What is a 529 College Savings Plan & How to Use It

Abby Chao January 15, 2020


In the throes of the preschool and elementary years it can seem like college is light years away, but it’s never too early (or too late!) to get started with college savings. After all, student loan debt is at an all-time high and a college savings plan can help ensure that your future scientist or teacher or chef is prepared for whatever their higher education future holds.

If you’re planning to save for college, your best option may be a 529 college savings plan.

What is a 529 college savings plan?

A 529 college savings plan is a tax-advantaged investment account with tax-free growth and tax-free withdrawals.

This means that if you start saving when your child is young, your savings could be worth a lot more by the time your child reaches college.

Most states offer at least one plan (legally known as “qualified tuition plans”). There are no income restrictions or annual contribution limits, although each plan has a lifetime contribution limit, which ranges anywhere from $235,000 to $511,000. Some states offer tax benefits for state 529 plan contributions while others do not, so it’s best to first understand what your state offers.

You can start a 529 plan for your child at any time (after your child is born) and contribute any amount annually that works for your family’s budget.

How can 529 plan funds be used?

While 529 plans are most commonly associated with saving for traditional colleges and universities, the funds can also be used for other post-secondary education expenses such as trade or vocational schools.

Plus, thanks to the Tax Cuts and Jobs Act that passed in 2017, funds from many 529 plans can now also be withdrawn tax-free to use toward tuition at private elementary and secondary schools (up to $10,000 per student per year). Check your 529 plan to make sure that your state allows these expenses as qualified withdrawals.

What if a child ends up getting a full scholarship or decides not to pursue post-secondary schooling?

529 college savings plans can be surprisingly flexible. If your child earns a scholarship, you can withdraw the full value of the scholarship without any penalty, although you will pay taxes on the gains. However, remember that there’s much more to the cost of college than simply tuition, and 529s can be used for other expenses like room and board, books, and computers.

If the child decides that they don’t need the funds, you can always transfer the 529 plan to another member of the family, such as a sibling, cousin, or even back to yourself. Otherwise, withdrawals for non-qualified expenses (e.g., buying a car) will trigger a 10% penalty and taxes on the gains.

Do you have to setup a 529 plan for the state you live in?

Nope, you can pick a plan from any state you want. Some states offer tax benefits to residents in that state if they contribute to their own state’s plan, and some more generous states give a benefit to residents no matter which state’s plan you pick.

You can see a breakdown by state here. You can also get a recommendation for a 529 college saving plan and portfolio by visiting CollegeBacker.

How much do I really have to save for college?

The average current cost of a private 4-year college is $50,900/yr and a public, in-state 4-year college costs on average $25,290/yr. That means you need at least $100k for 4 years of college in today’s dollars.

Of course, it doesn’t mean you have to save all that money right this second, but the more you put away now, the more time it will have to grow. Starting a 529 college saving plan early means more college tuition saving overtime for your children.


Abby Chao

Abby Chao is the co-founder of CollegeBacker, the easiest way to save for college with help from family and friends. In just 5 minutes, you can start saving with a tax-advantaged 529 college savings plan, and then invite family and friends to contribute at birthdays and other milestones.

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