The average cost of going to college is about $30,000 per year. So it could help to start saving for your child’s college education as soon as possible. And you can start investing in your child’s future now by opening a 529 college savings plan. You can think of it as a 401(k) for college expenses. But there’s more to it than that.
So let’s take a closer look.
What Is a 529 Plan?
A 529 college savings plan allows you to invest for a child’s college education and pay for expenses such as tuition, books, and supplies required for enrollment. It also offers distinct tax benefits, such as:- Earnings on your contributions that grow tax-free.
- Tax-free withdrawals as long as they’re used for qualified college expenses.
- In some states, state-level tax deductions or credits based on your contributions.
What Are Qualified Educational Expenses?
You can use your 529 plan funds tax-free on a variety of expenses, including the following:- College tuition and fees
- Room and board (for at least half-time students)
- Books and supplies required for enrollment
- Computers and internet access
- K–12 tuition (up to $10,000 per year per beneficiary)
- Student loan repayment (up to $10,000 lifetime limit per beneficiary)
How Do 529 Plans Work?
When you open a 529 plan, you generally have a variety of investment options, such as mutual funds. Many also offer age-based portfolios. These are professionally managed portfolios that aim to change asset allocation over time in order to become more conservative and retain savings.You can open a 529 plan for any minor, but you retain control of the account. And if the beneficiary decides not to go to college, you can replace the beneficiary with any other family member. However, you must be a U.S. resident, over the age of 18, and have a valid Social Security number to open an account.
Furthermore, anyone such as friends and family can donate to your child’s 529 plan. Many providers make it easy for others to give money electronically and send invites.
Withdrawing Money From a 529 Plan
You may withdraw money from your 529 plan at any time. But federal income taxes would apply on earnings, and a 10 percent tax penalty would also kick in if funds are used for nonqualified educational expenses.But the 10 percent penalty may be waived. For instance, it can be waived if your beneficiary receives a scholarship or attends a U.S. military academy. However, applicable federal income taxes on earnings would still apply. These may also be subject to state taxes.
What to Watch Out For
You’re free to open any 529 plan, which are often sponsored by states and managed by major investment firms. However, fees and expenses may vary by plan.It’s also best to open an account when your beneficiary is born, as this will give your funds time to accumulate before they’re off to college.
Types of 529 Plans
There are three main types of 529 plans.
Direct-sold: These are basic investment accounts with various investment options.
Adviser-sold: These are available through licensed financial advisors, but they may charge higher fees than direct-sold plans.
Prepaid tuition plans: These allow you to prepay all or part of in-state college expenses at current rates.
What About Gift Taxes?
Contributions to 529 plans are considered gifts for tax purposes, but you have a gift tax exclusion of $19,000 in 2025. If you contribute more than that, you may just need to fill out some paperwork. You won’t owe gift taxes until you breach your lifetime gift and estate tax exclusion of $13.99 million for 2025.The Bottom Line
A 529 plan or education savings plan can help you invest in your child’s college education as soon as possible. You have many investment options, including professionally managed portfolios. And you also get distinct tax benefits.The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
