Making the Most of Your 529 Education Plan

Are you saving for your children's or grandchildren's education? College tuition and housing costs have steadily increased for decades, making long-term financial planning essential for your family's future.

The good news is that educational savings plans have expanded beyond college expenses. You can now use these tax-advantaged accounts to cover education costs at all levels—from elementary and high school through college and graduate school. This flexibility means you can start saving early and use the funds as your children progress through their education journey.

With education costs continuing to rise, starting an educational savings plan today can help ensure your children and grandchildren have the financial support they need to pursue their academic goals without the burden of excessive debt.

What is a 529 Education Plan?

Contributing to a 529 Education Plan is simple and offers significant financial advantages. These plans, typically managed by individual states or financial institutions, allow for tax-deductible contributions and flexible features such as automated deposits and the ability to transfer funds between beneficiaries. With substantial tax benefits, they make it easier to build a dedicated education fund. According to a recent study by the Investment Company Institute, total assets in 529 Education Plans reached $525.1 billion in 2024—an 11.45% increase over 2023.

When is the best time to set up a 529 Education Plan?

Like most savings plans, the sooner you start, the more time your money will have to grow. You don’t have to pay in an exorbitant amount for it to be useful—just contribute what your budget will allow. “Even if you don't have a lot to spare at the moment, consistent contribution to an education savings account will have significant benefits when your children are ready to start school,” says Chad Waddoups, vice president of wealth management at Mountain America Credit Union. “And the earlier you start, the better!”

Choose the savings plan that works best for you

There are two types of 529 Education Plans—prepaid tuition plans and savings plans . Prepaid tuition plans let you lock in a specific rate and purchase credits for participating colleges and universities. No investing is needed with this plan.

With savings plans, money is deposited into a tax-advantaged account and invested. Use this money to pay for eligible education expenses. Do some research or talk with an advisor at your financial institution to determine which fund will best meet the financial needs of your future students.

Why a 529 Education Plan makes financial sense

A 529 Education Plan offers more than just college savings—it’s a versatile financial tool that grows with your family’s changing needs. These tax-advantaged accounts provide multiple ways to invest in education while maintaining flexibility for life’s unexpected turns.

Key advantages:

• Flexible use of funds—Unused funds can be rolled over into a Roth IRA, ensuring your savings aren’t locked into educational expenses if plans change.

• Student loan relief—Use your 529 funds to pay down existing student loans, providing another pathway to reduce education debt.

• Complete account control—As the account owner, you maintain full authority over withdrawals and investment decisions, regardless of the beneficiary’s age.

• Universal accessibility—Income limits don’t apply. Families at any income level can open or contribute to a 529 plan.

Beware of potential fees

Just like with any investment, 529 plans could charge a fee to cover operating costs. While some fees are unavoidable, keep in mind that plans managed by investment advisors tend to charge higher fees than those that are run by the state. Be sure you understand the fee structure and investment options before opening your account.

Flexibility for 529 plan funds

One of the greatest advantages of a 529 Education Plan is its versatility. These tax-advantaged funds can be used for a wide range of educational expenses, giving families flexibility to support learning at every stage of life.

Qualified educational expenses:

• K–12 tuition—Up to $10,000 per year for elementary and secondary school tuition at public, private or religious schools.

• Higher-education costs—Tuition, fees, books, supplies and required equipment for college, university and graduate programs.

• Student housing—Room and board expenses for students enrolled at least half-time in eligible institutions.

• Special needs support—Additional costs for special needs services required for enrollment or attendance.

• Career training—Qualified apprenticeship programs and trade schools .

• Student loan relief—Up to $10,000 lifetime maximum for repaying qualified student loans for the beneficiary or their siblings.

Who can contribute

No matter who opens the account—whether a parent, grandparent or the student themselves—a 529 Education Plan welcomes contributions from virtually anyone who wants to support a child’s educational future. Contributions can be made easily through check or electronic transfer, and there are no income restrictions limiting who can contribute or who can benefit from the plan.

It's important to note that contributions are considered completed gifts for federal tax purposes, so contributors should be aware of annual gift tax exclusion limits. Additionally, while some states offer tax deductions or credits for 529 contributions, these benefits typically apply only to the account owner rather than third-party contributors. Check with your state's specific rules to understand any tax advantages that may be available.

Protect your investment

Allocating your funds wisely is critical to the long-term growth of your 529 Education Plan. The investment approach you choose can significantly impact how much your savings will grow over time, making it essential to develop a strategy that aligns with your timeline and comfort level.

Some people may be comfortable managing their own investments, researching funds and making periodic adjustments based on market conditions and their child's age. Others may feel better having a knowledgeable financial professional oversee the account.

Consider your risk tolerance carefully—if you've started saving early when your child is young, you can typically afford to be less conservative with a higher allocation to growth-oriented investments like stock funds. As your child approaches college age, many families gradually shift to more conservative investments to protect their accumulated savings. Many 529 plans offer age-based investment options that automatically adjust this allocation over time, becoming more conservative as the beneficiary gets closer to college age.

Remember that investment performance isn't guaranteed, and it's important to review your investment choices periodically to ensure they still match your goals and timeline.

Common pitfalls to avoid

Saving for a child's education is a big responsibility, and understanding potential pitfalls can help you maximize your 529 plan's benefits. Here are key mistakes to watch out for when managing your educational savings strategy:

1. Making unqualified withdrawals can be costly. To ensure this money is used as intended, set up a separate emergency fund for those unexpected moments in life. Early withdrawals for noneducational expenses could cost you a 10% penalty plus taxes on the earnings portion of the withdrawal.

2. Financial aid impact is another consideration. While 529 plans owned by parents have a relatively modest effect on financial aid eligibility, funds owned by grandparents or other relatives can reduce aid packages more significantly. Understanding these rules can help you time withdrawals strategically.

3. State tax benefit limitations may apply if you choose an out-of-state 529 plan. While you can invest in any state's plan, you may miss out on valuable state tax deductions or credits that are only available with your home state's plan.

4. Starting too late is perhaps the most common mistake. The power of compound growth means that even small contributions made early can significantly outperform larger contributions made closer to college age. Time is your greatest ally in building educational savings.

Getting started with your family's educational future

Whether you're a new parent looking ahead to kindergarten expenses or a grandparent wanting to contribute to a grandchild's college fund, starting early and contributing consistently will give your savings the best opportunity to grow.

The key is to begin—your family's educational dreams are worth the investment, and every dollar saved today is a step toward reducing future student debt and expanding educational opportunities. Consider speaking with a financial advisor first for the guidance needed to make the best decision for your family.