College costs are rising faster than inflation. A 529 plan is the government’s designated tax-advantaged account for saving for education — and most parents who could benefit from one don’t have one. Here’s everything you need to know.
What a 529 plan is
A 529 plan is a tax-advantaged savings account specifically designed for education expenses. You contribute after-tax money, it grows tax-free, and qualified withdrawals for education expenses are completely tax-free. Many states also offer a state income tax deduction on contributions.
What counts as a qualified expense
- College tuition and fees
- Room and board (up to certain limits)
- Books, supplies, and required equipment
- Computers and internet access for school
- K–12 tuition (up to $10,000/year)
- Apprenticeship programs registered with the Department of Labor
- Up to $10,000 of student loan repayment (lifetime limit)
The tax advantages
The federal government doesn’t give you a deduction for contributing, but the tax-free growth is significant. If you invest $300/month from birth to age 18 at 7% average returns, you’d have about $115,000 — all tax-free for qualified expenses. The state tax deduction (in most states) makes the upfront contribution even more valuable.
What happens if your child doesn’t go to college
You have several options. You can change the beneficiary to another family member — a sibling, cousin, or even yourself — without penalty. Since 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary (up to $35,000 lifetime, subject to annual Roth IRA limits). You can also withdraw the money for non-qualified expenses but you’ll owe income tax plus a 10% penalty on the earnings portion — not on the principal you contributed.
Where to open one
You can open a 529 plan in any state regardless of where you live or where your child will attend school. If your state offers a tax deduction for in-state plans, start there. If not, the best options are Utah Educational Savings Plan, New York’s 529 Direct Plan, and Nevada’s Vanguard 529 — all offer low-cost index fund options with minimal fees.
Should you prioritize a 529 over retirement?
No. Always fund your retirement accounts first. Your child can borrow for college if needed. You cannot borrow for retirement. A financially secure parent is a better gift to your child than a fully-funded 529 at the expense of your own retirement.