Why every child—and even you—can benefit from a 529 Plan… Even if they never go to college.
Ann Garcia, CFP®
Head of Content & Author
Ann Garcia, CFP®
Head of Content & Author
Ann is a nationally recognized financial advisor and author who provides comprehensive financial planning and investment management advice to families, businesses, and individuals. She obtained her BA from the University of California, Berkeley, is a member of Phi Beta Kappa, and holds the Certified Financial Planner certification. Ann lives in Oregon with her husband and is the proud parent of two recent debt-free college graduates. In her free time, she enjoys running the Wildwood Trail and exploring Portland's vibrant food scene.
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir is the Founder, CEO, and Registered Investment Advisor Representative of Tobi. Prior to founding Tobi in 2023, he was a consumer financial services attorney in private practice for twelve years. He earned his BA in Economics from the University of Virginia and his JD (cum laude) from American University. He lives on a small farm outside Washington, D.C. with his wife and middle-school son, perfecting the art of keeping their alpaca, llama, horses, and sheep in a semi-perfect state of harmony. Their rescued alpaca became the inspiration for the company's mascot.
529s are widely misunderstood. They’re also powerful.
Education plans are probably the most misunderstood—and powerful—investment vehicle out there. Did you know that they now can also be used to pre-fund your child’s retirement? How about your own retirement, too?
A 529 plan is now a dual-purpose powerhouse for tax-free compounded growth! And when combined with its tax advantages, you're likely to end up with at least 10% more money for college if you used a 529 instead of investing in a brokerage account.
To illustrate, investing $50 per week over 20 years would add up to only $52,000, but when your investments are powered by a 6% average compounded investment growth per year (which is the typical average investment return for most 529 plans), the total balance would double to $100,000 over 20 years. See for yourself with our Growth Calculator.
A 529 plan allows you to take that $50,000 investment profit over the $50,000 that you invested—tax-free! In this example, that would mean saving you $7,500 in federal capital gains tax—and that’s on top of potential state taxes, too. (If this sounds familiar, it’s because this is pretty much the same tax-free growth that you can get with a Roth retirement account—either through work or as an IRA.)
Want to know a little trick? You can actually also open a 529 account before a child is ever born, which would extend the growth horizon by years! So, if you plan to start a family later in life, you can jump start your future-children’s education savings by, say, ten years prior. And those extra 10 years would allow the $100,000 to grow to $220,000!
The Original Purpose of 529 Plans Is Still Powerful: Tax-Free Growth for Vocational and College Education
A 529 plan was originally meant to help parents (or other relatives) save for educational expenses for their young—leveraging to its main super powerful tax perk: tax-free compounded growth, so long as the investment growth was used for permissible educational purposes:
- At vocational and trade schools around the country
- Apprenticeships
- Up to $10,000 per year for K-12 private school tuition
- Undergraduate and Graduate tuition, supplies, and actual on-campus or estimated off-campus housing costs—anywhere in the U.S.
- Even studying abroad at about 300 institutions around the world!
With flexibility like this, you can plan for a wide range of educational opportunities. But… wait. There’s more!
529 Accounts Have No Extra Impact on Financial Aid Eligibility!
Here’s the good news: in many common cases (especially with a parent-owned 529), a 529 is treated similarly to other parent assets in financial aid formulas—so using a 529 doesn’t automatically “hurt you more” than holding the same money in a regular bank or brokerage account.
And because the investment growth inside a 529 can be tax-free when used for qualified education expenses, you can potentially end up with more money available for education than you would with a taxable account.
That said, financial aid treatment can depend on who owns the 529 (parent vs student vs grandparent/other), and different schools may use different methodologies—so it’s worth double-checking how your target schools and applications treat 529 ownership and withdrawals.
And in fact, 529s have two big benefits in financial aid calculations:
- Because the investment growth can be tax-free, using a 529 for qualified expenses can avoid the tax drag you’d face when selling investments in a taxable account.
- The federal financial aid formula excludes 529 accounts belonging to siblings from the family’s ability to pay.
What If Your Child Skips College?
You have some options! Life is unpredictable—and you don’t need us to tell you that—but that doesn’t mean your 529 account is wasted; to the contrary! If your child earns scholarships or decides against higher education, you can:
- Change the beneficiary to another family member, including yourself, and use the growth for their or your qualified educational expenses instead.
- Withdraw all of the money and use it for anything you want. But you would have to pay an ordinary income tax plus a 10% penalty—both assessed only on the investment profit. The amount you invested into the 529 plan itself is never subject to further taxes or penalties—only the investment growth!
- Roth IRA Rollover: Roll over up to $35,000 of the account balance into a Roth IRA after the account has been open for at least 15 years. This roll-over feature allows you to continue the tax-free growth for the account beneficiary, so long as the investment profits are not withdrawn before age 59½. But there are a lot of rules and limitations on how to do it—discussed in the Q&A below.
You Can Always Hold the Power
You own the assets the whole time—even if other friends and family also donate money into the account. This account ownership allows you to designate anyone you choose as the beneficiary of the account, but the beneficiary designation never changes the fact that it’s always your account. So, if you change your mind and change the beneficiary to anyone else: another one of your children (current or future-born), another close relative, or even to yourself for maximum flexibility.
Enjoy high contributions & limits
529 plans are open to everyone, regardless of their income, and anyone—including strangers—can gift money into the account. Contributions are allowed of any size until the total balance in the account hits the balance cap that is set by whichever state is sponsoring the plan. But the state-imposed balance caps are very high: $235,000-$575,000 per beneficiary, depending on the state. And hitting the balance cap does not mean that you have to withdraw the excess. It simply means that nobody is permitted to make additional contributions—but the investments can continue to stay and compound into the future.
The Carrot…and the Stick
The 529 plan comes with tempting benefits—and a few cautionary details:
- The Carrots: Tax-free growth on your savings, flexibility in education uses, and even a state tax deduction in many cases.
- The Stick: If you need to withdraw investment profits for non-educational expenses, taxes on growth and a 10% penalty apply. All contributions into the plan, however, can be pulled out tax-free and penalty-free at any time and for any reason. Keep in mind that withdrawals from a 529 are always pro rata contributions and growth. Unlike a Roth IRA, there is no option to withdraw just the contributions.
The most appropriate 529 plan for you is NOT necessarily sponsored by the state you live in!
Not all 529 plans are created equal, and they all allow non-residents to invest in them. So, you can live in Nebraska, open a 529 plan in New York, and send your child to college in Virginia or even some international institutions.
It’s just that some state 529 plans are better managed than others, and some have lower fees than others. Some states allow tax deductions on their residents, and others don’t.
Why Play This Card?
A 529 plan is way more than a college savings account—it's now a strategic and flexible tool for their success—wherever their future may take them!
Frequently Asked Questions and Common Misconceptions about 529 Plans:
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