As families continue to prioritize smart college planning, 529 savings plans remain one of the most powerful and flexible tools for funding higher education. With new changes coming in 2025, now is the time to revisit your strategy, understand the latest federal and state guidelines, and take full advantage of what these plans offer.
In this updated and expanded guide, we’ll explore the new 529 rules for 2025, including increased contribution limits, expanded qualified expenses, new legislative updates, and practical strategies families can use to maximize tax advantages and financial flexibility.
A Quick Recap: What Is a 529 Plan?
A 529 plan is a tax-advantaged savings account designed to help families save for education. The key benefits include:
- Tax-free growth: Any investment earnings within a 529 account are not subject to federal taxes when the money is withdrawn for qualified education expenses. This allows funds to grow more efficiently over time, similar to a Roth IRA, making it an excellent long-term savings vehicle.
- State tax benefits: Many states provide income tax deductions or credits to residents who contribute to their state’s 529 plan. These incentives can make regular contributions more affordable and appealing, depending on where you live.
- High contribution limits: Unlike traditional education savings options, 529 plans offer exceptionally high contribution ceilings—often over $500,000 per beneficiary depending on the state. This allows families to save aggressively without worrying about hitting caps too quickly.
- Flexibility: 529 plans can be used not only for traditional college tuition but also for a wide range of educational needs. This includes K–12 tuition, registered apprenticeship programs, certain professional certifications, and even up to $10,000 in student loan repayments. These expanded uses make the 529 plan a versatile tool for various life stages and career paths.
There are two main types of 529 plans:
- Savings plans: These are the more common type of 529 plan and function similarly to investment accounts. Funds are invested in a portfolio of mutual funds, ETFs, or other financial instruments. The account’s value can fluctuate depending on market performance, but it has the potential for higher growth over time. Most states offer age-based investment options that automatically adjust asset allocation as the beneficiary approaches college age.
- Prepaid tuition plans: These plans allow you to pay for future college tuition at today’s rates, essentially locking in the cost of tuition. They are typically sponsored by state governments and limited to in-state public colleges, although some offer portability features. While they don’t carry market risk, they may not cover room and board or other non-tuition expenses, and they offer less flexibility than savings plans.
What’s New in 2025: Major Changes to 529 Rules
Thanks to recent legislation, particularly the One Big Beautiful Bill Act (OBBBA) passed in early 2025, the landscape of 529 plans has changed significantly. Here are the most impactful updates:
1. Increased K-12 Withdrawal Cap
Previously, only $10,000 annually could be withdrawn tax-free for K-12 tuition per beneficiary. Starting in 2026 (under the 2025 rules), that cap increases to $20,000 per beneficiary.
This expansion also reflects the growing use of 529 plans beyond college tuition, helping families cover:
- Private K‑12 school tuition
- Homeschooling costs (where eligible)
2. Expanded Definition of “Qualified” K-12 Expenses
In addition to tuition, qualified expenses now include:
- Tutoring services
- Standardized test prep and fees (SAT, ACT, AP, etc.)
- Educational therapy (e.g., for learning disabilities)
- Curriculum materials and online instruction fees
This is a big win for parents investing in their child’s academic success before college.
3. Postsecondary Credential Expansion
529 plans can now be used tax-free for a wider range of postsecondary options, including:
- Trade and vocational school programs
- Professional certification programs (e.g., CPA, PMP)
- Short-term credentialing courses that meet Department of Education standards
This flexibility opens doors for students pursuing alternatives to the traditional four-year degree.
Federal Contribution Rules for 2025
Annual Gift Tax Exclusion Limit
In 2025, the annual gift tax exclusion increases to $19,000 per donor per beneficiary (up from $18,000 in 2024). This means:
- One parent can contribute up to $19,000 per child without triggering gift tax reporting.
- Two parents (filing jointly) can contribute up to $38,000 per child per year.
5-Year Superfunding Strategy
Donors can contribute five years’ worth of gift exclusions in a single year and spread the gift over five years for tax purposes:
- In 2025, that’s up to $95,000 per individual or $190,000 per couple.
This strategy allows grandparents, aunts/uncles, or wealthy parents to front-load 529 accounts while maximizing compounding growth potential.
Important: If you use the 5-year averaging, you cannot make additional gifts to the same beneficiary during the 5-year period without impacting your lifetime gift/estate tax exemption.
State Lifetime Contribution Limits in 2025
Every state sets its own maximum limit for total contributions to 529 accounts. These limits reflect the maximum amount considered necessary to cover the cost of education.
High and Low Limits Across States
- New York: $520,000 per beneficiary
- California: $529,000
- Texas: $500,000
- Massachusetts: $400,000
- South Dakota: $350,000
Check your state’s updated limit via SavingForCollege.com
CBRG Tip: Hitting the state cap doesn’t mean you can’t save more—it just means contributions won’t be accepted until the account balance drops due to withdrawals or market fluctuations.
Coordinating 529 Plans with Financial Aid (FAFSA)
How 529 Assets Are Treated
- Parent-owned 529s: Count as a parental asset, assessed at up to 5.64% of value in federal aid formulas.
- Grandparent-owned 529s: Previously treated as untaxed student income when distributions were made. As of 2024, the FAFSA Simplification Act changes this treatment to no longer count distributions—a huge benefit.
Strategy: Consider who owns the account and when to distribute funds to minimize impact on aid eligibility.
Avoiding Common Pitfalls
Overfunding a 529
If you save more than needed, you risk taxes and penalties on non-qualified withdrawals. However, you can:
- Change the beneficiary to another family member
- Use up to $10,000 toward student loans
- Roll over funds to a Roth IRA (if conditions are met under SECURE Act 2.0)
Non-Qualified Withdrawals
Subject to:
- 10% penalty on earnings
- Federal and possibly state income taxes
Pro Tip: Always document qualified expenses and match distributions to expenses in the same calendar year.
Smart Strategies for 2025 and Beyond
1. Front-Load While Children Are Young
The earlier you contribute (especially under the 5-year rule), the more time your investments have to grow.
2. Diversify Contributions by Account Owner
Split 529 ownership among parents, grandparents, or others to:
- Maximize gift tax exclusions
- Distribute financial aid impact
3. Time Distributions Carefully
Withdraw only what you need in the same tax year that the qualified expense is paid.
4. Use State Tax Benefits Wisely
Contribute enough each year to qualify for your state’s deduction or credit, even if the account is already well-funded.
Who Should Use 529s in 2025?
Parents with College-Bound Kids
Take advantage of:
- Tax-free growth
- K‑12 tuition funding
- High contribution ceilings
Grandparents
Great tool for:
- Estate planning
- Contributing without affecting financial aid
Adults Changing Careers
Use 529 funds for:
- Professional certifications
- Trade school retraining
Homeschooling Families
Cover eligible online materials, tutoring, and testing fees.
Take Action in 2025
The 2025 updates to 529 plan rules expand their flexibility, increase tax advantages, and provide more opportunities for creative college planning. Whether you’re just starting to save or optimizing an existing strategy, it’s essential to stay informed and take full advantage of current laws.