Planning for a child’s education is one of the biggest financial commitments many families face. With college tuition and related expenses continuing to rise, finding efficient ways to save is more important than ever. For many parents and grandparents, 529 plans remain a cornerstone tool for education funding.
But how can you get the most out of these accounts, especially with changing rules and evolving family needs? Let’s explore what families need to know about maximizing 529 plans in 2025 to build a thoughtful education savings strategy.
Why 529 Plans Are a Go-To for College Savings
529 plans are designed to encourage saving for education by offering unique tax advantages. While contributions aren’t federally tax-deductible, earnings grow tax-deferred, and withdrawals used for qualified education expenses are free from federal income tax. Many states also sweeten the deal by offering their own deductions or credits for contributions.
What makes 529 plans particularly valuable is their flexibility. Funds can cover more than just college tuition, they can be used for room and board, books, fees, supplies and even computers and software required for classes. Recent changes have broadened the list of qualified expenses, including:
- K-12 tuition (subject to certain limits).
- Apprenticeship programs registered with the Department of Labor.
- Student loan repayment, up to $10,000 per beneficiary.
These expansions mean families can use 529 plans in ways that fit their unique goals. And if one child doesn’t use all the funds, a sibling or even a parent can often be named as a new beneficiary, preserving the value of your investment.
SEE ALSO: Legacy Planning: Passing Wealth with Purpose
Key Strategies for Maximizing 529 Plans in 2025
If you already contribute to a 529 plan—or are thinking of starting—these strategies can help you stay proactive:
- Evaluate State Plan Benefits
Every state runs its own version of the 529 plan, and the benefits vary widely. Some states offer significant tax incentives for residents who contribute to their plan, while others allow you to invest in any state’s plan without penalty. Each state plan has different maximum contribution limits which is important when using a 529 as a part of your estate plan. Compare fees, investment options, and state-specific perks to determine which plan fits your family’s needs. - Take Advantage of Age-Based Portfolios
Many 529 plans offer age-based portfolios that automatically adjust their risk level as the 529’s beneficiary approaches college age. These options can provide a more hands-off approach for families who want a simple solution. For those who prefer a more customized investment strategy, static portfolios allow you to choose a fixed asset allocation. Age-based portfolios are best suited for young beneficiaries 10 years or more from entering college, while static portfolios are best suited for older beneficiaries. - Consider “Super funding” Contributions
One unique feature of 529 plans is the ability to make a large lump-sum contribution, up to five years of the annual gift tax exclusion, without triggering gift taxes. This can be especially impactful for grandparents or relatives who want to make a meaningful financial gift while still complying with tax rules. - Align Contributions with Milestones
Rather than waiting until your child is older, consider breaking contributions into smaller, regular amounts tied to key milestones (like birthdays or tax refunds). Automating contributions can also help you stay on track without needing to think about it each month. - Stay Informed on Legislative Changes
A provision in the SECURE 2.0 Act further expands how families can use 529 funds in the future, such as allowing transfers of unused funds into Roth IRAs when certain conditions are met by the 529 beneficiary.
SEE ALSO: Investment Account Options for College Savings
Common Pitfalls to Avoid
While 529 plans offer significant advantages, there are some potential missteps to watch out for:
Overfunding the account
If your child doesn’t use all the funds for education, non-qualified withdrawals may be subject to income taxes and a 10% penalty on earnings. A contingency plan, such as changing the beneficiary to another family member, can help avoid penalties.But a beneficial caveat is if the assets in the 529 have been invested for more than 15 years incurring taxes and tax penalty on the investment gain can net higher capital appreciation versus a taxable investment account over the same time period.
Timing withdrawals incorrectly
To avoid unexpected tax consequences, make sure distributions from the account align with the timing of qualified expenses.
Not naming a successor owner
Naming a successor ensures that the account can be managed seamlessly if something happens to the current owner.
Preparing for Rising College Costs
The cost of higher education shows no signs of slowing down. Even small, consistent contributions to a 529 plan can make a big difference over time. Starting early allows funds to benefit from potential compound growth, helping you build a stronger foundation for your child’s future.
It’s also worth revisiting your plan regularly. Family circumstances, college choices, or market conditions can shift over time. Adjusting your contributions or investment strategy along the way can help you stay aligned with your long-term goals.
Your Next Step Toward Education Planning
A 529 plan can be a powerful part of a larger financial strategy, but only if it fits within your overall goals. At Davidson Capital Management, we actively manage our clients’ assets and goals that reflect their priorities, including preparing for education expenses.
Take the next step in planning for your family’s future. Schedule a consultation today to discuss how we can help you navigate the path forward.
