Opening a 529 College Savings Plan

A 529 plan is a tax-advantaged investment account for education expenses. Contributions grow tax-free, and withdrawals for qualified education expenses are completely tax-free at the federal level. There is no federal tax deduction for contributions, but 30+ states offer state income tax deductions or credits. On a 50,000 USD balance growing to 100,000 USD, the tax savings can be 10,000-15,000 USD compared to a taxable account.

Qualified expenses include tuition and fees at any accredited college, university, or vocational school in the US (and some international institutions). Room and board (up to the school's cost of attendance), books, supplies, required equipment, and computers are also qualified. Since 2018, up to 10,000 USD per year per beneficiary can be used for K-12 tuition. Since 2024, unused 529 funds can be rolled into a Roth IRA (with conditions).

Parents, grandparents, aunts, uncles, friends, or even the student themselves can open a 529. The account owner controls the account and the beneficiary (the student) is named. You can change the beneficiary to another family member at any time without tax consequences. You can even open a 529 for yourself if you plan to pursue education. There is no age limit for the beneficiary.

Over 30 states offer income tax deductions or credits for 529 contributions, but most require you to use your home state's plan. For example, New York offers a deduction of up to 5,000 USD per person (10,000 USD for married filing jointly). A 10,000 USD deduction at a 6% state tax rate saves 600 USD per year. Check your state's specific benefit at savingforcollege.com. States without income tax (Texas, Florida) have no state benefit, so choose any plan.

Direct-sold plans (you open online without a financial advisor) have significantly lower fees than advisor-sold plans. Top-rated direct plans include Utah my529, Nevada Vanguard 529, and New York 529 Direct. Compare expense ratios: the best plans charge 0.10-0.30% annually, while poor plans charge 0.50-1.50%. On a 100,000 USD balance, the difference between 0.15% and 1.00% is 850 USD per year in fees.

Age-based portfolios automatically adjust from aggressive (mostly stocks when the child is young) to conservative (mostly bonds as college approaches). This is the simplest option and works well for most families. Static portfolios maintain a fixed allocation you choose. Use age-based if you want set-and-forget simplicity. Use static if you want control over the allocation, but remember to adjust manually as the child ages.

Go to the plan's website and create an account. You need your Social Security number, the beneficiary's Social Security number, your bank account information for funding, and the beneficiary's date of birth. You will select your investment option during the setup. Most plans have no minimum initial contribution, though some require 15-25 USD to open. The entire process is online.

Consistent contributions are more important than large lump sums. Contributing 200 USD per month from birth to age 18 at a 7% average return grows to approximately 86,000 USD. At 400 USD per month, it reaches approximately 172,000 USD. Most plans allow automatic bank drafts starting at 25 USD per month. Set it up at account opening so contributions begin immediately.

529 plans do not have annual contribution limits, but contributions above 18,000 USD per year (2026 gift tax exclusion) may require filing a gift tax return. A special provision allows front-loading up to 5 years of gifts (90,000 USD) at once without gift tax consequences. Lifetime contribution limits vary by state from 235,000 USD to 550,000 USD. Most families will never approach these limits.

Most 529 plans offer a gifting page where grandparents, family, and friends can contribute directly for birthdays, holidays, and special occasions. Share the link in birthday invitations or holiday communications. A grandparent contributing 500 USD to the 529 at each birthday and Christmas creates approximately 36,000 USD over 18 years at 7% returns. This is more impactful than most physical gifts.

If using an age-based portfolio, review annually to confirm it is adjusting appropriately. If using a static portfolio, manually reduce stock exposure as college approaches: 80-90% stocks until age 10, 60-70% stocks ages 10-14, 40-50% stocks ages 14-17, and 20-30% stocks in the final year. The goal is to protect gains from a market downturn right before you need the money.

Download an annual contribution summary from the plan website for tax filing. Your plan may or may not send a tax form; many states require you to self-report the deduction. Keep records of who contributed (important for gift tax purposes if grandparents are contributing). Contributions made by December 31 qualify for that tax year's deduction (some states extend to April 15).

Request distributions from your 529 account online. The plan can send money directly to the school, to you (the account owner), or to the beneficiary. Time withdrawals in the same calendar year as the expense to match income and expenses for tax reporting. Keep receipts for all qualified expenses. You will receive a 1099-Q tax form for distributions.

If funds are used for non-qualified expenses, the earnings portion is subject to federal income tax plus a 10% penalty. The contribution portion is always penalty-free (you already paid tax on it). For example, withdrawing 10,000 USD where 6,000 USD is contributions and 4,000 USD is earnings: only the 4,000 USD earnings face tax and penalty. Since 2024, up to 35,000 USD of unused 529 funds can be rolled into the beneficiary's Roth IRA (account must be 15+ years old).

You can change the beneficiary to another family member (sibling, cousin, parent, or even yourself) without tax consequences. The definition of family is broad, including the beneficiary's spouse, children, parents, siblings, nieces, nephews, aunts, uncles, and first cousins. This flexibility means 529 funds rarely go to waste. This guide is informational only, not legal or tax advice.