those funds to pay for qualified education expenses without tax implications. 

But how about students who opt to attend a trade school instead of a traditional college or university? Can you still use the funds in your 529 to cover college costs?

We explore what the funds in your 529 can be used for, whether apprenticeships are eligible, and share some tips of how to fill any potential funding gaps. 

Can You Use A 529 To Pay For Trade School?

Yes, the funds in your 529 can be used to pay for an eligible trade school. Although not all vocational schools are eligible, many are. 

Which Vocational Schools Are Eligible?

You can use the money in a 529 to cover the cost of an education at certain vocational schools. Qualifying trade and vocational trade school programs must be sponsored by schools that are eligible for Title IV federal student aid.

In order to determine if the institution you have in mind accepts federal aid, search for a Federal School Code on the Free Application for Federal Student Aid (FAFSA).

It requires a bit of research, but you can often find a vocational or trade school offering the skill you want to learn that is eligible for your 529 funds. For example, in Ohio, the Ohio Department of Higher Education operates 50 career centers across the state that are eligible for 529 fund use.

Are Apprenticeships Eligible?

An apprenticeship is often a viable alternative to a traditional trade school or vocational school path. Generally, an apprenticeship is a long-term, paid working program that includes both on-the-job training and classroom instruction.

In some cases, you can use 529 funds to cover expenses related to an apprenticeship program. But the apprenticeship program must be registered and certified with the Secretary of Labor to qualify. 

What Expenses Can You Cover With A 529?

As mentioned, if you are attending an eligible trade school or apprenticeship program, you can use the funds in your 529 to cover certain expenses. Qualified expenses include:

• Tuition
• School fees
• Textbooks
• Supplies and equipment required for attendance, including tools
• Computers
• Room and board 

If you use the funds in your 529 to pay for a non-qualified expense, you’ll have to pay federal income tax and a 10% penalty on the earnings. 

How To Fund Any Gaps

In most cases, trade school students with a 529 will be able to use plan funds to pay for their education. However, in some cases, you might need to reconsider which trade school you choose to attend. 

Depending on your situation, your 529 account may or may not have enough funds available to cover all of your education costs. If you can’t pay for all of your trade school expenses using 529 funds, you’ll need to come up with some other ways you can pay for the remaining costs. We outline the best ways to fund the remaining costs from most ideal to least efficient below:

• Scholarships. When you win a scholarship, you can use the money for school and you won’t have to pay it back. Try to apply for at least 50 scholarships to land money for school. Use our guide of scholarships by state to help you find scholarships to apply for. 
• Grants. Grants are another type of financial award that you don’t have to pay back. 
• Personal savings. If you’ve worked during high school or have funds tucked away from holiday presents, consider tapping into those funds to cover your educational costs. 
• A part-time or summer job. It’s usually possible to work while you attend school. Even if you can’t work and attend class at the same time, it’s often possible to work a summer job to build up funds to cover your next semester. Don’t overlook your earning potential as a way to pay for school.
• Employer tuition reimbursement programs. Some employers offer tuition reimbursement as a perk of working for them. A few employers offering tuition reimbursement include Carhartt, Carvana, and Nvidia. When looking for a job, it might be helpful to include employers who offer this perk in your search. 
• Help from relatives. If you have relatives who want to help you pay for school, that’s always a welcome source of funds. 
• Student loans. It’s possible to pay for trade school costs with student loans. But since you’ll have to repay the funds with interest, these should be treated as the last option.

When it comes to paying for school, don’t be afraid to get creative. Generally, it’s a good idea to limit the amount of student loans you take on. After graduation, you’ll be grateful you did everything you could to avoid taking out more loans than you needed to. 

The Bottom Line

It’s possible to use a 529 to fund your trade school education. Although there are limitations on which vocational schools are eligible, many are. Do you research before signing up for classes to ensure you are able to use the funding source you had in mind to pay for school without any penalties. 

One of the big perks of using a 529 plan to save for college is that many states offer tax deductions for 529 plan contributions. Other states offer tax credits, and some even will allow contributions to any state's plan (this is called tax parity) But, like anything, there are rules that apply.

Some states require you to contribute to their state's plan, while other states allow you to take the tax deduction for contributions to any state's plan. Finally, there are (sadly) states that don't offer any incentives for contributions.

Also, the rules for withdraw can also impact your taxes. Make sure you understand the differences in qualified 529 plan withdrawals so you aren't paying taxes and penalties!

What Is a 529 Plan?

A 529 plan allows you to contribute money for educational use. The funds must be used for education, which includes college or K–12 tuition.

The owner of the account remains in control of the account, while the money is used for a beneficiary (typically the child). This is different from a UGMA or UTMA account, which allows the beneficiary to take control of the account once they reach legal age.

Related: What Is A 529 Plan?

What Is the 529 Plan Contribution Tax Deduction?

Many 529 plans do offer state tax deductions on contributions. Some states even offer a tax credit. But not every state offers the deduction. Plus, there are certain rules you need to follow.

For example, most states only give you the tax credit or tax deduction if you contribute to your state's plan. However, a few states offer "parity", meaning the allow you to get a tax deduction regardless of which state's plan you contribute to.

529 plans do not offer federal contribution tax deductions.

How Do I Open an Account?

You can open a 529 plan with your brokerage or by searching for 529 plans. Once you find one you like, you’ll choose an in-state or out-of-state plan. After the account is opened, you can then choose one of the investment options offered by the plan.

Check out this list here and see where to open the 529 plan that makes the most sense for you:

529 Tax Benefits by State

For most states, you must contribute to your state’s 529 plan (as opposed to an out-of-state plan) to receive any state tax benefit. However, seven states offer tax parity, which allows you to contribute to any 529 state plans.

529 Tax Parity States

These seven states that provide a tax deduction for contributions to any state plan include:

• Arizona: $2,000 single or head of household, and $4,000 for joint filers
• Arkansas: $5,000 for single filers, and $10,000 for married filers
• Kansas: $3,000 for single filers, and $6,000 for married filers
• Minnesota: $1,500 for single filers, and $3,000 for married filers
• Missouri: $8,000 for single filers, and $16,000 for joint filers
• Montana: $3,000 for single filers, and $6,000 for joint filers
• Pennsylvania: $16,000 for single filers, and $32,000 for joint filers

529 Plan Tax Deduction States

The following states offer deductions:

• Alabama: $5,000 for single filers, and $10,000 for joint filers
• Colorado: $22,700 for single filers, and $34,000 for married filers
• Connecticut: $5,000 for single filers, and $10,000 for married filers 
• Delaware: $1,000 for single filers, and $2,000 for joint filers
• Georgia: $4,000 for single filers, and $8,000 for joint filers
• Idaho: $6,000 for single filers, and $12,000 for joint filers
• Illinois: $10,000 for single filers, and $20,000 for joint filers
• Iowa: $5,500 for single filers, and $11,000 for joint filers
• Louisiana: $2,400 for single filers, and $4,800 for joint filers
• Maryland: $2,500 for single filers, and $5,000 for joint filers
• Massachusetts: $1,000 for single filers, and $2,000 for joint filers
• Michigan: $5,000 for single filers, and $10,000 for joint filers
• Mississippi: $10,000 for single filers, and $20,000 for joint filers
• Nebraska: $10,000 for single and married filers, $5,000 if filing separate
• New Jersey: $10,000 per taxpayer, per year
• New Mexico: Full amount of contribution with no limit
• New York: $5,000 for single filers, and $10,000 for joint filers
• North Dakota: $5,000 for single filers, and $10,000 for joint filers
• Ohio: $4,000 per year regardless of filing status
• Oklahoma: $10,000 for single filers, and $20,000 for joint filers
• Rhode Island: $500 for single filers, and $1,000 for joint filers
• South Carolina: Full amount of contribution with no limit
• Virginia: $4,000 per year regardless of filing status
• Washington, D.C.: $4,000 for single filers, and $8,000 for joint filers
• West Virginia: Full amount of contribution with no limit
• Wisconsin: $4,000 per dependent beneficiary, self or grandchild

529 Plan Tax Credit States

The following states offer tax credits:

• Indiana: 20% tax credit on contributions up to $5,000
• Oregon: $170 for single filers, $340 for joint filers
• Utah: 4.85% of contribution, up to $112.06 for single filers, and $224.13 for married filers
• Vermont: 10% tax credit, up to $250 for single filers, and $500 for married filers

No 529 Plan Tax Benefit States

If your state has no income tax, the 529 plan tax deduction doesn’t apply. These states include:

• Florida
• Nevada
• Texas
• South Dakota
• Washington
• Wyoming

Some states do have income taxes but no 529 plan tax deduction. They include:

• California
• Hawaii
• Kentucky
• Maine
• New Hampshire
• North Carolina
• Tennessee

Find your state in our full 529 plan guide here >>

Is It Worth It?

If you want control over the money you’re putting toward a beneficiary’s college tuition, then yes — it is worth it. Be sure the funds will eventually be used for education. If not, you’ll incur a 10% penalty, plus you’ll be taxed at your ordinary income tax rate for non-educational use of the funds.

529 plans are tax-advantaged education savings accounts designed to encourage saving for future education costs.

While these plans are state-sponsored, investors are not limited to their home state’s plan. Opening multiple 529 accounts in different states allows families to diversify their investment portfolios and take advantage of varying investment options and fee structures.

Different states offer a range of investment choices, fees, and performance histories. By selecting plans from multiple states, parents can tailor their investment strategy to align with their risk tolerance and financial goals.

Related: 529 Plan Guide By State

Maximizing Contributions

Each state’s 529 plan has an aggregate contribution limit per beneficiary, ranging from $235,000 to over $550,000. These limits represent the maximum total contributions allowed to a particular state’s 529 plan for a beneficiary.

If a family were to contribute the maximum allowable amount to every state’s 529 plan, the cumulative potential savings could exceed $23 million per beneficiary. While this scenario is uncommon due to the substantial financial commitment required, it illustrates the flexibility 529 plans offer in accommodating large education savings goals.

This could even potentially be used by families to setup dynasty 529 plans or effective education trusts.

It’s important to note that while there is no federal limit on the number of 529 plans one can open, contributions may be subject to federal gift tax rules. For 2024, contributions up to $18,000 per beneficiary per year ($36,000 for married couples) qualify for the annual gift tax exclusion. Additionally, 529 plans allow for accelerated gifting, enabling lump-sum contributions of up to five times the annual exclusion amount without incurring gift taxes, provided no further gifts are made to the beneficiary in the next five years.

Understanding State Tax Benefits

One significant consideration when opening multiple 529 plans is the state tax benefits associated with contributions.

Over 30 states offer a tax deduction or credit for contributions made to their own state’s 529 plan. If your state provides such incentives, contributing to your home state’s plan may offer immediate tax savings.

However, some states extend tax benefits to contributions made to any state’s 529 plan (known as tax-parity).

Regardless of what state you open the 529 plan in, you will be subject to your state's tax laws.

For example, as a California resident, if you open an plan in Arizona, you're still subject to California's rules. So, while Arizona does have a tax deduction, you don't get to claim that on your California tax return (though, if for some reason you also had an Arizona return, you could claim it).

Also, the benefits don't transfer. For example, Arizona allows the 529 plan to be used for K-12 education and converted to a Roth IRA. But California does not. Even if you open an Arizona plan, if you do either of these events as a California resident, you'll be subject to taxes and a penalty.

Financial Aid Implications

While maximizing contributions can significantly boost education savings, it’s essential to consider the potential impact on financial aid eligibility.

Assets in 529 plans owned by the parent are considered parental assets on the Free Application for Federal Student Aid (FAFSA) and can affect the student aid index. However, if your goal is to get millions into a 529 plan, you'll likely not need (or qualify) for financial aid anyway.

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A 529 plan can be an effective estate planning tool. But because many families are unaware of its benefits, very few consider using a 529 plan for estate planning. 

Nevertheless, families may need to consider including 529 plans as part of their estate plans because of potential changes to death taxes. 

We explain why in more detail below and break down all the "how-tos" of using a 529 plan for estate planning. Here's what you need to know.

Possible Changes To Death Taxes

In 2024, the unified lifetime gift, estate and generation-skipping transfer tax exemption is $13.6 million ($27.2 million for married couples), up from $5.49 million in 2017. 

Since 2010, the lifetime exemption has been portable between spouses, allowing a surviving spouse to get the unused portion of their spouse’s lifetime exemption. This effectively provides a married couple with twice the lifetime exemption of a single person. The deceased spouse must have been a U.S. citizen at the time of death. The surviving spouse must elect portability when they file a timely Federal Estate Tax Return, IRS Form 706, for the deceased spouse. IRS Form 706 must be filed within 9 months plus extensions after the date of the decedent’s death. IRS Form 4768 may be filed to claim an automatic 6-month extension.

However, the future of the exemption from death taxes is uncertain. The Tax Cuts and Jobs Act of 2017 doubled the lifetime exemption. But this increase will sunset for tax years after 2025 unless Congress acts to extend it. The lifetime exemption will revert back to $5 million plus an inflation adjustment for taxpayers who die in 2026 and later years.

In addition, President Biden has proposed cutting the lifetime exemptions to $3.5 million for estates and $1 million for gifts (returning to the exemptions that were in effect in 2009). His proposal also calls for increasing the tax rate, which is currently 40%. He has also proposed eliminating the stepped-up basis for inherited assets and to tax the unrealized capital gains at ordinary income tax rates (as opposed to long-term capital gains tax rates). 

Although President Biden did not include the proposed decreases in the lifetime exemptions in the American Families Plan, these cuts might be included in future legislation. 

Opposition To Estate Tax Changes

These proposals have generated bipartisan opposition from lawmakers for several reasons:

The proposed changes also generate relatively little tax revenue. Fewer than 2,000 families pay federal estate taxes each year, yielding less than $20 billion in tax revenue.

States That Levy Estate Taxes

State estate and inheritance taxes, which vary by state, may have lower exemptions than the federal levels, causing smaller estates to be taxed. Families may wish to use 529 plans to reduce state estate and inheritance taxes in these states.

Currently, 13 states have state estate taxes: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. The state estate tax exemption is $1 million in Massachusetts.

As of writing, 6 states have state inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Pennsylvania includes out-of-state 529 plans in the account owner’s estate, but not in-state 529 plans. 

Inheritance taxes may depend on the relationship of the heir to the decedent. In Pennsylvania, for example, the inheritance tax rate is 0% for surviving spouses or parents of a minor child, 4.5% for direct descendants, 12% for siblings, and 15% to other heirs (except for charitable organizations, exempt institutions and government entities that are exempt from tax).

Benefits Of Using A 529 Plan For Estate Planning

The advantages of using 529 plans for estate planning involve contributions, distributions, control and financial aid impact. They're simpler, easier to use and less expensive to set up than complicated trusts. They also have generous and flexible contribution limits. There are no income, age or time limits. 

Account owners retain control over the 529 plan account and can change the beneficiary. Earnings accumulate on a tax-deferred basis and distributions are tax-free if used to pay for qualified educational expenses. Grandparents can also use 529 plans to leave a legacy for their descendants. And policymakers are unlikely to limit these estate-planning benefits. 

Contributions

Contributions are removed from the contributor’s estate for federal estate tax purposes. Contributions are considered to be a completed gift.

Although there is no annual contribution limit for 529 plans, contributors can give up to the annual gift tax exclusion, which is $18,000 per year in 2024, without incurring gift taxes or using up part of the lifetime gift tax exemption. 

There are no gift tax limits if the beneficiary is the account owner or the account owner’s spouse. The spouse must be a U.S. citizen. If the spouse is not a U.S. citizen, the gifts are capped at $157,000 a year, as of 2000.

If the beneficiary is a grandchild, contributions may result in generation-skipping transfer taxes, but the annual and lifetime exemptions and tax rates are the same as for gift and estate taxes. Generation-skipping transfer taxes apply if the beneficiary is two or more generations younger than the contributor or if the beneficiary is at least 37.5 years younger than the contributor. There is an exception if the grandchild’s parents are deceased at the time of the transfer.

Superfunding

Five-year gift-tax averaging, also known as superfunding, allows a contributor to make a lump sum contribution of up to five times the annual gift tax exclusion and have it treated as through it occurs over a five-year period.

The contributor may be unable to make additional gifts to the beneficiary during the five-year period, unless the prorated gift is less than the annual gift tax exclusion amount. If the contributor dies during the 5-year period, part of the contribution may be included in the contributor’s estate.

For example, if the contributor dies in year 3, the remaining 2 years of contributions will be included in the contributor’s estate. The contributor may need to file IRS Form 709 to report the contribution, even if there are no gift taxes or reduction in the lifetime exemption.

State Limits And Benefits

There are high aggregate contribution limits, which vary by state, ranging from $235,000 in Georgia and Mississippi to $542,000 in New Hampshire. Once the account balance reaches the aggregate limit, no more contributions are permitted, but the earnings may continue to accumulate.

Families may be able to bypass the state’s aggregate contribution limits by opening 529 plans in multiple states. But contributors will still be subject to the annual gift tax exclusion limits.

Contributions are eligible for a state income tax deduction or tax credit on state income tax returns in two-thirds of the states. The amount of the state income tax break varies by state. There are no income limits, age limits or time limits on contributions. The beneficiary does not need to be of college age and can already have a college degree.

Distributions

Earnings in a 529 plan accumulate on a tax-deferred basis. And distributions are tax-free if used for qualified educational expenses. The money can be used to pay for elementary and secondary school tuition, college costs, graduate or professional school costs, and continuing education. 

Non-qualified distributions are subject to ordinary income taxes at the recipient’s tax rate and a 10% tax penalty. The penalty is only levied on the earnings portion of the distribution, not the full amount of the distribution.

Non-qualified distributions are not subject to capital gains taxes, gift taxes or estate taxes. If the contributor previously claimed a state income tax deduction or tax credit, the state income tax break may be subject to recapture if the account owner makes a non-qualified distribution. 

There are no income limits, age limits or time limits on distributions. Account owners are not required to make distributions when the beneficiary reaches a particular age. They can choose to leave the money in the account, letting it continue to accumulate earnings.

Control

The account owner retains control over the 529 plan account, unlike direct gifts to the beneficiary or complicated trust funds. The account does not transfer to the beneficiary when the beneficiary reaches a particular age. Instead, the account owner gets to decide whether and when to make distributions. 

The account owner can change the beneficiary to a member of the beneficiary’s family, including to the account owner. This effectively lets the account owner revoke the gift, if they choose, by changing the beneficiary to themselves. 

Financial Aid Impact

Grandparent-owned 529 plans are not reported as an asset on the Free Application for Federal Student Aid (FAFSA). 

The Consolidated Appropriations Act, 2021, simplified the FAFSA starting with the 2023-24 FAFSA (subsequently delayed until the 2024-25 FAFSA by the U.S. Department of Education). Among other changes, the simplified FAFSA drops the cash support question, so distributions will no longer count as untaxed income to the beneficiary on the beneficiary’s FAFSA.

This will eliminate any impact from a grandparent-owned 529 plan on federal student aid eligibility.

Leaving A Legacy

Grandparents can open a 529 plan for each grandchild. If the grandparents have three children and nine grandchildren, they could open a total of twelve 529 plans, one for each child and grandchild.

With 5-year gift-tax averaging, they could make lump-sum contributions totaling $1.8 million as a couple (e.g., $150,000 per beneficiary x 12 beneficiaries = $1.8 million). This yields a significant reduction in the grandparents’ taxable estate. Grandparents can also use a 529 plan to hint that they’d like their grandchildren to go to college. 

529 plans are a great way of leaving a legacy for your heirs. If there is leftover money in the 529 plan after paying for college, the unused funds can continue to grow and be passed on to future generations.

Leftover money can also be used for other expenses by making a non-qualified distribution. But the earnings portion of the non-qualified distribution will be subject to ordinary income taxes and a tax penalty as opposed to estate and inheritance taxes.

Major 529 Plan Policy Changes Are Unlikely

Policymakers are unlikely to limit the use of a 529 plan for estate planning. When President Obama proposed taxing 529 plans in 2015, his proposal was met with fierce opposition from both Democrats and Republicans. In fact, the resistance was so hostile and swift that he was forced to drop the proposal just a few days later.

Lifetime Exemption For Federal Gift Taxes

This table below shows the changes in the lifetime exemption for federal gift, estate and generation-skipping transfer taxes over the last nine decades. Key changes were made by the following pieces of legislation:

Who Should Consider 529 Plans For Estate Planning?

If grandparents are close to the lifetime exclusions or are worried about future cuts in the lifetime exclusions, they should consider using 529 plans for estate planning.

529 plans are particularly useful when the grandparents are wealthy but the parents are not. The favorable financial aid treatment of 529 plans lets grandparents who are wealthy help pay for elementary, secondary and postsecondary education expenses without affecting the grandchild’s eligibility for need-based financial aid.

Qualified tuition refers to the tuition required for enrollment or attendance at an eligible educational institution.

This typically includes tuition fees for undergraduate, graduate, or professional degree courses.

An eligible institution is generally any accredited public, nonprofit, or privately-owned for-profit college, university, vocational school, or other post-secondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education (Title IV).

Depending on the state, a qualifying institution could also be an accredited K-12 school.

What Counts As Qualified Tuition

Qualified tuition is defined as the tuition fees paid to an eligible institution. The tuition fees are reported on the cost of attendance and are typically billed by semester or quarter.

For tax purposes, qualified tuition is the amount paid during the calendar year (January 1 through December 31), not the academic year.

For a 529 plan, qualified tuition must be paid to an eligible Title IV college or university, or an eligible K-12 school.

For higher education, there are no limits on qualified tuition to be withdrawn as an eligible expense.

For K-12 education, only $10,000 per year can be used as a qualifying expense, and only if your state allow it. Not all states allow this. Make sure you check out guide to using a 529 plan for K-12 expenses here.

What's considered a non-eligible institution? 

Any school or college that is not Title IV eligible is non-eligible. This mainly applies to some trade and vocational schools. It also applies to most Montessori schools and preschools. This can also apply to career training programs.

If you need financial aid for a non-eligible institution, you have to look at special private loans for trade school or career training.

People Also Ask

What Expenses Are Considered Qualified Tuition?

Only tuition fees are considered qualified tuition if paid to an eligible institution.

What If I Pay My Tuition In Installments?

It doesn't matter if you pay your tuition in installments. Qualified tuition is simply the tuition fees you pay.

Are Room And Board Considered Qualified Tuition Expenses?

No, room and board are NOT considered qualified tuition. However, they may be a qualified education expense depending on your enrollment status.

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