529 Plan (Qualified Tuition Plan)

529 plans are the best way to save for college. Contributions grow tax-free, and withdrawals are tax-free when used for education—making them more powerful than regular savings or investment accounts.

How 529 Plans Work:

1. You contribute after-tax money (no federal deduction)
2. Money grows tax-free (no capital gains, dividends, or interest taxes)
3. Withdrawals are 100% tax-free for qualified education expenses
4. Many states offer state tax deductions for contributions

Tax Benefits Example: Scenario: Save $300/month for 18 years at 7% return

• Regular Taxable Account:

• Contributions: $64,800

• Grows to: $112,000 (after taxes on growth)

• 529 Plan:

• Contributions: $64,800

• Grows to: $135,000 (tax-free!)

• Extra $23,000 from tax savings

Qualified Expenses: ✅ Tuition and fees ✅ Room and board (if at least half-time student) ✅ Books and required supplies ✅ Computer and internet access ✅ K-12 private school tuition (up to $10,000/year) ✅ Apprenticeship programs (2019 SECURE Act) ✅ Student loan repayment (up to $10,000 lifetime)

Types of 529 Plans:

1. Education Savings Plan (Most Common):

• Invest in mutual funds/ETFs
• Account value fluctuates with market
• Can be used at any accredited college nationwide
• More flexibility, higher potential returns

2. Prepaid Tuition Plan:

• Lock in today's tuition rates for future use
• Guaranteed return (tuition inflation)
• Only available in some states
• Typically limited to in-state public schools

State Tax Benefits: Over 30 states offer state tax deductions or credits:

Example State Benefits:

• New York: Deduct up to $5,000/year (single) or $10,000 (married)
• Illinois: Deduct up to $10,000/year (single) or $20,000 (married)
• Indiana: 20% tax credit on contributions up to $5,000 (max $1,000 credit)

529 Plan Contribution Limits:

• No annual limit (but gift tax applies over $18,000/year per person in 2025)
• Lifetime limit: $235,000-$550,000 (varies by state)
• "Superfunding": Can contribute 5 years' worth of gifts at once ($90,000 in 2025)

What If Child Doesn't Go to College?

Option 1: Change Beneficiary Transfer to another family member tax-free:

• Sibling, parent, cousin, niece/nephew, even yourself

Option 2: Use for Trade School Qualified expenses include vocational/trade schools

Option 3: Keep for Grandchildren No requirement to spend it—can stay invested for future generations

Option 4: Withdraw for Non-Education Use

• Pay income tax on earnings
• 10% penalty on earnings portion
• Contributions (already taxed) come out penalty-free

**Option 5: New in 2024

• Rollover to Roth IRA**
• Transfer up to $35,000 from 529 to beneficiary's Roth IRA
• Account must be open 15+ years
• Subject to annual Roth contribution limits
• Game-changer for excess 529 funds

Common 529 Plan Mistakes:

❌ Not starting early enough: Time is your biggest advantage ❌ Being too conservative: Too much in bonds/cash for young children ❌ Saving in parent's name instead of 529: 529s have minimal FAFSA impact ❌ Not using state tax deduction: Free money in 30+ states ❌ Overfunding: Only contribute what you'll likely use for education

Impact on Financial Aid:

• 529 owned by parent/student: Assessed at 5.64% (minimal impact)
• Regular investment account: Assessed at 20% (4x worse!)
• 529 owned by grandparent: Not counted on FAFSA at all (prior to 2024 rules)

Best Strategy:

1. Ages 0-8: Aggressive (80-90% stocks)

• time to recover from market drops

2. Ages 9-14: Moderate (60-70% stocks)

• balancing growth and protection

3. Ages 15-18: Conservative (30-40% stocks)

• protecting gains before college

Many plans offer "age-based portfolios" that automatically adjust.