How to Save for College: The 529 Plan Explained

College costs have risen faster than inflation for decades. The average four-year public university now costs over $100,000 total; private universities can exceed $300,000. A 529 plan is the government's preferred tool for saving for education — with significant tax advantages. Here's how to use it.

What Is a 529 Plan?

A 529 plan is a tax-advantaged savings account specifically designed for education expenses. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses — tuition, fees, books, room and board, and even K-12 tuition (up to $10,000/year).

The Tax Benefits

• Tax-free growth: investments grow without being taxed each year
• Tax-free withdrawals for qualified education expenses
• State tax deductions: 34 states offer a deduction or credit on contributions
• Gift tax exclusion: contribute up to $18,000/year per child (2024) without gift tax
• Superfunding: contribute 5 years of gifts upfront ($90,000 per child) all at once

What Can You Use 529 Funds For?

Qualified expenses include: tuition and fees, books and supplies, room and board (if enrolled at least half-time), computers and technology for school, and K-12 private school 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, subject to conditions).

How Much Should You Save?

A common goal: save enough to cover 1/3 of projected college costs, take loans for 1/3, and have the student earn/work for 1/3. If current public university costs $30,000/year and you expect 5% annual inflation, a 4-year degree in 18 years could cost $175,000+. Starting early and letting compound interest work is far more powerful than waiting.

How to Open a 529 Plan

• Choose a state plan — you don't have to use your own state's plan, but many states offer tax deductions only for in-state plans
• Compare fees — look for low-cost index fund options
• Name a beneficiary (the child) and yourself as account owner
• Choose investments — target-date funds that shift to bonds as college approaches are popular
• Set up automatic contributions

What If My Child Doesn't Go to College?

You can change the beneficiary to another family member (sibling, cousin, even yourself). Since 2024, you can roll up to $35,000 into a Roth IRA for the beneficiary. Or withdraw the funds — you'll pay income tax plus a 10% penalty only on the earnings, not contributions.