Make the Most of 529 Day: Understanding the Power of Education Savings Plans
May 29th marks the nationwide celebration of 529 Day, an opportunity to highlight the many benefits of 529 college savings plans. As higher education costs continue to soar, many parents find themselves faced with the nagging question, “Will I have enough money to pay for my child’s college education?”
Consider that the average cost for the 2026 school year according to U.S. News and World Report is:
- $45,000 (tuition), $60,920 overall all to attend private colleges;
- $11,000 (tuition), in excess of $31,000 for out-of-state students at public schools; and
- $11,950 for state residents at public colleges[i]
529 Plans Can Help
One often overlooked savings option is a state-sponsored 529 plan. These plans offer great tax benefits, while allowing you to contribute substantially higher sums than other savings alternatives.[ii]
529 plans generally come in two forms. The first form – prepaid tuition programs – allows participants to lock in tuition rates at eligible state colleges or universities with a lump-sum investment or monthly installment payments. In some states, a portion of the contract value may also be applied to private or out-of-state schools.
The second form – college savings programs – allows contributions to vary. The full value of the account can be applied at any accredited institution of higher education nationwide. Since 529 plans operate under individual state laws, costs and details vary by state.[iii]
Substantial Contributions Allowed
Some states allow you to set aside over $500,000 per beneficiary (with no income limitations or age restrictions), compared to $2,000 annually per beneficiary for a Coverdell Education Savings Account (formerly known as an education IRA).[iv]
Tax Benefits
Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and are not taxed when the money is taken out to pay for college.
Special Estate Planning Features
One unique feature of 529 plans is that they allow you to move up to $19,000 out of your estate ($38,000 per couple) annually, per beneficiary. Further, current law allows each account owner to pay up to five years of contributions upfront without triggering gift taxes. That means a couple can contribute up to $190,000 per beneficiary in one move.[v]
The donor generally retains control of the account and may be assessed a penalty for “nonqualified” withdrawals.
Other Considerations
Professional Management. 529 plans offer a “hands-off” savings approach: Funds invested in the plan are professionally managed.[vi]
Penalty for Refunds. You will be subject to a federal 10% penalty on the earnings portion of a nonqualified withdrawal.[vii] In addition, the earnings on nonqualified withdrawals are taxed at your tax rate and not the student’s. However, you may be able to avoid a nonqualified withdrawal by rolling over the account to a new beneficiary.
Effect on Financial Aid. Any investment may affect a student’s eligibility for financial aid. Earnings withdrawn from a 529 plan are not considered student income. A 529 plan is considered an asset not income, when calculating the Student Aid Index (SAI).
It’s Worth a Look
Keep in mind, there is no guarantee that any investment portfolio will achieve its investment goals. The value of your 529 account will fluctuate as the value of the mutual fund shares in which it invests fluctuates, so that your investment, when it is withdrawn, may be worth more or less than its original cost. Also, be aware that out-of-state plans may have in-state income tax ramifications.
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