529 College Savings Plan: Everything Parents Need to Know
A 529 plan is the most powerful college savings vehicle available. Here is how it works and why you should start now.
A 529 plan is a tax-advantaged investment account specifically for education expenses. Contributions grow tax-free and withdrawals for qualified education expenses (tuition, room and board, books, computers) are also tax-free. Many states offer a state income tax deduction for contributions — potentially saving $200-1,000 per year in state taxes on top of the investment growth.
How Much to Save
For public in-state college (current cost ~$25,000/year × 4 years = $100,000): save $300/month from birth to reach $100,000 by age 18 (at 7% return). For private college ($50,000/year × 4 = $200,000): save $600/month. Starting at age 5 instead of birth: double the monthly amount needed. Starting at age 10: quadruple it. The earlier you start, the more compound growth does the work.
What If They Do Not Go to College?
529 funds can be used for trade schools, community college, graduate school, and even K-12 tuition (up to $10,000/year). Since 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary (up to $35,000 lifetime). You can also change the beneficiary to another family member — sibling, cousin, even yourself. The money is never wasted.