529 Plans Made Simple: Your Guide to Tax-Free College Savings
College costs keep rising. The average public four-year college cost $11,260 for in-state tuition during the 2023-2024 year. Private colleges averaged $41,450 annually.
Parents feel this pressure. Many wonder how they can possibly save enough for their child’s future education.
The good news? You have powerful tools to help. 529 college savings plans offer a tax-smart way to build education funds over time.
What Are 529 Plans?
A 529 plan is an investment account designed specifically for education expenses. These state-sponsored accounts let your money grow tax-free. When you use the funds for qualified education costs, you pay no federal taxes on withdrawals.
In 2023, families saved $508 billion in 529 plans across the United States with an average account balance of $30,295
Key Benefits You Should Know
529 plans offer several advantages:
- Your investments grow without yearly tax bills
- Withdrawals for education expenses are tax-free
- Many states offer tax deductions for contributions
- You maintain control of the account as the owner
- Funds can be used at most colleges nationwide
Starting in 2024, you gained even more flexibility. Unused 529 funds can now be rolled into a Roth IRA for the beneficiary. This new option requires the account to be open for at least 15 years.
How Much Should You Save?
You don’t have to save the full cost of college before your child attends. Alternative ways to pay such as scholarships and student loans can carry some of the burden. A good guideline is to aim to cover one-third to one-half of expected expenses.
For an in-state public college, saving about $96 per month could get you to this goal. This assumes college costs $10,200 per year at enrollment.
“The key is starting early and being consistent,” says Scott Ente, Senior Vice President of Investments at David Lerner Associates. “Even small monthly contributions can grow significantly over 18 years.”
Getting Started
Opening a 529 plan is straightforward. You can choose your home state’s plan or look at options from other states. Consider these factors:
- State tax benefits for residents
- Investment options and fees
- Account minimums and contribution limits
For 2025, you can contribute up to $19,000 per year without triggering gift taxes. Married couples can contribute up to $38,000 annually.
Investment Choices
Most 529 plans offer age-based portfolios. These automatically adjust from growth-focused investments when your child is young to more conservative options as college approaches.
Some 529 plans let you choose from a selection of Mutual Funds. Others allow you to choose a static portfolio that doesn’t change as the beneficiary gets older. The key is understanding your risk tolerance and time horizon.
Using Your Savings
529 funds can pay for many education-related expenses:
- Tuition and fees at colleges, trade schools, and universities
- Room and board for students enrolled at least half-time
- Books, supplies, and required equipment
- Computers and internet access for educational use
- Student loan payments (up to $10,000 lifetime limit)
Starting in 2026, 529 funds qualified expenses can also be for workforce credentialing programs under “post-secondary credential programs.”
September: The Perfect Time to Start
September marks College Savings Month nationwide. This makes it an ideal time to open your 529 account or increase your contributions.
The earlier you start, the more time your money has to grow. A child born today could see their education fund grow for 18 years before college begins.
Don’t let college costs overwhelm you. 529 plans provide a practical path forward. Take the first step this month to securing your child’s educational future.
Material contained in this article is provided for information purposes only. It is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. These materials are provided for general information and educational purposes, based on publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.