Alabama 529 Plans: Tax Deduction, Uses, and CollegeCounts

The Alabama 529 plan, officially called the CollegeCounts 529 Fund, lets state residents deduct up to $5,000 per year in contributions from their Alabama taxable income, or $10,000 on a joint return.¹ Money inside the account grows free of federal and state income tax, and withdrawals used for qualified education expenses come out tax-free.

Which Alabama 529 Plan Is Open to New Savers

CollegeCounts, administered by the State Treasurer’s Office, is the only Alabama 529 plan currently accepting new accounts.² There’s no minimum to open an account, and any U.S. citizen or legal resident can enroll regardless of state.¹

Alabama’s older Prepaid Affordable College Tuition (PACT) Program closed to new enrollment in 2008. Existing PACT holders still use their benefits, but if you’re starting now, CollegeCounts is it.³

The Alabama State Tax Deduction

The $5,000 single / $10,000 joint cap applies to your total contributions across all Alabama 529 accounts for all beneficiaries in a year, not per child.¹ You claim the deduction in the same tax year you contribute, so a deposit made in late December still counts for that year.

Contributions above the cap aren’t lost. They go into the account and compound tax-free along with everything else. You just can’t deduct the overage on your Alabama return. Withdrawals used for qualified expenses later escape income tax on both the original contributions and any earnings they generated.

How Much You Can Contribute

There’s no annual contribution ceiling set by the plan, but Alabama stops accepting new contributions once a beneficiary’s total balance across all Alabama 529 accounts hits $475,000. Earnings can continue to accrue above that line; you just can’t add fresh money until the balance falls back below it.¹

Federal gift tax rules also apply. For 2026, you can give up to $19,000 per beneficiary without triggering a gift tax return.⁴ A married couple can combine for $38,000 to the same beneficiary. A five-year election on IRS Form 709 lets you front-load up to $95,000 ($190,000 for a couple) in a single year by treating it as five equal annual gifts, which works well when a young beneficiary has the full runway to compound.

What the Money Can Pay For

College, Graduate School, and Apprenticeships

Qualified higher-education expenses include tuition, required fees, books, supplies, and equipment at an eligible institution. Room and board qualify when the student is enrolled at least half-time. Computers, software, and internet access used primarily by the student during enrollment also count.⁵

Registered apprenticeship programs certified with the U.S. Department of Labor are eligible, including fees, books, supplies, and required equipment.⁵

K-12 Expenses

For students at public, private, or religious K-12 schools, federal law covers more than tuition:⁵

Tuition at any elementary or secondary school
Curriculum materials, textbooks, workbooks, and online educational content
Tutoring by a licensed teacher, former eligible-institution instructor, or subject-matter expert, as long as the tutor isn’t related to the student
Standardized achievement tests, AP exams, and college admission test fees
Dual-enrollment college course fees
Occupational, behavioral, physical, and speech-language therapies for students with disabilities, provided by a licensed practitioner

Student Loan Payments

You can also use 529 funds to pay down qualified student loans for the beneficiary or a sibling of the beneficiary, up to a lifetime cap of $10,000 per borrower across all tax years combined.⁵

What Happens If the Funds Aren’t Used for School

Non-qualified withdrawals carry two layers of tax. Federally, the earnings portion is taxed as ordinary income and hit with a 10% additional penalty.⁵ Alabama then requires the contributing taxpayer to add back the full amount of the non-qualified withdrawal, plus another 10% of that withdrawal, to Alabama taxable income.⁶ The state recapture applies to the entire withdrawal, not just earnings, which makes casual non-qualified withdrawals costly for Alabama residents who claimed the deduction in prior years.

One softening rule: if the beneficiary receives a tax-free scholarship, you can withdraw an amount equal to the scholarship without the 10% federal penalty, though ordinary income tax on the earnings portion still applies. The same penalty exception covers withdrawals after the beneficiary enters a military academy, becomes disabled, or dies.

Change the Beneficiary Instead

If the original beneficiary doesn’t need the money, you can change the beneficiary to another qualifying family member with no tax or penalty. The IRS definition is broad: siblings, parents, children, stepchildren, first cousins, nieces, nephews, aunts, uncles, in-laws, and their spouses all qualify. You can also roll funds between 529 plans for the same beneficiary or a family member, limited to one rollover per 12-month period.

Roll Leftover Funds to a Roth IRA

Since 2024, unused 529 funds can be moved directly to a Roth IRA in the beneficiary’s name under SECURE 2.0, subject to strict conditions:

The 529 account must have been open at least 15 years
Only contributions made more than five years before the rollover are eligible
Each year’s rollover can’t exceed the Roth IRA contribution limit, which is $7,500 in 2026⁷
Lifetime cap of $35,000 per beneficiary⁵
The transfer must go trustee-to-trustee
Each rollover dollar reduces the beneficiary’s regular Roth contribution room for that year

At the 2026 limit, moving the full $35,000 takes at least five years, so this is a long-horizon safety valve rather than a quick exit.

How a 529 Affects Financial Aid

A parent-owned 529, which is the usual setup, is treated as a parental asset on the FAFSA. Only up to 5.64% of the balance counts toward the family’s Student Aid Index. If the student owns the account instead, up to 20% is counted.

The difference is meaningful. A $50,000 parent-owned 529 reduces aid eligibility by at most about $2,820. The same balance in a student-owned account could cut eligibility by $10,000. If a grandparent or other non-parent originally opened the account, transferring ownership to a parent before the FAFSA is filed captures the lower assessment rate.

Opening a CollegeCounts Account

Enrollment happens online through the plan’s website and takes a few minutes. You’ll need Social Security numbers and addresses for yourself and the beneficiary, plus bank information if you want to fund the account right away. No minimum contribution is required.¹

Once open, the account accepts automatic recurring deposits from a bank account or through payroll deduction.⁸ When you withdraw, time distributions to the tax year in which you actually pay the qualified expense. That keeps a clean record if the IRS ever asks whether a distribution was used properly.

1
CollegeCounts. CollegeCounts 529 – FAQs
2
Office of the Alabama State Treasurer. CollegeCounts 529
3
Office of the Alabama State Treasurer. PACT – Prepaid Affordable College Tuition
4
Internal Revenue Service. Gifts and Inheritances
5
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
6
Alabama Administrative Code. Alabama Administrative Code 810-3-15-.27 – Deductions for Contributions to Alabama College Education Plans
7
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
8
CollegeCounts. CollegeCounts 529 – Contributions