Kids are simultaneously the best part of our families and the most expensive. Especially when it comes to education, the costs from birth to adulthood can easily cross 6-figures. While parents have started saving more for these costs in recent decades, the new tax bill just made doing so even more attractive. The rules for 529 accounts have just expanded and could lead to even more tax savings if done correctly.
Using a 529 for Education Planning
A 529 account is a special tax-preferred account designed specifically for education. In 1996, as part of the Small Business Job Protection Act, Congress created this state-run program to help people pay for education expenses for their children. Almost 30 years later, these accounts have consistently improved and offered more benefits than before.
The main benefit is the tax status of the money. For example, let’s say high school and college eventually cost $100,000 in education expenses for a child. If you are a successful business owner and have a tax rate of around 35%, that means you will likely pay at least $35,000 in taxes to pay your child’s way through school. This example is horribly oversimplified, but you are essentially paying $135,000 for $100,000 worth of schooling. 529s can help reduce and possibly eliminate that tax burden.
In some states (but not Kentucky), you can get a tax deduction for contributing to the 529. Similar to an IRA or 401k, if you contribute $5,000 to the account, then your taxable income decreases by the same $5,000. Next, money within any 529 grows tax-free (also similar to a 401k or IRA). There is no year-to-year taxable event that you would see in a brokerage account, for example. Finally, you can withdraw money from the 529 completely tax-free as well, if those funds are used for qualified expenses.
These exact tax benefits vary from state to state, depending on where you live. Kentucky, for example, does not offer any tax deduction or credit for contributing to the 529. So for us, the only benefit is the tax-free growth and withdrawals. Across the river in Indiana, the state offers a nice tax credit of up to $1,500 per year for contributions over $7,500 each year. Check your state’s rules to see what tax benefits would apply to your 529s.
Old and New Rules
Defining what qualifies as education expenses becomes the major source of tax savings for these accounts. College tuition, for an easy example, is one of the highest expenses and most likely requires the most planning to benefit from. However, the drawback to a 529 is pulling out funds for non-qualified expenses (like a wedding, down payment, or new car). These expenses will require you to pay income tax (at your rate) plus a 10% penalty. So, it is important to estimate roughly the amount of expenses you think will be education-related for each child.
Under current regulations, 529s can also be used for up to $10,000 each year for K-12 expenses. While this is great, many private high schools charge $12,000-$15,000 in tuition annually, sometimes more. Fortunately, the new tax bill is expanding this rule. To start, they doubled the per-year limit for K-12 expenses to $20,000. Additionally, they expanded the qualified expenses during this time. Instead of being solely used for tuition, once the new rule starts in 2026, books, tutoring, certificates, AP classes, dual-credits, and others can all be paid for with 529 money as well.
There are many other benefits to a 529 account as well. One of the best newer rules is that leftover 529 money can be rolled into a Roth IRA for the student. Imagine scholarships covering most or all tuition, leaving you with unused 529 funds. Done correctly, you could move $7,000 per year into a Roth IRA (up to $35,000 per kid) for retirement for your graduate. This allows you to not only save money for education but also give your kids a boost towards their own retirement as well.
How to Use a 529
Contributions to a 529 can be relatively generous, since there is no limit similar to what you would see with an IRA or 401k. All contributions are technically considered gifts, which means considering the annual exclusion amount. As long as you contribute less than $19,000/year ($38,000 for a couple), there are no gift tax consequences for the contribution. There are maximum limits for Kentucky for lifetime contributions into a 529, but as of 2025, that is $450,000 per beneficiary.
However, there is a provision to superfund a 529. In other words, without needing to involve any gift taxes, you can bunch up to 5 years’ worth of the $19,000 annual limit into one year. So, $95,000 per beneficiary could be contributed ($190,000 for couples). Depending on the type of education plan for your situation, this could easily fund all of the educational expenses required going forward.
Unfortunately for Kentucky residents, there is no deduction for 529 contributions. Which means for us to maximize the tax savings for a 529, we should try to let money in the 529 grow as long as possible. Therefore, from a tax perspective, the longer each dollar sits in the 529 (and earns more), hopefully, the higher the savings in taxes. This means as you fund a 529, think of paying for all the education expenses from the last year of their education up to the present.
From a contribution perspective, this also means attempting to front-load as much savings as you want relative to your overall financial plan. In some scenarios, super-funding a larger amount upfront may result in higher long-term savings compared to monthly contributions. It is important to note here that few people could truly max out this strategy, and fewer should even try to. Work within the cash flow and assets you have today, albeit knowing that the earlier you save for the kid’s school, the better.
Education is Expensive
Building in education expenses can be a great way to save money over time. As 529s have gotten more generous (especially with K-12 expenses), it can be a great solution for people who know the bill will be high over the years. Take the time to map out the education plan for your situation, and figure out whether a 529 can help out. If done correctly, it is possible to save thousands of dollars in taxes on money that will be spent anyway.
TC Falkner 