The Complete Guide to a 529 Savings Plan for College


By Rita Cunha

College expenses and debt from student loans are at an all-time high. So if you want to support your child’s education and give them the best opportunities out there, you have to be strategic about it.

image of jar containing dollar bills saved for college

Getting a 529 Savings Plan for college is the best way to ensure your child thrives. At the same time, you can collect special tax benefits and other advantages, so everyone wins.

What Is a 529 Plan?

A 529 plan is a tax-advantaged savings account. It’s regulated by the Internal Revenue Code and was designed to help families save for educational expenses.

There are essentially two types of 529 plans: a prepaid tuition plan, and a more flexible savings plan.

No matter which one you choose, your money always works for you. Every cent you deposit into a 529 account gets invested. Thus, you can see the balance grow as time goes by.

Who Can Open a 529 Account?

Any resident in the United States can open a 529 plan. You could live in California and sign up for Virginia education savings plan accounts, for example.

What Can You Use 529 Savings For?

529 plans must be used for qualified education expenses. This means you can pay for qualified tuition programs, room and board, and supplies with your savings. Moreover, registered apprenticeship program expenses may also be covered by the plan.

On top of that, you can also spend up to $10,000 of your 529 plan on student loan repayments.

Keep in mind that you can cover educational expenses from all higher educational institutions. You don’t need to limit your child’s options by choosing now what university they’ll attend.

What If a Child Doesn’t Go to College?

Plans change and it’s possible your child doesn’t want to go to college. If that’s the case, you won’t have qualified higher education expenses to cover. But don’t worry, it’s not the end of the world.

You may get a tax penalty on the tax-free earnings you accumulated with your 529 plan, as well as pay state and federal taxes. In other words, you can still withdraw your savings, but you may lose money.

Alternatively, you can cover the education expenses of another family member (including yourself!) with those 529 savings.

5 Benefits of a 529 College Plan

Remember how we mentioned that a 529 plan can also benefit you, the account owner? It’s true. These prepaid tuition plans and savings plans come with tax advantages you won’t get anywhere else.

Let’s take a quick look at the state benefits, tax advantages, and other benefits that come with a 529.

1. Diverse Investment Portfolios

529 plans can maximize your savings through investments. The money you put in a 529 investment account goes to buying mutual funds, exchange-traded funds (ETFs), municipal securities, and so on. Where your money is invested is completely up to you and your risk tolerance.

2. Investments Grow Tax-Free

One of the perks of a 529 plan is that your investment earnings grow on a tax-deferred basis. This means you don’t pay any income tax on distributions. Thus, all your savings can go toward future tuition expenses.

This is a unique feature that makes a 529 account such a worthwhile tax-advantaged savings plan.

3. Tax-Free Withdrawals

When you need to cover college costs, you can withdraw your college education funds without paying any federal income taxes on that money.

4. Gift and Estate Tax Benefits

Anyone can contribute to 529 plans, even if they are not the account holder. Contributions of up to $15,000 are removed from the donor’s taxable estate and exempt from the gift tax.

This is one of the federal tax benefits that makes it worthwhile for family and friends to donate to college savings plans.

5. State Income Tax Deductions

You can’t write off contributions to 529 plans from your federal income tax dues. But you can lower how much you pay in local income tax in many states. In Pennsylvania, for example, you can deduct up to $15,000 per year from your state income taxes this way.

Additionally, in some states, this is a perk not just available to the account owners. Friends and family may also claim deductions.

However, this isn’t available to all U.S. residents. Some states bar deductions of donations to 529 plans. Californians, for example, cannot deduct 529 contributions from their state tax dues.

How to Choose the Right 529 Plan for You

Choosing the right 529 college savings plan requires time and planning.

For starters, you need to ask yourself if the investment manager, program manager, or financial institution behind the 529 matters to you.

Secondly, it’s best to research your state’s tax deduction laws. Some states allow you to deduct contributions, but only if you sign up for the state’s qualified tuition program.

Answering these questions can seem complicated at first, but you can always get the help of a tax advisor.

So, Is a 529 Plan Worth It?

If you want to send your child to college, a 529 plan is crucial. It allows you to reap all the tax advantages you don’t get from other savings accounts and still take advantage of financial aid, scholarship funds, and other opportunities.

Moreover, if you have a low-risk tolerance, there are even 529 plans insured by the Federal Deposit Insurance Corporation. Truly, you have nothing to lose.

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