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Family · College · 2026 gift tax
A 529 grows tax-free and comes out tax-free for qualified education. That edge is real if the money will be tuition, housing, K-12 (capped), or a leftover Roth rollover. If the plan is “maybe college, maybe a house,” a taxable brokerage or Roth contributions fit better. Do not put rent money in a 529.
Updated 2026-09-15 · 10 min read · Educational, not tax, gift-tax, or financial-aid advice. Run the 529 vs taxable calculator with your monthly number and a return you actually believe. Twin URL 529-college-savings is a stub.
| 529 | Taxable brokerage | |
|---|---|---|
| Growth | Tax-deferred, tax-free if qualified | Dividends and sales on a 1099-B |
| Qualified out | Higher-ed, K-12 (capped), apprenticeship, $10k loans, leftover Roth | Anything. Basis + LTCG / 0% harvest |
| Wrong out | Earnings: ordinary + 10% extra (exceptions exist) | You already paid the tax |
| 2026 gift | $19,000 exclusion; $95,000 superfund on Form 709 | Same gift-tax rules if you gift the account |
| FAFSA 2026–27 | Parent-owned: parent asset (~5.64%). Grandparent lag is dead | Parent asset the same way if the parent owns it |
| State break | Some states deduct / credit, often in-state only | None for contributions |
People google “529 vs brokerage” as if tax-free were free. The price is optionality. A 15% long-term gain on a brokerage you would have held anyway is a smaller haircut than the slogan implies. The 529 wins when the bill is actually school, the horizon is long, and you will not raid it for a kitchen.
Worked slice
Example return, not a live scrape. 529 future value about $74,660 on $44,000 in. Taxable after 15% LTCG on the $30,660 gain: about $70,061. Advantage $4,599. That is the tax, not a reason to skip the 401(k) match. If the same sale sits in the 0% LTCG band, the gap nearly vanishes.
Superfund slice
One donor, five-year election, Form 709. 529 about $219,518. Taxable after 15%: about $200,841. Advantage about $18,678. Skip the election and $76,000 of that dump is a 2026 taxable gift. The compounding is why grandparents do this. The Form 709 is why they should not Venmo it.
| Item | 2026 figure | Source |
|---|---|---|
| Federal annual 529 cap | None | IRC §529 |
| Gift-tax annual exclusion | $19,000 per donor per person | Rev. Proc. 2025-32 §4.42(1) |
| Gift-split couple | $38,000 | Form 709 split |
| Superfund (5-year election) | $95,000 / $190,000 | IRC §529(c)(2)(B) |
| Basic exclusion (estate/gift) | $15,000,000 | Rev. Proc. 2025-32 |
| K-12 qualified / year | $20,000 per beneficiary | IRS Topic 313 (was $10,000 through 2025) |
| Student-loan repayment | $10,000 lifetime per person | IRC §529(c)(9) |
| 529-to-Roth lifetime | $35,000 per beneficiary | SECURE 2.0 |
| 529-to-Roth annual | $7,500 (under 50) | Notice 2025-67 |
State aggregate 529 caps (often $300k–$500k+ per beneficiary) are a different ceiling — the plan stops accepting contributions when the balance is “enough” for that state’s published cost of attendance. That is not the gift-tax number. Direct tuition paid to an eligible school (not room and board) is a separate unlimited gift-tax exclusion; it never enters the 529.
Higher education: tuition, required fees, books, supplies, equipment, computers, and room and board if the student is at least half-time, up to the school’s cost-of-attendance figure. Eligible schools are those that can run federal student aid. Registered apprenticeship fees, books, and equipment count. Student-loan principal or interest for the beneficiary or a sibling: $10,000 lifetime each; that interest cannot also take the student-loan interest deduction.
K-12: IRS Topic 313 now caps elementary and secondary expenses at $20,000 per beneficiary per year from all of that beneficiary’s 529s, for distributions after December 31, 2025. Tuition plus curriculum, books, qualifying tutoring, and listed testing fees. Transportation, K-12 room and board, and most extracurriculars still do not. Postsecondary credentialing programs added in 2025 sit outside the K-12 cap — confirm the plan’s operational rules; the statute moved faster than some recordkeepers.
On the 2026–27 FAFSA, a 529 owned by a parent is a parent asset. Parent assets raise the Student Aid Index at most 5.64% after the asset-protection allowance. A $50,000 parent 529 is at most about $2,820 of SAI. A student-owned UTMA / custodial 529 is assessed at 20%. Title the account in a parent’s name. The kid is the beneficiary, not the owner.
Grandparent 529: through 2023–24, a distribution showed up as student untaxed income on the next FAFSA and could cost ~50% of the distribution in aid. FAFSA Simplification (2024–25 onward, still true for 2026–27) stopped asking. Grandparent-owned 529 assets are not reported. Those distributions are not student income. The old “wait until after the last FAFSA” lag is stale for federal aid. CSS Profile and some state grants can still ask. Keep the 529 in a parent’s name for control and a clean SAI, not a timing trick.
Change the beneficiary first. Then the Roth valve: 15 years, $35,000 lifetime, this year’s Roth cap, earned income, last-five-year contributions ineligible. A toddler’s 529 opened in 2026 is not a 2030 Roth. Cash-out is last. The calculator’s “kid skips” toggle shows ordinary + 10% on earnings — often enough to lose to the taxable twin you could have kept.
Match, then a cash sleeve, then the 529. There is no scholarship for your retirement. Loans, jobs, and schools exist at many price points. That order is the 12-step playbook, not this primer.
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Hash + bars. Gift-tax flag, superfund load, leftover 10% + ordinary, shareable URL. 7% is an example.
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12-step: net-price number, parent title, Form 709, dead FAFSA lag, draw order, leftover Roth.
No federal annual cap. $19,000 is the gift-tax exclusion per donor (Rev. Proc. 2025-32). Above that: Form 709, or the five-year election.
$95,000 / $190,000 treated as five years of exclusion. Election on Form 709. Skip the return and $76,000 of a $95,000 dump is a 2026 taxable gift.
Change beneficiaries. Then leftover Roth ($35,000 lifetime, 15-year clock, $7,500 in 2026). Cash-out last: tax plus 10% on earnings.
Parent-owned: parent asset, ~5.64%. Student UTMA: 20%. Grandparent lag is dead on the 2026–27 FAFSA. CSS Profile can still ask.
Some states, often in-state only. Run the deduction against the fee. Federally, contributions are not deductible.
$20,000 per beneficiary (IRS Topic 313). Tuition plus listed materials / tutoring / tests. Not bus fare. Higher-ed is uncapped.
15 years, $35,000 lifetime, annual Roth cap, earned income, last five years ineligible. MAGI limits on regular Roths do not apply to the rollover.
No. Maybe-school money is a brokerage. Match and HYSA sleeve first. There is no scholarship for your 401(k).
Educational only. Confirm Rev. Proc. 2025-32, IRS Topic 313, Notice 2025-67, your state’s 529 deduction, the plan’s program description, and FAFSA / CSS rules before you fund or withdraw. Written by Thomas Sanders.