Happy 5/29 Day! Regular readers probably already know that a 529 is a college savings plan. For those new here, well, I guess you just found out!
I first started looking into college savings plans in 2007, when my nephew was born. I wanted to give him a little head start. I loved the idea my gift would be multiplied thanks to the power of compound interest. Now, he’s 18 years old! He’ll be off to college in the fall.
Unfortunately college savings plans can be a little difficult for a new parent to understand. This is why I wrote my guide for How to Choose a 529 back in 2007.
As new uncle, I put in a little money to seed the account and added more on birthdays and holidays. My nephew got himself an awesome little sister, so I opened up an account for her too. My mother (their grandmother) pitched in on holidays.
Today, he has more than $7,500 in his account. More than half of that is from stock market gains. College is expensive, but $7,500 is still something.
In 2012, we had kids of our own and we focused on saving in their own 529 Plans. We’ve got some work to do on that front, but we do have $50,000 saved. We have some saved in a Coverdell which is another educational savings plan. (In my opinion, 529s are better, but I did the Coverdell once because it was a little more flexible for some expenses). We also have my wife’s GI Bill. We’re investing in their education with the best private school in the area, so they better earn scholarships too, right? Finally, we want the kids to have some of their own money for their own education so they don’t skip classes.
In short, there are a lot of ways to save for college. Before we get started with my 29 thoughts on 529 Plans on 5/29, I have one update for 2025. I added my updates from 2024 with negative numbers, so I’ll continue with that system with this year’s update. (If I had more time, I’d consolidate a few of these thoughts to keep it at 29. Yes, you can laugh at my numbering system.)
-2. 2025 Update – While 529 plans are mostly the same for this year, keep an eye out for Trump/MAGA Accounts. They aren’t passed into law yet, but they’ve could be soon. If they do become a real financial product, it seems they won’t get the same tax benefit as 529 plans. So if you think you are going to use money for higher education, it’s likely going to be better to stick to the 529 plan. In any case, we’ll wait and see what those financial accounts look like when they are done baking… if they get done baking at all.
-1. 2024 Update – There was an update to one of the laws in 2024 that makes a 529 even more flexible. The law is the Secure Act 2.0 and you can read more about why a 529 plan is even better in 2024 from my friend Jim’s Wallet Hacks website.
0. 2024 Update – Here’s a brilliant hack to draw down from your 529k Plan if your kids don’t use all the 529 money you’ve saved. It comes from Justin at Root of Good:
Ultimate 529 draining methodology:
Enroll half time in a community college in fun interesting classes. Pay for 6 hours to be considered half time (cost ~$1k/yr)
Withdraw from 529 the $21,717 per year for Room and board plus the $1k tuition, all qualified educational expenses pic.twitter.com/nDd9fRoS5R
— Justin RootofGood, Worker Emeritus (@RootofGoodBlog) December 15, 2023
Jonathan at My Money Blog, explains it in more detail here. Essentially by enrolling part time in Community College you can use the amount of room and board as a qualified tuition expense. This means that you don’t have to pay the 10% withdrawal fee or taxes on the investment gains.
1. When money from a 529 plan is used for a qualified education expense, there are no taxes to pay on the investment gains.
2. Unfortunately, it’s difficult to get great gains on a 529 plan since they are typically compounding for less than 20 years.
3. You might be able to reasonably double your money twice in that 20 years. Thus one dollar invested at a child’s birth may be worth four after high school graduation. This assumption uses the rule of 69 with 7-8% investment growth.
4. Thus, if you put one year of tuition in a 529 account at birth, it could fund their entire college education. (Unfortunately, very few people have tens of thousands to invest when a new child is born.)
5. 529 plans are run at the state level. As soon as you are done with this article, you’ll want to look at your own state’s specific plan.
6. Some states give you an extra incentive to open a 529 plan. My state, Rhode Island, gives a $100 grant if you sign up for a 529 plan when your baby is born.
7. I used this idea to help motivate a blogger friend to start a 529 plan. I offered $25 and a couple of other bloggers joined in.
8. Some states allow for a tax deduction or credit for saving in a 529 plan.
9. Some states have better investment options than others. When I lived in California there was no tax incentive for me to invest in the state plan. I decided it was best to invest in Ohio’s plan which had Vanguard funds with low expenses.
10. 529 plans can be rolled over to a new beneficiary such as a child. This can be done indefinitely, possibly creating a family legacy of education funding and compound interest.
11. 529 plan money can be used to buy computers. See this IRS page for more details.
12. 529 plan money can also be used to buy computer software subject to the same IRS rules mentioned previously.
13. 529 plan money can even be used for internet service.
14. 529 plan money can be used for tuition at private or religious elementary or secondary schools.
15. 529 Plans can be used for community and technical schools.
16. 529 Plans can be used for some nontraditional schools such as the Golf Academy of America, the commercial diving program CDA Technical Institute, and the Le Cordon Bleu College of Culinary Arts. Yes, golf, diving, and cooking can qualify.
17. 529 Plans can be used for online schools.
18. 529 Plans can be used for hundreds of international schools. Check with the government searchable database first.
19. 529 Plans can be used for online schools. Again, check with the government searchable database first.
20. There’s a limit of $10,000 per year for elementary and secondary use.
21. If your state has a tax deduction for 529 plan contributions, you may want to funnel money through the plan to save on your state tax.
22. If the beneficiary gets a scholarship an equivalent amount of the money in the 529 plan can be used penalty-free. However, taxes on the gains will apply.
23. Alabama and Illinois have a 529 Rewards Visa card where you can earn 1.529% rewards on your spending. A small annual fee may apply. As always, it’s best to pay off your credit cards every month to avoid the huge interest charges.
24. One of the best ways to grow a 529 is simply to create an automatic monthly transfer from your income. This “paying yourself first” creates forced savings.
25. A wealthy relative can use a 529 plan to circumvent the gift tax by “superfunding” 5 years of contributions ($70,000) in one year.
26. Almost 300 private colleges and universities belong to a Private College 529 Plan. It’s the only 529 plan not run by a state and it allows you to lock in tomorrow’s tuition at today’s rates. It’s not an investment.
27. However, if you plan to contribute to the Private College 529 Plan and go to a school that doesn’t participate, you may have done better investing in a regular 529 plan.
28. It’s possible to combine a Private College 529 for tuition and a regular 529 for other expenses such as room and board.
29. As 529 plans are intrinsically linked to taxes, please consult with your tax advisor before implementing anything mentioned here.
If you’ve made it through all 29 thoughts, I hope that you’ve been inspired to investigate at least a few of them further. Let me know in the comments if you have followed any of these down the rabbit and what your experience with 529 plans is.
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