529 plans are the most powerful way to save for education. Tax-free growth, high contribution limits, and flexibility make them essential for families planning for college.
What Is a 529 Plan?
A state-sponsored investment account for education expenses:
- Contributions grow tax-free
- Withdrawals for qualified education are tax-free
- Many states offer tax deductions for contributions
Types of 529 Plans
529 Savings Plans (Most Common)
- Invest in mutual funds/portfolios
- Value fluctuates with market
- Flexible—can use at any eligible school
- Higher growth potential
529 Prepaid Tuition Plans
- Lock in today's tuition rates
- Limited to specific schools/states
- Less flexible, no market risk
- Becoming rare
Tax Benefits
Federal Benefits
- Tax-free growth
- Tax-free withdrawals for qualified expenses
- No federal deduction for contributions
State Benefits
Many states offer deductions or credits:
| State | Deduction (Per Beneficiary) |
|---|---|
| New York | Up to $10,000 (joint filers) |
| Illinois | Up to $20,000 (joint filers) |
| Indiana | 20% credit, up to $1,500 |
| Utah | Up to $4,400 (single), $8,800 (joint) |
Check your state's specific benefits.
Pro Tip
Some states let you deduct contributions to ANY state's 529, not just your own. Compare options before choosing a plan.
Qualified Education Expenses
Higher Education
- Tuition and fees
- Room and board
- Books and supplies
- Computers and software
- Special needs expenses
K-12 (Limited)
- Up to $10,000/year for tuition only
- No room, board, or supplies
Student Loans
- Up to $10,000 lifetime to pay student loans
Apprenticeships
- Qualified registered apprenticeships
Choosing a 529 Plan
Your State's Plan
Consider first if it offers tax benefits. Even if investments are mediocre, the deduction may make it worthwhile.
Other States' Plans
If no home state benefit (or you want better options):
- Utah (my529): Low-cost Vanguard funds
- Nevada (SSGA Upromise): Vanguard and DFA options
- New York: Low-cost Vanguard funds
What to Look For
- Low expense ratios (<0.30%)
- Good investment options
- Age-based portfolio option
- Ease of use
Investment Strategies
Age-Based Portfolios
Automatically adjust allocation as child ages:
- Age 0-5: Aggressive (80%+ stocks)
- Age 6-12: Moderate (60% stocks)
- Age 13-17: Conservative (40% stocks)
- Age 18+: Very conservative (20% stocks)
Best for: Hands-off investors, most families.
Static Portfolios
Choose your own allocation, doesn't change automatically.
Best for: Engaged investors, specific risk preferences.
Watch Out
You can only change investments twice per year. Choose a strategy you can stick with.
How Much to Save
College Cost Projections
| School Type | Current Cost/Year | In 18 Years* |
|---|---|---|
| Public in-state | $25,000 | $48,000 |
| Public out-of-state | $45,000 | $86,000 |
| Private | $58,000 | $111,000 |
*Assuming 3.5% annual increase
Monthly Savings Targets
To cover 50% of projected costs (4 years):
| School Type | Monthly for 18 Years |
|---|---|
| Public in-state | $250 |
| Public out-of-state | $450 |
| Private | $575 |
Assuming 6% average return.
Contribution Limits
Annual Limits
No federal limit, but:
- Gift tax exclusion: $18,000/person/year (2024)
- Superfunding: Up to 5 years at once ($90,000)
Lifetime Limits
Varies by state: typically $300,000-$550,000 per beneficiary
Superfunding Strategy
Contribute 5 years of gifts at once:
- $90,000 per person ($180,000 for couples)
- No gift tax, treated as 5-year gift
- Maximizes tax-free growth time
Pro Tip
Grandparents can superfund 529s to reduce estate while maximizing growth. $180,000 invested at birth could grow to $700,000+ by college.
What If Money Isn't Used?
Change Beneficiary
Transfer to:
- Siblings
- Cousins
- Yourself
- Future grandchildren
Roll to Roth IRA (NEW in 2024)
- Account must exist 15+ years
- Up to $35,000 lifetime
- Subject to Roth IRA annual limits
Non-Qualified Withdrawal
- Pay income tax on earnings
- 10% penalty on earnings
- Contribution basis always tax/penalty free
Financial Aid Impact
529s owned by:
- Parent: Counted at 5.64% in federal formula
- Student: Same as parent
- Grandparent: No longer counted (as of 2024-25 FAFSA)
The Bottom Line
Quick Win
Open a 529 plan this month. Even $50/month started at birth can grow to $20,000+ by college. The best time to start is now.
529 plans combine tax benefits, flexibility, and growth potential unlike any other education savings vehicle. Start early, contribute consistently, and let compound growth do the heavy lifting.