529 plans offer the most powerful tax advantages available for college savings. Money grows tax-free when used for qualified education expenses, making 529s the go-to choice for parents saving for their children's education.
How 529 Plans Work
Basic structure:
- Contribute after-tax money to the account
- Money grows tax-free
- Withdrawals for qualified expenses are tax-free
- Each account has one beneficiary (student)
- Account owner controls the funds
Tax Advantages
Federal Tax Benefits
- Tax-free growth (no capital gains taxes)
- Tax-free withdrawals for qualified expenses
- No federal deduction for contributions
- Gift tax advantages (up to 5 years of gifts at once)
State Tax Benefits
- Many states offer deductions for contributions
- Some states require using in-state plan for deduction
- Deduction limits vary by state
- Check your state's specific benefits
Qualified Education Expenses
529 funds can pay for:
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College Expenses
- Tuition and fees
- Room and board (if enrolled at least half-time)
- Books and supplies
- Computers and software
- Internet access
- Special needs equipment
K-12 Education
- Up to $10,000 per year for K-12 tuition
- Private or religious school tuition
- Not all states allow this use without penalty
Student Loan Repayment
- Up to $10,000 lifetime per beneficiary
- Can also pay $10,000 for each sibling
- Reduces student loan interest deduction
Contribution Limits
529 plans have high contribution limits:
- Total lifetime limit: $235,000-$550,000+ depending on state
- No annual contribution limit (but gift tax applies)
- Annual gifts up to $18,000 avoid gift tax reporting (2024)
- 5-year gift tax averaging: $90,000 at once (2024)
Investment Options
Age-Based Portfolios
Most popular choice:
- Automatically adjusts allocation as child ages
- More aggressive when young, conservative near college
- Set-it-and-forget-it approach
Static Portfolios
For hands-on investors:
- Choose your own allocation
- Remains constant unless you change it
- Options typically include stock, bond, and money market funds
Choosing a 529 Plan
Key factors to compare:
- State tax benefits: Does your state offer deductions?
- Fees: Expense ratios and account fees
- Investment options: Quality and variety of funds
- Minimum contributions: Initial and ongoing requirements
- Flexibility: Ability to change investments
Top-Rated 529 Plans
Consistently well-regarded plans include those from:
- Utah (my529)
- Nevada (multiple options)
- New York
- Virginia
- California
What If My Child Doesn't Go to College?
529 flexibility options:
- Change beneficiary: Transfer to sibling, cousin, or yourself
- Use for other education: Trade school, graduate school, etc.
- Pay student loans: Up to $10,000
- Roll to Roth IRA: Up to $35,000 (after 15 years, certain conditions)
- Withdraw with penalty: 10% penalty + taxes on earnings only
529 vs. Other College Savings
| Account | Tax Benefit | Use Restrictions | Best For |
|---|---|---|---|
| 529 | Tax-free growth | Education expenses | Most families |
| Coverdell ESA | Tax-free growth | Education + K-12 | Income limits apply |
| UTMA/UGMA | Minor tax benefits | Any purpose | Flexibility needed |
| Roth IRA | Tax-free growth | Retirement primary | Backup option |
Financial Aid Impact
529 accounts affect financial aid:
- Parent-owned 529: Counted as parent asset (5.64% assessed)
- Grandparent-owned 529: No longer affects FAFSA (as of 2024)
- Student-owned 529: Counted as parent asset if dependent
Learn about federal financial aid to understand how 529s interact with loans and grants.
