You may have heard that a 529 plan is a great way to save for your child’s college, vocational training, or trade program. You can even use it to help pay for K-12 expenses too. Now, you’re trying to figure out where to begin with setting one up.
“The ideal time to start a 529 is when your baby is born,” says Jeff Rose, a certified financial planner (CFP) and owner of Good Financial Cents. “For the power of compounding to take effect, you need time.”
It’s even possible to start a 529 before your baby is born by setting up the plan for yourself and then transferring it to your child later, explains Nicole Webb, CFP, senior vice president and financial advisor with Wealth Enhancement Group. “If higher education is important to you, align your investing with your values,” she says. “This can buy you more years of growth.”
If you didn’t open a 529 plan yet, there is still plenty of time to start saving to benefit from the gains. Here’s what you need to know about these saving plans and which one is best for your family.
What is a 529 plan, and how does it work?
A 529 plan is an investment plan specifically for your child’s education expenses. Similar to retirement accounts, a 529 plan invests the money in your account, allowing your money to earn more money in the form of interest over time. Every 529 plan will earn money at a different rate and like any investment, there is no guaranteed rate of growth on the money you put in. However, Rose says that a 529 can earn as high as 8% to 10% interest.
An added perk: You do not have to pay taxes on any interest earned on the money in the account (which is different than many other investment or savings accounts). Additionally, you can withdraw the money from the account without any tax penalties or fees (as long as you use the money toward education). And in some states, any money you put in a 529 can be deducted from state taxes too.
Most 529 plans invest in mutual funds, which are stocks, bond, and other investments “mutually” owned by other investors, explains Danelle Gittus, director of communications with the Michigan Department of Treasury.[1] They’re the most common type of investment. When you buy a mutual fund, you buy a portion of that asset’s earnings.
The money in a 529 can go toward your own education, your kids’ college, a trade program, school books, room and board, or meal plans. Money in state-specific 529s can be used for any school in the country and, sometimes, even internationally as well.[2] Some states also offer “section 529 plans,” which are prepaid tuition plans that let account holders lock in current college tuition rates by pre-purchasing tuition now.
There are other ways you can grow money for your child’s education, like a high-interest savings account or a regular investment account (like a Roth IRA), but Gittus points out that 529 plans can be better because of the additional tax benefits they have. Namely, you don’t have to pay taxes on the earnings or pay taxes when you take the money out.
Funds in a 529 can be used for any child in your family. And as of 2024, 529s that meet certain criteria, such as being held for a minimum of 15 years, can be rolled over into a Roth IRA — this way you do not lose your money (or tax benefits) if no one goes to college and it can help in retirement instead.[3] “Saving for the future is not going to hurt you, even if the child decides not to attend college,” Gittus sums up.
How to choose a 529 plan for college savings
The first thing you’ll need to do when choosing a 529 plan for college savings is decide what type of plan to open. Most states offer a savings plan that you can either manage on your own or work with an advisor for an additional fee to help you choose the investments in the account.
Rose recommends looking carefully into the investment options and fee structure for the plan you are considering. As for fees, you may face an advisor fee as well as an internal management fee. There are usually two types of 529 plans: direct-sold plans, which let you open an account in minutes with funds chosen for you, or advisor-sold plans, which come with a higher fee but give you a personal advisor to help guide you to choose the best investment funds for you, Gittus explains.
You can choose to set up a separate 529 plan for each of your children or create one plan to use for all of your children. There are no maximum yearly contribution limits, but some states do limit the overall amount of money a 529 can hold, which varies from $400,000 to $550,000.
“If you have children that are a couple of years apart in age, you may want to invest the money differently to maximize growth potential,” Gittus says. “This would also help you see if you are reaching your individual savings goals easier.”
How we chose the best 529 plans
With many 529 plans on the market, we made selections for the best 529 plans based on the following criteria:
We consulted Jeff Rose, CFP and owner of Good Financial Cents; Nicole Webb, CFP, SVP, a financial advisor with Wealth Enhancement Group; Danelle Gittus, director of communications with the Michigan Department of Treasury; and Lea Ann Knight, CFP and co-founder of Better Money Decisions. Each certified financial planner was able to speak from experience navigating 529 plans for clients and even their own families.
Each plan is accessible to families from any state
The best 529 plans
To help you get started, here are some of the best 529 plans to consider in your search.
1. Your state’s 529 plan
Almost every state has its own 529 plan[4] and Rose says your own state’s plan is often the simplest place to start as well as the one that usually offers the most state-specific tax benefits to you. For instance, if you live and work in a state that offers 529 tax deductions, like Colorado, you can deduct any money you contribute to a 529 from your state’s taxable income.[5] This means that the amount of money you pay on state taxes on from your income is reduced.
Always check your state’s specific plan because some states — like California — do not offer any state-specific tax deductions. “If you live in a state that gives a tax credit for contributions to the in-state plan, weigh that savings against the relative performance of out-of-state plans,” advises Knight.
Pros:
Easy to set up in your state
Potential state-specific tax deductions
No taxes paid on withdrawals for eligible expenses
Can be used for educational expenses in any state
Can be used even if you move to a different state
Cons:
Investment options differ in each state
Fees differ in each state
2. The Michigan Education Savings Program (MESP)
As an example of a state-specific 529 plan, the MESP can be started by anyone and offers state residents up to a $10,000 yearly tax dedication.
Pros:
Direct sold, which means you do not have to pay a financial advisor to participate in the program
If you live in Michigan, you can get a state tax deduction on 529 contributions
Cons:
Non-state residents will not get tax deductions
3. Virginia529
529s have no annual contribution limit, but they do have a lifetime limit.[6] That means that although you can add as much as you want to a 529 plan in a year, the account can only hold a certain amount total. Virginia is one of the three states that offer the highest overall plan limit for 529 saving plans. So if you’re looking for an account that can hold up to $550,000, you’ll want to choose Virginia, West Virginia, or Vermont-based plans.
Pros:
One of the three highest overall maximum balances of any state plans
Minimum investment of only $10
Cons:
Virginia’s yearly tax deduction is $4,000, which is lower than some states
4. Smart529: West Virginia’s Education Savings Solution
West Virginia offers a dollar-for-dollar deductible on contributions, making it one of the highest in the country.[7] This means that every dollar you contribute into this 529 plan is tax-deductible. Additionally, if you have a wealthy family member who wants to gift your child money without being taxed, this is a plan that lets them contribute a lot — $36,000 per year per married couple or a one-time amount of up to $180,000 as a couple.
Pros:
Account can hold up to $550,000
Married couples filing jointly can contribute up to $36,000 per year tax-free
Your entire contribution is tax-deductible
Cons:
Out-of-resident investors must invest at least $250 initially and at least $25 for every investment thereafter
5. Alaska 529
Alaska’s 529 plan has a unique offering: anyone who contributes at least half of a Permanent Fund Dividend (PFD) — a payment that Alaskan residents receive every year— is automatically entered to win a $25,000 college scholarship that can be used anywhere in the country.[8]
Pros:
Opportunity to win a $25,000 college scholarship
You can choose a pre-paid tuition 529 plan or an investment plan
Cons:
No state tax deductions, so you can’t deduct any contributions from your income if you live and work in Alaska
The last thing to consider before deciding if a 529 plan is right for you is the potential impact on your child’s financial aid. Balances in 529 plans do have to be disclosed on financial aid forms, Knight explains. However, 529 plans aren’t considered as heavily as parents’ income, so in general, most experts say they won’t make much of a difference in determining how much your child will receive for financial aid.[9]
"I would advise you to do the 529 no matter what," sums up a What to Expect Community member. "It’s better to be safe than sorry. Open that account as soon as possible, and let that money start working for you and your child."
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