By the close of 2024, a staggering $525.1 billion has been tucked away by American families in 529 plans, earmarked for educational pursuits, per the figures from the Education Data Initiative. That breaks down to nearly $31,000 on average for each of the 17 million households engaged in these savings vehicles. Given the ever-increasing sticker price of higher education, it pays to strategically zero in on which 529 plan fits your family’s financial playbook best.
Ohio’s CollegeAdvantage: A Tax-Savvy Contender
Favored for its lean expense ratios, Ohio’s CollegeAdvantage delivers a recipe of low-cost funds anchored by Dimensional Fund Advisors. This plan rolls out the welcome mat to savers both within and beyond state lines, sweetening the deal with a $4,000 state tax deduction per beneficiary for Ohio residents. In essence, the second half of this advantage lies in its broad accessibility and tax perks, making it a compelling choice for many.
New York residents eyeing a 529 can rake in generous tax breaks — up to $5,000 for those filing singly and $10,000 for couples filing jointly. This juicy incentive offsets the state’s heftier tax burden, all while leveraging low-fee Vanguard fund options renowned for cost-efficient investing.
Edvest: Wisconsin’s All-Inclusive 529 Plan
Edvest shines as Wisconsin’s flagship 529 program, welcoming contributors from across the country. This plan pairs Vanguard with Invesco to craft a versatile investment palette. A standout feature is West Virginia’s unlimited tax deductions on contributions, empowering savers to stash away more without hitting a cap.
ScholarShare 529: The Golden State’s Education Savings Solution
California’s ScholarShare 529 plan stands as a robust vehicle for educational savings, offering a flexible structure and a variety of investment options to suit diverse risk appetites and timelines. It caters to residents and non-residents alike, though weighing local tax benefits is key.
Broker-Managed 529 Plans: Expert Guidance at Your Fingertips
If the hands-on route feels intimidating, tapping into a broker’s expertise can ease the journey. Firms managing multiple state plans — including Arizona, Connecticut, Delaware, Massachusetts, and New Hampshire’s UNIQUE College Investing Plan — offer streamlined access and professional insights. While anyone can enroll regardless of residency, keep in mind the interplay of state tax rules before stepping outside your state’s plan.
Merrill Edge and the Trade-Offs
Though platforms like Merrill Edge provide convenience and breadth, they often come with trade-offs—whether in fees, choice, or complexity. Savvy savers should weigh these factors carefully.
Tax-deferred growth, tax-free withdrawals for qualified expenses, and state tax deductions form the triumvirate of 529 plan perks. Beyond tuition, these funds can flex to cover room, board, essential software, and computers.
“Grandparents and long-term planners can harness 529 plans for estate strategies or to build a family legacy,” explains H. Adam Holt, CFP and CEO of Asset-Map, a financial planning technology provider.
Begin your journey: Connect with financial advisors who can untangle the complex web of taxes and 529 nuances for you.
State tax deductions — not a given. Many states skip offering deductions for contributions, especially if you don’t pay income taxes there. This gap can impact your bottom line depending on your residency and where you choose to invest.
Beware of taxes and penalties. Pulling funds out for anything but qualified educational expenses can lead to unwanted taxes and a 10% penalty, even if the withdrawal was unintentional.
“Among the toolbox of college savings options, 529 plans currently form the backbone of education funding,” Holt emphasizes.
Yet, navigating the maze of choices can feel overwhelming.
“Sifting through various 529 plans and completing the paperwork can consume hours,” notes Peter Mansfield, ex-CMO of the UNest app, which facilitates 529 plan setup. “Each state offers unique twists, and many parents mistakenly think they must stick to their home state’s plan.”
“Even after picking the right plan, parents face mountains of paperwork—up to 20 pages. Unfortunately, many drop out and settle for less optimal saving strategies,” adds Mansfield.
529 Plans Demystified: Your Top Questions Answered
What exactly is a 529 plan?
In essence, a 529 plan is a financial vehicle crafted to help you stash money for qualified educational costs. Though initially created to fund college, the plan’s playground has expanded, courtesy of legislation such as the 2017 Tax Cuts and Jobs Act, which now encompasses K-12 private school tuition. The 2019 SECURE Act threw in a game-changer: up to $10,000 annually can be tapped to pay off the beneficiary’s student loans, plus an equal amount for each sibling’s loans.
Contributions grow tax-deferred, and withdrawals are tax-free when used for eligible education expenses at qualified institutions. Many states sweeten the pot by offering tax credits or deductions for contributions, giving you more reasons to invest.
With a range from conservative bonds to high-octane stocks, 529 plans cater to all risk appetites. Plus, anyone—friends, family, even your neighbor—can pour funds into the account, boosting your child’s educational nest egg.
What flavors of 529 plans exist?
Primarily, there are two types:
- Prepaid Tuition Plans: Think of these as tuition “coupons” bought at today’s prices for future college use. These apply only to participating schools, typically don’t cover room and board, nor K-12 education, and are usually non-transferable outside the designated institution.
- Education Savings Plans: These work like investment accounts earmarked for education expenses, covering tuition, room, board, and other qualified costs. You can use withdrawals at most U.S. colleges, some international schools, and for K-12 private school tuition—as well as for certain student loan repayments.
Thanks to their fluidity, education savings plans have surged in popularity among families.
How does one sign up for a 529 plan?
Enrollment can be done straightforwardly via a state plan online or through a brokerage. Choosing from a buffet of plans is possible, but selecting out-of-state options might mean missing out on local tax perks.
Direct state plan participation means you’re in charge: researching investments, managing contributions, and monitoring the account—all typically handled online. Residents also snag immediate tax incentives where applicable.
Going through a broker offers guidance, helping you pick the best plan and optimize your investments over time with professional advice.
Starting early is the golden rule, letting compound interest work its magic over time.
What if a 529 plan goes unused?
The plan’s flexibility shines here: you can hold onto the funds indefinitely, or if unused, withdraw with taxes and a 10% penalty on earnings. But there are savvy ways to sidestep this.
“Assets can remain in the plan as long as the beneficiary is alive,” says Jordan Sowhangar, CFP at Girard.
Account holders have options too: switching beneficiaries to another qualified family member without incurring taxes or penalties is one.
Notably, changes since 2024 allow a 529 plan’s account to be transferred to a Roth IRA for the beneficiary after a 15-year holding period, adding another layer of flexibility.
How do 529 plans juggle multiple children?
Though a single plan can only have one beneficiary at a time, name changes to other eligible family members are permitted multiple times, enabling you to rotate use across siblings.
“If kids are spaced by over four years, a single plan might work by changing beneficiaries after the first finishes school,” Sowhangar advises.
On the flip side, tailoring investments by child age is crucial. Older kids nearing college need more conservative investments, while younger ones can afford aggressive growth strategies.
Given the intricacies, opening individual plans per child often simplifies asset allocation, record keeping, and state tax benefits.
Is there a risk of losing money with 529 plans?
Risk varies by plan type. Prepaid plans hinge on the financial health of plan sponsors—some state governments back them, but not all, introducing an element of risk.
Education savings plans invest in markets and carry typical investment risks. Stocks and bonds fluctuate, and these accounts lack federal or state guarantees. There are, however, safer investments insured by the FDIC if you want peace of mind.
“Longer investment windows let you take calculated risks,” Sowhangar points out. “Closer to college, shifting to conservative portfolios helps preserve capital.”
Unused funds can be withdrawn with penalties or rolled over into a Roth IRA under new rules, offering some solace for leftover balances.
How do taxes interplay with 529 plans?
Tax benefits arguably top the list of reasons to embrace 529 plans.
“Over recent years, 529s have become go-to savings vehicles thanks to their tax advantages, inspiring more folks to tuck away money for education,” shares Holt.
Contributions grow without annual tax hits, and money withdrawn for qualified educational expenses escapes taxation, protecting your gains.
Numerous states bolster this with deductions or credits on contributions, effectively rewarding your foresight.
“The tax incentives are probably the single most magnetic feature of 529 plans,” Holt concludes.
Can 529 funds be tapped beyond college?
Absolutely. Originally college-focused, 529 plans now cover tuition for K-12 private schools, thanks to legislative tweaks. But the catch is, only tuition—not room, board, or books—is covered for K-12, capped at $10,000 annually.
For higher education, qualified expenses have a broader umbrella: tuition, fees, textbooks, room and board, plus computer equipment used primarily for school.
The 2019 SECURE Act also enabled using 529 funds for student loan repayments (up to $10,000 per beneficiary and siblings) and qualified apprenticeship programs, widening the net.
In summary, a 529 plan remains one of the most potent financial tools for families aiming to ease the sting of educational expenses—from first grade to grad school. Yet surprisingly, billions remain untouched in unclaimed tax benefits and incentives, underscoring the value of setting up and optimizing a 529 plan sooner rather than later.