A Complete Guide to 529 Plans and How to Choose the Right One to Save for College

According to research published by CollegeBoard.org, the average cost of tuition and fees for the 2023-24 school year ranges from $11,260 to $41,540. And, those costs are expected to rise over the coming years. If you want to save for your child’s education, 529 plans are a popular tool that can help you reach your goals.

But before you open a 529 plan, it’s important to understand your options. In this comprehensive guide to 529 savings plans, we’ll cover:

• what 529 plans are and how they work
• the types of plans available
• tips on how to compare your options 
• information about tax benefits
• frequently asked questions

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan that helps individuals and families save for the costs of higher education, including tuition, fees, books, room and board and other qualified expenses. 

Most 529 plans are sponsored and administered by individual states, with each state having its own set of rules and investment and contribution limits. These limits can be quite high—often exceeding $300,000 per beneficiary. 

What are qualified education expenses?

Money invested in a 529 plan can only be used on “qualified education expenses,” such as tuition and fees, room and board, books and supplies, computers and software, and other materials directly related to school. If the expense is essential for education-related activities and meets the criteria set by relevant tax laws, it likely qualifies.

Expenses for non-educational activities—such as travel or health care—are generally not qualified. For instance, the cost of plane tickets to travel to an out-of-state institution are unlikely to be covered because the expense isn’t directly tied to education.

What are the different types of 529 plans?

There are 2 primary types of 529 plans to choose from: 529 prepaid tuition plans and 529 savings plans (college savings plans).

How to compare 529 plans

Which 529 plan is right for your child? To answer that question, you’ll need to think ahead. Do you want to lock in tuition rates at a particular institution? Or would you rather invest in a more flexible savings option?

To make an informed decision, consider the following:

• State residency. Some states offer tax incentives for residents who invest in prepaid tuition plans. These tax benefits can be a significant advantage. Start by checking to see if your state offers any tax incentives for contributions to in-state plans.
• Investment options. College savings plans often offer various investment choices. If you prefer a conservative approach, you might opt for plans with stable value or bond funds. For a more aggressive approach, consider plans with diversified equity funds.
• Direct-sold vs. advisor-sold plans. A direct-sold 529 plan means you open the account directly. With advisor-sold 529 plans, you’ll work with a financial advisor. Advisor-sold plans may involve additional fees or sales charges.
• Fees and expenses. Fees from managed 529 savings plans can significantly impact your returns over time. Pay attention to management fees, administrative costs and any sales charges or load fees. Plans with lower fees are generally more cost-effective.
• Price and performance history. Consider the inflation rate of tuition at your institution of choice over the past decade. Then, compare the returns of 529 savings plans over that same time. Do the savings from a 529 prepaid tuition plan outweigh them?
• Account ownership and control. No matter which type of account you choose, determine who will own and control the account. Some 529 plans allow the beneficiary to take control once they reach a certain age. Others keep control with the account owner. Choose a plan that aligns with your preferences.
• Contribution limits. Check the contribution limits for each 529 plan. Keep in mind that contributing above certain limits may incur gift tax implications. This is particularly important if you plan to invest an estate gift, for example. 
• Flexibility. Some plans allow you to change the beneficiary to another eligible family member without penalties. Others may have restrictions. This flexibility can be valuable, if the original beneficiary doesn’t use the funds for education.

Generally, you’ll also want to read the fine print about the specific guidelines associated with 529 plans in your state. Some plans offer additional features, such as gifting programs, rewards programs or estate planning benefits. Explore these extras to see if they align with your needs.

What are the tax benefits of 529 plans?

One of the key features of 529 plans is their tax benefits. Many states offer tax deductions or credits for contributions made to their state’s 529 plan. Contributions above certain limits may be subject to a gift tax. 

Another tax advantage is that earnings on investments within the plan grow tax-deferred. That means you won’t pay federal income tax on gains if the funds are used for qualified education expenses. The funds you withdraw from a 529 plan to pay for these expenses generally are tax-free at the federal level. In many cases, they’re tax-free at the state level, too.

Frequently Asked Questions About 529 Plans

Why should I save money for college in a 529 plan?

Saving within a 529 plan offers state and federal tax benefits. It’s also a dedicated vehicle to save for education expenses, for easier money management. 

Can 529 plans be used for purposes other than college?

Although 529 plans are primarily intended for higher learning expenses, they also can be used to pay for some or all K-12 tuition and certain apprenticeship programs.

Do I have to choose my state’s 529 plan?

No, you can choose any state’s 529 plan that meets your needs. Consider factors such as tax benefits and investment options when making your choice.

Should I use a broker for my 529 plan?

It’s not necessary to use a broker. You can open a 529 plan directly with the plan provider. Using a broker may involve additional fees. However, if you need more guidance, a broker can help you choose options that best align with your needs.

What happens to the money in my 529 plan if my child doesn’t go to college?

Beginning Jan. 1, 2024, you can roll up to $35,000 over from a 529 account into a Roth IRA (subject to annual contribution limits), provided the fund is at least 15 years old. You may also be able to change the beneficiary to another eligible family member or use the funds for your own education. 

Can you lose money in a 529 plan?

Yes, it’s possible. Because 529 savings plans are subject to stock market fluctuations, the value of your investments can go up or down based on market performance.

What is the contribution limit for a 529 plan?

Contribution limits vary by state, but they’re often quite high—typically exceeding $300,000 per beneficiary.

Save for college with Navy Federal Credit Union

Overall, 529 plans are valuable tools in saving for future education expenses. You could also choose to supplement your 529 savings plan with other investment opportunities. Navy Federal Credit Union offers a variety of options to help save for your child’s college education, such as Education Savings Accounts (ESA), Education Money Market Savings Accounts or Education Standard Certificates.