California 529 Plans: ScholarShare Rules, Tax Benefits, and Aid Impact

A California 529 plan, known as ScholarShare 529, lets you invest money for a child’s education and pay no federal tax on the investment growth as long as the funds are used for qualified education expenses. It’s open to anyone in the country, charges some of the lowest fees of any 529 in the country, and can pay for everything from private kindergarten to graduate school to student loans. What it does not do is give you a California income tax deduction for your contributions, which sets it apart from the roughly 30 states that do offer one.

The California Tax Catch

California does not offer a state income tax deduction or credit for 529 contributions. That’s the single most important thing for a California resident to understand before opening an account. If you live in a state that does offer a deduction, contributing to that state’s plan instead of ScholarShare may save you more money, so it’s worth comparing before you commit.

For Californians, the incentive is entirely at the federal level, and it applies no matter which state’s plan you choose. So the reason to pick ScholarShare over an out-of-state plan comes down to fees, investment lineup, and convenience, not a home-state tax break.

What the Federal Tax Break Gives You

Contributions go in with after-tax dollars. Inside the account, investment earnings grow without triggering annual income tax. When you pull money out for qualified education expenses, the earnings come out completely tax-free at the federal level.¹

That combination of tax-deferred growth and tax-free withdrawals is what makes a 529 more efficient than a regular brokerage account for education savings. Your original contributions can also come back to you at any time without tax or penalty, since they were already taxed on the way in. Only the earnings carry conditions.

Who Can Open a ScholarShare Account and How Much They Can Put In

Any U.S. citizen or legal resident who is at least 18 and has a Social Security number or taxpayer identification number can open a ScholarShare account.² You do not need to live in California, and if you move out of state later you can keep contributing.³ The beneficiary also needs a Social Security or taxpayer ID number, but has no age or residency requirement.

ScholarShare caps total balances at $529,000 across all accounts held for a single beneficiary.³ Once you hit that ceiling, you can’t add more, though investment returns can still push the balance higher.

There’s no annual contribution limit imposed by the plan itself. Federal gift tax rules are what usually govern how much you’d want to put in during a single year. For 2026, the annual gift tax exclusion is $19,000 per recipient.⁴ A married couple can together contribute $38,000 to the same beneficiary without any gift tax paperwork.

A special five-year election lets you front-load up to $95,000 per beneficiary in a single year, or $190,000 for married couples, by spreading the gift evenly across five tax years for gift tax purposes.⁴ You report it on IRS Form 709. During those five years, additional gifts to the same beneficiary can push you over the annual exclusion. If the contributor dies before the five years run out, a prorated share of the contribution gets pulled back into the taxable estate.

Fees and Investment Options

ScholarShare’s total annual asset-based fees run from 0.04% to 0.38%, depending on the portfolio.⁵ Passive index-based portfolios sit at the low end; actively managed portfolios cost more. Fees come out of your account assets rather than as a separate bill. There are no enrollment fees, no annual account fees, and no sales loads. That fee structure is the main reason a California resident might stick with ScholarShare even without a state deduction.

You get two kinds of portfolios. Age-based portfolios shift automatically from stock-heavy allocations while the beneficiary is young to more conservative bond-heavy allocations as college approaches. Set it up when the child is a toddler and it handles the rebalancing for the next 18 years or so. Static portfolios let you pick and hold a specific mix regardless of age, giving you more control if you want it.

Federal law limits how often you can reshuffle money already in the account. You can change the investment allocation for existing contributions only twice per calendar year.¹ New contributions can go into any portfolio you like at any time. Changing the beneficiary also resets the counter.

What You Can Spend It On

Tax-free treatment only applies when the money pays for expenses the IRS calls “qualified.” Use it for anything else and you owe income tax on the earnings, plus penalties. Qualified expenses fall into four buckets.

College and Postsecondary

Tuition and mandatory fees at any school that participates in federal student aid programs are covered. That includes four-year universities, community colleges, many trade and vocational schools, and some international institutions. Books, supplies, and equipment required for enrollment also qualify.¹

Room and board qualifies if the student is enrolled at least half-time. On-campus housing is covered up to what the school actually charges. Off-campus, you can withdraw up to the school’s published cost-of-attendance figure for room and board. Anything above that allowance loses the tax break.⁶

Computers, peripheral equipment, software, and internet service qualify as long as the beneficiary uses them primarily during enrollment. Games and hobby software don’t count unless they’re predominantly educational.¹

K-12

Starting in 2026, you can withdraw up to $20,000 per beneficiary per year for elementary and secondary school expenses at public, private, or religious schools.¹ That’s double the previous $10,000 cap. The list of what counts expanded, too: beyond tuition, eligible K-12 expenses now include curriculum and instructional materials, books, online educational materials, standardized achievement test and AP exam fees, dual enrollment fees, and tutoring by a qualified instructor outside the school.⁶ The $20,000 limit applies across all 529 accounts held for that beneficiary combined, not per account.

Student Loans

Up to $10,000 per borrower, over a lifetime, can go toward student loan repayment for the beneficiary or the beneficiary’s sibling.¹ The cap applies across all 529 plans, so pulling from two accounts doesn’t double the limit. Federal and private student loans both qualify. Paying a sibling’s loan counts against that sibling’s $10,000, not the designated beneficiary’s.

Registered Apprenticeships

Fees, books, supplies, and equipment for apprenticeship programs registered with the U.S. Department of Labor qualify for tax-free withdrawals.⁶ The account still works if the beneficiary goes into a skilled trade instead of a traditional degree program.

If Plans Change

The Cost of a Non-Qualified Withdrawal

Take money out for something other than a qualified expense, and the earnings portion of that withdrawal gets taxed as ordinary income. On top of that, the federal government tacks on a 10% additional tax on those earnings.¹ California adds a 2.5% additional tax on that same earnings portion.⁷ Only earnings get hit. If you contributed $50,000 and the balance grew to $70,000, a full non-qualified withdrawal would trigger income tax plus the 10% federal and 2.5% California penalty on the $20,000 in earnings.

The 10% federal penalty is waived in a few situations, though the earnings are still taxed as income: the beneficiary receives a scholarship (you can withdraw up to the scholarship amount penalty-free), the beneficiary dies or becomes disabled, or the beneficiary attends a U.S. military academy. California’s 2.5% penalty follows the same exceptions.

Changing the Beneficiary

If one child doesn’t need the money, you can change the beneficiary to another qualifying family member without triggering any tax. The IRS defines “family member” broadly for this purpose, covering siblings, parents, first cousins, in-laws, step-relatives, and the spouses of most of those relatives.¹ Rollovers into another state’s 529 plan are allowed once per 12-month period for the same beneficiary.

Rolling Leftover Funds Into a Roth IRA

Federal law now allows tax-free rollovers from a 529 into a Roth IRA in the beneficiary’s name.⁸ The rules are strict. The 529 account has to have been open for the beneficiary for at least 15 years. Only contributions (and their earnings) that have been in the account for at least five years can be rolled. The rollover in any year cannot exceed the beneficiary’s Roth IRA annual contribution limit and counts against it. Total rollovers across all 529 plans for one beneficiary are capped at $35,000 for life. The money must move as a direct trustee-to-trustee transfer.

The 15-year clock means this isn’t a last-minute escape hatch. Parents who opened an account at a child’s birth and find leftover money in the child’s twenties are the ones best positioned to use it.

How a 529 Affects Financial Aid

A 529 plan owned by a parent or the student is reported as a parent asset on the FAFSA. Parent assets are assessed at a maximum rate of 5.64% when calculating the expected family contribution. A $50,000 balance would reduce aid eligibility by at most about $2,820. That treatment is much more favorable than money held in a custodial account in the student’s name, which gets assessed at 20%.

A 529 owned by a grandparent or other relative isn’t reported on the FAFSA at all. Under current FAFSA rules, distributions from grandparent-owned 529 plans also no longer count as untaxed student income, removing a penalty that used to make grandparent-owned accounts less attractive.

Opening a ScholarShare Account

Opening an account takes a few minutes online. You need your Social Security or taxpayer ID number, the same for the beneficiary, and bank routing and account numbers to fund the first contribution.² There’s no minimum initial contribution. Once the account is open, you can set up recurring automatic contributions, change the beneficiary, adjust portfolios within the twice-per-year limit, or transfer account ownership through the online portal. The funds work at eligible schools in any state or abroad, so the money follows the student wherever they land.³

1
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
2
ScholarShare 529. How Does a 529 Plan Work in California
3
ScholarShare 529. ScholarShare 529 College Savings Plan Frequently Asked Questions
4
Internal Revenue Service. Whats New Estate and Gift Tax
5
ScholarShare 529. Fees and Expenses
6
Internal Revenue Service. Publication 970 Tax Benefits for Education
7
Franchise Tax Board. 2025 Instructions for Form FTB 3805P Additional Taxes on Qualified Plans
8
Internal Revenue Service. Publication 590-A Contributions to Individual Retirement Arrangements