What Are the Tax Benefits of a 529 Plan in California?

A 529 plan in California offers tax-deferred growth and tax-free withdrawals when the funds are used for qualified education expenses such as tuition, books and certain housing costs. While California does not provide a state income tax deduction or tax credit for 529 plan contributions, residents can still benefit from federal tax advantages. Earnings in the account are not subject to federal income tax, and qualified withdrawals avoid taxation altogether, making 529 plans a useful tool for long-term education savings.

For a hands-on approach to your finances, including education planning, consider working with a financial advisor.

How 529 Plans Work in California

529 plans are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code. These plans are designed to offer tax advantages that enable families to save for future college costs in a financially efficient manner.

When considering California’s plan, known as ScholarShare 529, ¹ you must understand the tax laws that govern it. Unlike many other states, the Golden State does not provide a state income tax deduction or credit for contributions made to a 529 plan. However, California’s 529 plans have generous contribution limits, allowing individuals to contribute up to $529,000 per beneficiary, over the account’s lifetime.

Tax Benefits of a California 529 Plan

California doesn’t offer a state income tax deduction or credit for 529 plan contributions, but residents still enjoy significant federal tax advantages. Contributions grow tax-deferred, and withdrawals used for qualified education expenses like tuition, housing, books and supplies are tax-free at both the federal and state levels.

1. Tax-Free Earnings

You contribute after-tax dollars to a California 529 plan, but any earnings on those contributions aren’t subject to ongoing federal or state income taxes as long as funds are used for eligible education costs. This allows savings to compound more efficiently over time.

2. Tax-Free Withdrawals for Qualified Expenses

Distributions used for qualified expenses, including tuition, fees, room and board and course materials, are not taxed at either the state or federal level. However, if you withdraw funds from a 529 plan for non-qualified expenses, the earnings portion of the withdrawal could be subject to income tax and a 10% federal penalty.

3. Estate Planning Benefits

Contributions to a 529 plan count as gifts for tax purposes and qualify for the annual gift tax exclusion. You can also front-load up to five years’ worth of contributions at once without triggering gift taxes, which makes 529 plans a useful estate planning tool for reducing taxable estates while funding education goals. In 2025, that means a person can contribute up to $19,000 to a 529 plan tax-free or front load five years’ of contributions (up to $95,000)

Qualifying Expenses for Your California 529 Plan

Qualifying educational expenses, as in other states, generally include education-related costs that meet the criteria set by the Internal Revenue Service (IRS). 529 plans typically cover:

• Payments for tuition at eligible educational institutions.
• Room and board expenses for students who are enrolled at least half-time.
• The cost of books, supplies, and equipment required for enrollment or attendance.
• Expenses for computer technology, software, and internet access that are used by the beneficiary while enrolled in an eligible educational institution.
• Expenses for special needs services incurred in connection with the enrollment or attendance of the beneficiary.

As explained earlier, qualifying expenses must be directly associated with the beneficiary’s education. Additionally, expenses for K-12 education have been expanded as eligible expenses up to $10,000 per year, per beneficiary, under federal law. Starting in 2026, that limit will increase to $20,000 under the One Big Beautiful Bill Act.

For students living off-campus, the eligible amount for housing expenses is capped at the amount the educational institution includes in its cost of attendance for federal financial aid purposes.

Other Benefits of a 529 Plan

In addition to tax-deferred growth and tax-free withdrawals for qualified education expenses, here are four additional benefits for a 529 plan:

• 529 plans can allow you to change the beneficiary. If the original beneficiary decides not to pursue higher education, you can change the beneficiary to another eligible family member without tax consequences.
• There are no income restrictions for contributing to a 529 plan, which makes it accessible for families from different income levels. This is unlike some other education savings options, such as Coverdell Education Savings Accounts, which have income limitations for contributors.
• As an account owner, you have control over the investment options in the 529 plan. This allows you to choose a portfolio that aligns with your risk tolerance and investment goals. So you can tailor your investment strategy based on market dynamics and the changing educational needs of the beneficiary.
• Unlike other education savings options, there is no age limit for using 529 plan funds. This means that the beneficiary can use the funds at any age for qualified education expenses without penalty.
• When a parent owns the account, a 529 plan is counted as a parental asset for FAFSA purposes, which has a smaller impact on financial aid eligibility than if the funds were owned by the student directly.

Bottom Line

California’s 529 plan provides a valuable framework for families to save for educational expenses with tax advantages, despite the absence of state tax deductions. These plans offer tax-deferred growth and tax-free withdrawals for qualified expenses, which can significantly boost savings over time.

Tips for Saving for College

• A financial advisor can help you create an education savings plan for your family’s goals and needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to open a 529 plan, make sure you consider which one might be best for the state you live in by analyzing every 529 plan by state.

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