529 Plan Strategies: Smart Ways to Maximize Your Education Savings

If there is one thing in financial planning guaranteed to elicit a jaw drop when seeing the numbers, it is the cost of funding college. 

As a financial planner, my goal is to use all tools available to combat the rising cost. Once we’ve determined how much to save, the next question is where to save — enter the 529 plan. 

The 529 is a tax-advantaged education savings account designed to encourage saving for education by offering tax benefits.

Here are six important things to know to maximize the 529:

1. State tax benefits for contributions
   While 529 plans don’t offer federal tax benefits for contributions, many states do offer state tax benefits. For example, Indiana’s 529 plan offers a state tax credit of 20% of your contributions (up to $1,500 for married couples). Other states, such as Arkansas, offer income tax deductions, while some states, such as California, offer no state benefits. Over 30 states provide some form of tax relief, so it’s important to check your state’s rules before selecting a 529 plan.
 
2. Account ownership & FAFSA
   The custodian of the 529, typically a parent, owns the account and names a beneficiary — usually their child. This ownership is significant for FAFSA (Free Application for Federal Student Aid). Assets in the parent’s name are assessed at a 5.64% rate when calculating the Student Aid Index (SAI), while a child’s assets are assessed at 20%. Therefore, keeping the 529 in the parent's name is beneficial. Even better, if a grandparent owns the 529, their assets are not considered in the FAFSA calculation at all. The less assets that are included in the calculation, the more financial aid the student might qualify for. 
 
3. Beneficiary flexibility
   One advantage of 529 plans is the ability to change the beneficiary at any time, as long as the new beneficiary is a family member. This is particularly useful if you have several children and one child doesn't need all the funds. If your child attends a less expensive school than anticipated, you can transfer the unused funds to another child attending a more costly school or pursuing an advanced degree.
 
4. Tax-free growth
   One of the main benefits of this account is growth uninterrupted by tax. The funds grow tax-deferred and can be withdrawn tax-free for qualified educational expenses. The investment options within 529 plans depend on the plan, similar to how a 401(k) works, and many plans offer target-date funds that automatically adjust as the beneficiary approaches college age, becoming more conservative over time.
 
5. Use funds beyond a 4-year college
   Funds in a 529 plan are not limited to a traditional four-year college. They can now be used for trade schools, associate degrees, student loan repayment ($10,000 per borrower) and K-12 education (up to $10,000 per year). The funds also cover more than just tuition — room and board, textbooks, school supplies, meal plans, and even computers and software are eligible qualified expenses.
 
6. Transfer unused funds to a Roth IRA
   A newer tax benefit allows you to transfer up to $35,000 of unused 529 funds to a Roth IRA for the beneficiary. However, there are important rules: 

• There’s a $35,000 lifetime limit on 529-to-Roth transfers.
• You can only transfer up to the annual Roth IRA contribution limit; for 2025, the annual limit is $7,000, which means it would take five years to fully transfer the funds.
• The 529 account must be at least 15 years old.
• Only contributions made at least five years prior can be transferred, excluding the last five years’ worth of contributions and earnings.

A 529 plan is one of the most effective tools for education savings, offering tax advantages, flexibility, and even opportunities for retirement planning. However, navigating the nuances can be complex. Working with a CFP® professional can help ensure you're making the most of these strategies while aligning them with your broader financial goals. Whether you are saving for a child’s future or your education, leveraging expert advice can help you maximize every dollar. Find your CFP® professional today.