You just opened and contributed some money to your child’s 529 plan, but are you getting the most out of it? 529 plans are savings accounts that parents, grandparents, or other relatives can set up and contribute to for their children’s education. The 529 plan has amazing benefits that go beyond college tuition costs. Did you know that you can use your child’s 529 plan to pay for his private school tuition from grades K-12? Here is how to get the most out of your 529 plan.
What Is A 529 Plan?
There are two types of 529 plans: The college savings plan and the prepaid tuition plan. With the college savings plan, you’re investing the funds you contribute to the plan, so this type of account operates like a 401K plan. The college savings plan includes mutual funds and exchange-traded funds that earn interest for many years. The college savings plan covers tuition, books, and room and board.
The prepaid tuition plan operates like a regular savings account. You can lock in a certain school’s current tuition rates and prepay this amount years ahead of time by contributing to the 529 plan. Not all colleges offer a prepaid tuition plan, so contact the school before you choose this option. Unlike the college savings plan, the prepaid tuition option only covers tuition and textbooks.
All contributions and withdrawals from your child’s 529 plan are tax-free as long as he uses the funds for qualified educational expenses as allowed by the IRS. You can also get a tax deduction from your state for enrolling in the 529 plan, but you must enroll in a plan from your home state to get this deduction.
You can even transfer your child’s 529 plan should he not attend college. Family members who can be beneficiaries include:
- Your child’s siblings
- Nieces and nephews
- Your siblings
- Your parents or in-laws (if they plan to return to school)
How Does a 529 Plan Affect Financial Aid?
When your child fills out a FAFSA form for financial aid, his 529 plan is considered an asset of the parent. 529 accounts owned by grandparents are not counted as income when the child applies for financial aid. If the 529 plan is owned by the student, then up to 20% of the plan is considered when the federal government determines eligibility for financial aid. If the 529 plan is owned by the parent, up to 5.64% is considered. In both cases, this reduces your financial aid eligibility slightly.
What Are Qualified 529 Withdrawals?
You can also get the most out of your 529 plan by only making qualified withdrawals. This is important because 529 plan withdrawals are only tax-free if they’re for qualified expenses such as:
- Tuition
- Books
- Room and board
- Computers and software
- Special needs equipment
- Private school tuition for K-12 students
- Up to $10,000 in student loan repayments after college
529 Plan Benefits
Aside from the tax advantages, the 529 plan has several other benefits. Unlike regular savings accounts, you can invest funds in the account. This leads to higher compound interest and more money for your child’s education expenses. As of 2024, under the SECURE Act, you can now roll your child’s 529 plan into their Roth IRA account. The child must have earned income that is equal to the amount you want to roll over from the 529 plan. The 529 account also must have been open for 15 years. The funds in the 529 account must have existed for more than five years before you roll them into the Roth IRA.
What you may not know is that you can fund your continuing education as a professional through the 529 plan. You can save toward a second degree or certifications if you’re starting a new career. This reduces your need for student loans to fund your college education.
529 Plan Investment Options
If you choose the college savings version of the 529 plan, you can invest the funds you contribute. Investment options vary by plan, so research different ones to determine which investment options are best suited for your needs. Some plans offer age-based portfolios. These portfolios are arranged by risk levels of aggressive, moderate, and conservative. If your child is small, the portfolio will be more aggressive. As he reaches the preteen years, the portfolio becomes moderate. Once he graduates from high school, it will be more conservative.
Some plans also offer a static investment portfolio. It gives you more control over your investments, and this type of portfolio doesn’t adjust over time, unlike an age-based investment portfolio. Many plans have different types of static portfolios. These include:
- Conservative allocation portfolio
- Balanced allocation portfolio
- High equity allocation portfolio
- 100% fixed income portfolio
How Do I Open This Plan?
Get started by opening a plan through your state or another state. Research plans thoroughly and compare investment options, fees, and features. Once you choose the plan you want, you’ll locate an institution that offers the plan. The next step is choosing your beneficiary. After this step, choose the portfolio you want. Finally, make an initial deposit and contribute to the plan regularly.
What About Vocational Schools and Trade Schools?
529 plans don’t have to be for four-year colleges. If your child will attend a community college or trade school, he can use the funds to pay for his education. Most vocational schools and community colleges cost less than four-year universities, and having a 529 plan shaves off thousands of dollars in tuition and room and board.
Does It Cover Homeschooling Expenses?
As of now, the 529 plan doesn’t cover homeschooling expenses, but that could change if the One Big Beautiful Bill is signed into law. If this law goes into effect, the 529 plan would cover more homeschooling expenses, such as curriculum, tutoring, dual enrollment college courses, and online learning materials. The bill also supports the use of the plan for on-the-job training and programs that require industry licensing exams for young adults entering certain careers.
College costs are higher than they’ve ever been in recent decades, and student loan debt keeps many people in financial bondage long after they received their degrees. Parents can lighten the financial load for their kids by using a 529 plan to save money for college. When you do this, your child will only have to focus on excelling academically and socially in college. He also gains the freedom to do more with his income in the future.