College Savings 529 Plans: Your Child’s Education Funding Solution
When it comes to saving for college, 529 plans stand out as one of the most powerful tools available to families. These state-sponsored education savings plans offer significant tax advantages while providing flexibility for future educational needs.
What are 529 Plans?
529 plans are tax-advantaged savings accounts designed specifically for education expenses. Named after Section 529 of the Internal Revenue Code, these plans come in two main types:
- Education Savings Plans: These work similar to Roth IRAs but for education. You contribute after-tax dollars that grow tax-free, and withdrawals are tax-free when used for qualified education expenses.
- Prepaid Tuition Plans: These allow you to pay today’s prices for future tuition at participating colleges, protecting against rising education costs.
Key Benefits of 529 Plans
The appeal of 529 plans comes from their unique combination of benefits:
Tax Advantages
Your investment grows tax-free, and withdrawals for qualified education expenses don’t incur federal taxes. Many states also offer state tax deductions or credits for contributions.
“One of the most overlooked benefits of 529 plans is the state tax advantage,” emphasizes Michael Norton, Senior Vice President at David Lerner Associates. “Depending on your state, you might receive a significant tax deduction for your contributions, effectively giving you an immediate return on your investment.”
Flexibility
529 plans offer surprising flexibility:
- Funds can be used at most accredited colleges and universities nationwide
- Money can pay for tuition, room and board, books, computers, and required supplies
- Recent changes allow up to $10,000 annually for K-12 tuition
- Unused funds can be transferred to another family member
- Some expenses for apprenticeship programs qualify
Control
Unlike other college savings options, the account owner (typically a parent or grandparent) maintains control of the funds. The beneficiary cannot access the money directly or change investment choices.
Starting Your 529 Plan
Getting started with a 529 plan is straightforward:
Choose Your Plan
You can invest in any state’s plan, not just your home state. Compare plans based on:
- State tax benefits
- Investment options
- Fees and expenses
- Minimum contribution requirements
Set Up Your Account
Opening an account typically requires:
- Basic information about the account owner and beneficiary
- Social Security numbers for both parties
- Bank account information for contributions
Create a Contribution Strategy
Many families find success with:
- Automatic monthly contributions
- Annual lump-sum contributions
- Asking relatives to contribute for birthdays and holidays
- Age-based investment portfolios that automatically adjust as college approaches
Common Questions About 529 Plans
Will a 529 plan hurt financial aid chances?
529 plans owned by parents have minimal impact on federal financial aid eligibility. When applying for federal financial aid, 529 savings plan assets are classified as parental assets. This means they are assessed at a rate of no more than 5.6 percent in the Student Aid Index (SAI) calculation during the federal financial aid process. In other words, only up to 5.6 percent of your 529 plan’s value will be counted when determining your eligibility for federal financial assistance.
What if my child doesn’t go to college?
You have options:
- Change the beneficiary to another family member
- Use the funds for your own education
- Make a non-qualified withdrawal (paying income tax varying by state and a 10% penalty on earnings)
How much should I save?
While college costs vary widely, starting early matters most. Even small, consistent contributions grow significantly over time thanks to compound interest.
529 plans represent one of the smartest ways to prepare for future education expenses. By combining tax advantages with flexibility and control, these plans help families create a foundation for educational success without compromising financial stability.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon 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.