Smart Education Planning, Part 3: Spending Education Funds Wisely

MaryLucy Bergeron, CFP®

You’ve worked hard to save—and now it’s time to put those dollars to work wisely.

In Part 1 of our education planning series, we talked about how much to save and when to start. Then in Part 2, we broke down the pros and cons of different account types, including how they’re taxed and how they affect financial aid.

In this final post, we’ll shift focus to the “spending” side of the equation, covering strategies for using what you’ve saved, how to avoid costly missteps, and what to do if plans change along the way. Whether you’re paying for college now or preparing for the future, these tips can help you stretch your savings and stay in control.

Understanding Qualified Education Expenses

Before tapping into your 529 plan or other savings, it’s important to understand what qualifies as a legitimate education expense. For 529 plans, qualified expenses include more than just college tuition:

• Tuition and fees at eligible colleges, universities, vocational schools, and other post-secondary institutions

• Room and board, if the student is enrolled at least half-time

• Books, supplies, and required equipment

• Technology, such as laptops, printers, and internet access used primarily for school

• Special needs services for a beneficiary with disabilities

• Expenses towards attaining or maintaining an eligible credential:

  • Tuition, books, and other requirements for enrolling in a credential program

  • Exam fees

  • Continuing education

Expanded Uses: Beyond Traditional College

529 plans have grown more flexible over the years, and qualified expenses now include:

• Registered apprenticeship programs—including those certified by the U.S. Department of Labor—are eligible, and 529 funds can be used for required tools, books, and supplies

• Accredited certification and designation programs—such as certain healthcare, financial, IT, and trade designations—may qualify if offered through an eligible institution

• K–12 tuition: You can use up to $10,000 per year for 2025, per student, from a 529 plan to pay for tuition at public, private, or religious K–12 schools, and homeschool expenses. Beginning in 2026, the new One Big Beautiful Bill Act increases this amount to $20,000 per student, per year. This bill, effective upon its passage, also expands eligible expenses to include:

  • Curriculum, books, and instruction materials

  • Tutoring outside the home

  • Standardized testing

  • Fees for postsecondary coursework

  • Physical, occupational, behavioral, speech-language, and other therapies for students with disabilities.

• Special Needs Education Expenses: If the beneficiary has special needs, 529 funds can be used for a broader range of qualified expenses, potentially including therapies, transportation, and other support-related education costs.

• Coordination with ABLE Accounts (for Disabilities): If the beneficiary becomes disabled and qualifies for an ABLE account, up to $17,000 per year (as of 2025) can be rolled from a 529 to an ABLE account without penalty or tax, giving them more flexibility and access to disability-related benefits.

This expanded definition opens the door to using 529 funds for a wide range of educational paths, not just four-year degrees. Whether your child is pursuing traditional college, a trade, a professional designation, or early private education, the 529 can be a valuable and flexible tool.

Tip: To confirm qualified expense eligibility, check that programs are listed with the Department of Education or Apprenticeship USA if you're unsure.

Tax Credit Optimization: Don’t Leave Money on the Table

When it comes to paying for college, it’s not just about what you spend—it’s also about how you spend it. Two major tax credits can help reduce your out-of-pocket costs:

• American Opportunity Tax Credit (AOTC): Offers up to $2,500 per student, per year, for the first four years of undergraduate education. This credit is partially refundable, meaning you can receive some credit even if you owe no tax, and has income phaseouts starting at $160,000 for married couples in 2025.

• Lifetime Learning Credit (LLC): Offers up to $2,000 per return for tuition and fees for any level of higher education, including part-time, graduate, or continuing education. This credit is non-refundable and has similar income limits.

To get the full benefit, be strategic about which expenses you cover out of pocket. More on this in the Smart Withdrawal Strategies section that follows.

Smart Withdrawal Strategies: Withdraw Education Funds in the Right Order

When it’s time to spend your education savings, the order in which you withdraw funds can make a big difference in taxes, penalties, and flexibility. Think of your savings as buckets of money, each with its own rules and benefits. Drawing from these buckets in the right sequence helps you maximize tax advantages and keep options open for unexpected expenses.

1. Start by Paying the First $4,000 of Tuition Out of Pocket (If You Qualify for the AOTC)

   A smart tactic is to cover the first $4,000 of tuition directly out of pocket—using income, savings, or Roth IRA contributions (not earnings)—to qualify for the American Opportunity Tax Credit (AOTC). This credit can provide up to $2,500 in tax savings per eligible student, reducing your tax bill dollar-for-dollar. However, keep in mind the AOTC has income limits and phases out for higher earners (for 2025, the credit begins to phase out at a modified adjusted gross income of $80,000 for single filers and $160,000 for joint filers). If you’re eligible, paying tuition out of pocket helps you maximize this valuable credit.

2. Use 529 Plan Withdrawals Next for Other Qualified Expenses

   Once you’ve paid that initial tuition out of pocket, use your 529 plan funds to cover other qualified education expenses such as room and board, books, supplies, or any additional tuition costs. Withdrawals from 529s for qualified expenses are federally tax-free and often state tax-free, making them a powerful source for education funding.

3. Then, Tap into Roth IRA Contributions If Needed

   If you need additional funds beyond your 529 plan, Roth IRA contributions are a flexible option. You can withdraw the contributions (the money you put in) tax- and penalty-free at any time. Just be careful not to withdraw earnings early, as that could trigger taxes and penalties.

4. Reserve Custodial and Taxable Accounts for Extra Flexibility

   Custodial accounts (such as UTMA/UGMA) and taxable investment accounts don’t have special tax advantages for education expenses, so it may make sense to use these last. They can be helpful for non-qualified costs or to cover gaps if other sources run short. Keep in mind, withdrawals here may result in capital gains taxes.

By thoughtfully sequencing your withdrawals—starting with out-of-pocket tuition payments to maximize tax credits if you qualify, then 529s, followed by Roth IRA contributions, and finally custodial or taxable accounts—you can reduce taxes, avoid penalties, and make your education savings work harder for you.

Timing & Coordination Tips

Smart planning can help you avoid costly mistakes and make the most of your education dollars:

1. Match withdrawals and expenses: 529 withdrawals must happen in the same calendar year as the qualified expenses they’re covering.

2. Watch income thresholds: If your income is near the AOTC or LLC phaseout ranges, consider contributing more to retirement plans or HSAs to lower your adjusted gross income and preserve eligibility.

3. Avoid double-dipping: If your student receives scholarships or grants, don’t use 529 funds to pay for the same expenses. Instead, reserve 529 withdrawals for other qualified costs or future education.

What to Do with Leftover 529 Funds

Sometimes students earn scholarships, take a different path, or simply don’t use all the funds saved in their 529 account. The good news? You have more flexibility than ever with what to do next. Here are smart options for leftover 529 funds:

• Roll Over to a Roth IRA

  Thanks to the SECURE Act 2.0, you can roll over up to $35,000 of unused 529 funds into a Roth IRA for the same beneficiary—penalty- and tax-free. This can be a great way to jump-start their retirement savings. However, there are a few rules: The 529 account must have been open for at least 15 years, the funds being rolled over must have been in the account for at least five years, and rollovers are subject to annual Roth IRA contribution limits and income eligibility rules.

• Use Up to $10,000 Toward Student Loans

  You can use up to $10,000 from a 529 plan to repay qualified student loans for the beneficiary—and an additional $10,000 for each of their siblings. This includes both federal and private loans and can help reduce debt faster without sacrificing tax benefits.

• Reassign the Beneficiary

  529 plans are highly flexible when it comes to family. You can change the beneficiary to another qualified family member—such as a sibling, cousin, spouse, or even yourself—without triggering taxes or penalties. This is a helpful strategy if another child or relative could use the funds for their education.

• Use for Graduate School or Continuing Education

  If your child pursues an advanced degree or professional certification, 529 funds can continue to be used tax-free for tuition, fees, books, and other qualified expenses.

• Withdraw Penalty-Free for Scholarships

  If your student received scholarships, you can withdraw up to the amount of the scholarship without paying the 10% penalty. However, you’ll still owe income tax on the earnings portion of the withdrawal.

• Leave It as a Legacy

  There’s no time limit on when 529 funds must be used. You can keep the account open and growing for future grandchildren or even use it to build an educational endowment for your family’s next generation. This can be a powerful multi-generational planning tool.

• Withdraw for Non-Qualified Expenses (Last Resort)

  If you decide to use the money for non-education expenses, be aware that the earnings portion of the withdrawal will be subject to income tax and a 10% penalty. This option should only be considered if none of the other alternatives apply.

Planning for the Unexpected

Even the best-laid education plans can shift over time. Whether your child takes a gap year, transfers schools, chooses a different path entirely, or returns to school later in life, the key is to keep your strategy flexible and the conversation open.

• Mix Account Types for Flexibility

  Using a combination of account types—like 529 plans, Roth IRAs, custodial accounts, and general savings—gives you room to pivot as plans evolve. Each has different rules and uses, and together they can adapt to a range of future scenarios.

• Talk Openly with Your Student

  Discuss costs, values, and responsibilities early and often. Involving your child in the planning process helps set expectations and encourages shared ownership over their education journey.

• Know That Funds Can Still Be Used Later

  If your student delays college, switches majors, takes time off, or pursues education or professional development later on, your savings don’t go to waste. 529 plans can be used well into adulthood (even for graduate programs or approved apprenticeships), Roth IRA contributions remain accessible, and taxable accounts are always flexible.

By understanding qualified expenses, leveraging tax credits, using smart withdrawal strategies, and staying flexible with your savings, you can make the most of your education funds—helping your student succeed no matter what path they take.

Looking Back at Part 1: Laying the Foundation—How Much to Save & When to Start

In the first part of our series, we explored how much to save for college and why starting early is key. We also covered the real cost of college, common saving mistakes, and how financial aid and scholarships can impact your plan—laying the groundwork for choosing the right accounts and spending strategies in the next posts.

Looking Back at Part 2: What Accounts to Use & How to Use Them

In the second part of the series, we explored the most common tools for saving for college. From 529 plans to UTMAs to Roth IRAs, we reviewed the pros, cons, and best-fit scenarios for each. While there’s no one-size-fits-all approach, we highlighted clear dos and don’ts to help families maximize their efforts and navigate tax and financial aid considerations.

Schedule a complimentary 30-minute discovery call with a fiduciary wealth advisor.