Personal Finance & Estate › Investing basics & strategy › Tax-efficient investing & asset location
529 college savings plan (ScholarShare in CA)
Since 1996· Account or plan
Standard practiceWhat most planners, CPAs and attorneys recommend.
A state-sponsored education savings account whose growth is tax-free when spent on qualified schooling; California's is ScholarShare 529.
See it on the Personal Finance & Estate map →How it works
Anyone can open one for any beneficiary; there is no income limit and no California deduction for contributions. Withdrawals for college tuition, fees, books, computers and room and board are tax-free. Federal law also allows K-12 tuition (up to $20,000 a year from 2026), up to $10,000 of student loans and limited Roth IRA rollovers, but California taxes those uses plus a 2.5% penalty. Other non-qualified earnings face tax plus 10% federal and 2.5% California penalties.
Why it matters for you
Besides funding school, it moves money out of the giver's taxable estate while the owner keeps control and can change beneficiaries.
Rules, limits and sources (2026)
IRC Sec. 529, created in 1996; ScholarShare is run by the state's ScholarShare Investment Board, which caps total balances per beneficiary at $529,000.
Watch out for
Whether California will ever conform to the federal K-12, loan and Roth-rollover uses is unknown; so far it has not.
Connections (3)
▸529 college savings plan (ScholarShare in CA) is a tax-free vehicle within Tax-efficient investing & asset locationStandard practice
How they connect
A 529 is a tax-free growth bucket for education: contributions are after tax, but earnings are never taxed if spent on qualified schooling, much like a Roth IRA for tuition. It also lets families move savings out of yearly-taxed accounts.
When it applies
Created by Congress in 1996; withdrawals tax-free since 2002, made permanent in 2006; ScholarShare has been California's plan since 1999.
How sure?
IRC Sec. 529; plan disclosure documents; Form 1099-Q reports each withdrawal.
Watch out for
If the child skips college or wins scholarships, the benefit shrinks; scholarship withdrawals avoid the 10% penalty but not tax on earnings.
▸SECURE Act (2019) & SECURE 2.0 (2022) allows limited Roth rollovers from 529 college savings plan (ScholarShare in CA)Law or rule (2026)
How they connect
SECURE 2.0 lets leftover 529 money move to the beneficiary's Roth IRA: up to $35,000 lifetime, if the account is at least 15 years old, excluding contributions from the last five years, and within the yearly IRA limit ($7,500 in 2026) and the beneficiary's earned income.
When it applies
Passed December 2022; rollovers allowed from January 1, 2024. California treats them as taxable non-qualified withdrawals.
The rule
IRC Sec. 529(c)(3)(E), added by SECURE 2.0 Sec. 126; reported on IRS Forms 1099-Q and 5498.
Watch out for
Whether changing the beneficiary restarts the 15-year clock remains unresolved pending IRS guidance.
▸Gift tax annual exclusion ($19,000 in 2026) can be superfunded into 529 college savings plan (ScholarShare in CA)Law or rule (2026)
How they connect
A special election lets a giver front-load five years of annual exclusions into a 529 at once: $95,000 per beneficiary in 2026, or $190,000 from a married couple, without using lifetime exemption. If the giver dies within five years, part comes back into the estate.
When it applies
Allowed since the late 1990s; elected on a Form 709 gift-tax return, most often by grandparents and parents.
The rule
IRC Sec. 529(c)(2)(B); Form 709 instructions; the 2026 annual exclusion is $19,000 per recipient.
Watch out for
Since the 2024 FAFSA overhaul, grandparent 529 payouts no longer count against federal aid, but colleges using the CSS Profile may still count them.