Hi, I'm Valery!

I’m a milennial latina, mama of two boys, wife, coffee addict, lover of all things aesthetics, dreamer, and money expert.

White piggy bank with printed words that read "529" on top of bills of money

How to Open and Use a 529 Plan for Your Child’s Education [2023 Edition]

Are you ready to tackle the daunting task of saving for your child’s education? Fear not, because we’re here to help you make saving for college fun! Today, we’ll be discussing everything you need to know about 529 plans, from how to open one to the benefits of using one. So, let’s get started!

Choosing a 529 Plan

States offer 529 plans, but not all plans are created equal. Some states offer better tax benefits or lower fees than others. Choosing a 529 plan can be overwhelming given the number of options available. Consider these factors when choosing a 529 plan:

  1. Fees: Look at the fees associated with each plan, including maintenance fees, administrative fees, and investment fees. Higher fees can eat into your investment returns over time.
  2. Investment options: Consider the investment options available within each plan. Some plans offer a range of investment options, while others have a more limited selection.
  3. Performance: Look at the historical performance of the plan’s investments to see how they have performed over time.
  4. Tax benefits: Check to see if your state offers a tax deduction or credit for contributions to a 529 plan. If so, you may want to consider a plan offered by your state.
  5. Contribution limits: Look at the contribution limits for each plan to make sure they meet your savings goals.
  6. Flexibility: Consider the flexibility of the plan, including the ability to change beneficiaries, transfer funds to another plan, or use the funds for non-education expenses.
  7. Reputation: Look at the reputation of the plan provider, including their customer service, ease of use, and overall satisfaction ratings.

Opening a 529 Plan

It may seem daunting to open a 529 plan, but it’s actually quite simple. You’ll need to gather some basic information about yourself, your child, and your chosen plan, and we have gathered all the necessary steps and documentation to make the process as easy as possible.

One of the most difficult parts of saving for college is deciding how much to contribute to a 529 plan. Several factors, including your financial situation, goals, and the cost of education, can influence your decision. Use these tips to help you decide how much to contribute to a 529 plan:

  1. Start with a budget: Begin by looking at your income, expenses, and savings to determine how much you can realistically contribute to a 529 plan each month or year.
  2. Consider the cost of education: Look at the projected cost of education at the schools your child is interested in attending. This can give you an idea of how much you need to save to cover the costs of tuition, room and board, books, and other expenses.
  3. Think about your goals: Consider your goals for your child’s education. Do you want to pay for the entire cost of their education, or do you want to contribute a portion and have them take out loans or work to cover the rest?
  4. Take advantage of tax benefits: Remember that contributions to a 529 plan may be tax-deductible in some states, and earnings grow tax-free. Be sure to check with your tax advisor to see if you are eligible for any tax benefits.
  5. Don’t forget about other savings goals: While saving for your child’s education is important, don’t forget about other financial goals, such as retirement savings and emergency funds.
  6. Adjusting contributions to your 529 plan over time is important as your financial situation changes. You may need to increase or decrease your contributions based on your child’s educational goals, your financial situation, and other factors.

What does Contributing Look Like?

If you were to contribute $100 a month from the moment your child was born until they were 18 years old, assuming a 7% annual rate of return, see below how much you should have:

amounts and an additional column for total contributions:

529 Plan ProviderProjected Total Balance at Age 18Total Contributions
College Savings Iowa$63,370.17$32,400
The table above shows how much your child will have if you contribute $100 every month from the day he was born until they turn 18. This is assuming a 7% annual rate of return and it also included a $600 extra contribution from gifts from family, bonuses, etc. The Second column shows the total balance at age 18, the third column shows how much was made just by investing in a 529 – these are the earnings, and the last column shows how much cash was actually contributed during the 18 years.

Each 529 plan provider may have different projected balances for a few reasons.

  1. Investment Options: Each 529 plan provider may offer different investment options with different levels of risk and potential returns. Some plans may offer more aggressive investment options, while others may offer more conservative options. The investment choices made by the account owner can impact the projected total balance at age 18.
  2. Fees: Each 529 plan provider may charge different fees, such as annual maintenance fees, investment fees, or account opening fees. These fees can impact the overall growth of the account.
  3. State Tax Benefits: Some 529 plans offer state tax benefits for contributions made to the plan. The value of these benefits can vary by state and can impact the projected total balance.

It’s important to note that projected balances are just estimates and are subject to change based on various factors. It’s always a good idea to do your own research and compare different 529 plan providers to find the one that best fits your needs and goals.

Contributing to a 529 Plan

Contributing to a 529 plan is easy and can be done in a few different ways. Here are the most common ways to contribute to a 529 plan:

  1. Electronic transfer from a bank account: Most 529 plans allow you to link your bank account to your 529 plan and make contributions electronically. You can usually set up a recurring contribution or make one-time contributions as you see fit.
  2. Check or money order: You can also contribute to a 529 plan by mailing a check or money order to the plan’s administrator. Be sure to include your account number and specify how you want the funds to be applied (e.g., to the principal, to a specific investment option, etc.).
  3. Payroll deduction: Some employers offer payroll deduction options for 529 plan contributions. The employer can deduct the contribution from the paycheck before taxes, making it a convenient way to save for your child’s education.
  4. UGift: Many 529 plans offer the UGift service, which allows family and friends to contribute to a child’s 529 plan. The account owner can set up a UGift account and share the account information with others, who can then make contributions online. This can be a great option for grandparents, aunts, uncles, and other family members who want to help contribute to a child’s education savings.

To use the UGift service, the account owner simply needs to log in to their 529 plan account and set up a UGift account. They can then share the unique UGift code with family and friends, who can use it to make contributions online. Some 529 plans may also allow contributions via check or money order through the UGift service.

It’s important to note that contributions made via UGift count towards the annual and overall contribution limits for the 529 plan, so be sure to keep track of contributions made by others to avoid exceeding these limits.

How Will this Affect Financial Aid?

A 529 plan can have an impact on financial aid eligibility, but the impact can vary depending on several factors.

The Free Application for Federal Student Aid (FAFSA) uses the expected family contribution (EFC) to determine how much a family is expected to contribute towards the cost of college when a student applies for financial aid. The EFC takes into account several factors, including income, assets, and family size.

For financial aid purposes, assets held in a 529 plan are considered a parental asset, regardless of who the account owner is. This means that the EFC will include up to 5.64% of the total value of the account.

While having a 529 plan can impact financial aid eligibility, there are several strategies that families can use to minimize the impact, such as:

  1. Use the funds for qualified education expenses: Funds withdrawn from a 529 plan for qualified education expenses, such as tuition, fees, books, and supplies, are not counted as income on the FAFSA.
  2. Consider delaying distributions: If possible, it may be beneficial to delay withdrawals from a 529 plan until after the student’s final year of college. This can reduce the impact on financial aid eligibility since the funds will not be counted in subsequent years.
  3. Use the 529 plan for non-college expenses: While not ideal, if a family decides not to use the funds for qualified education expenses, they can use the funds for non-college expenses. However, this will result in taxes and a 10% penalty on the earnings portion of the withdrawal.

It’s important to note that the impact of a 529 plan on financial aid eligibility can vary based on the individual circumstances of each family. It’s always a good idea to consult with a financial advisor or college financial aid expert for personalized advice.

Who Can Open a 529 Plan

The account owner of a 529 plan can be anyone, including parents, grandparents, other relatives, or even the beneficiary themselves. There are no age restrictions on the account owner, and you do not have to be a U.S. citizen to open a 529 plan.

However, each state has its own rules and regulations regarding who can open a 529 plan and who can be named as the beneficiary. Some states may require that the account owner be a resident of the state, while others may allow anyone to open an account. It’s important to research the specific rules of the state plan you are interested in before opening an account.

Additionally, some plans may have restrictions on who can be named as the beneficiary. In most cases, the beneficiary must be a U.S. citizen or resident alien with a valid social security number or tax identification number. Some plans may also allow non-U.S. residents to be named as beneficiaries, but it’s important to check with the specific plan provider for their rules and restrictions.

What if Your Child Doesn’t Go to College?

We get it, college isn’t for everyone. But don’t worry, if your child decides not to go to college, there are other options for using the funds in a 529 plan.

  1. Change the beneficiary: One option is to change the beneficiary of the 529 plan to another family member who plans to attend college in the future. This can include another child, grandchild, or even yourself or your spouse. As long as the new beneficiary is a qualified education expense recipient, you can use the funds in the 529 plan to pay for their education expenses.
  2. Withdraw the funds: If you decide not to change the beneficiary, you can withdraw the funds from the 529 plan. However, it’s important to note that you may be subject to taxes and penalties on the earnings portion of the withdrawal. The tax implications of withdrawing from a 529 plan can be complex, so it’s a good idea to consult with a financial advisor or tax professional before making any withdrawals.
  3. Hold onto the funds: Another option is to leave the funds in the 529 plan in case your child decides to attend college in the future. There’s no time limit on when you can use the funds in a 529 plan, so they can continue to grow tax-free until you decide to use them.
  4. Contribute to a Roth IRA: If your child doesn’t attend college and you have funds left in the 529 plan, you can consider contributing those funds to a Roth IRA in your child’s name. However, there is a lifetime cap of $35,000 per beneficiary for funds transferred from a 529 plan to a Roth IRA.

    Note that there are annual contribution limits for a Roth IRA, which may affect how much you can contribute. As of 2023, the contribution limit is $6,500 or your earned income, whichever is less. Before deciding to contribute to a Roth IRA, consult with a financial advisor to ensure that it’s the right option for you and your child.

Benefits to Parents:

529 plans aren’t just beneficial for your child, there are several benefits for parents who contribute to a 529 plan, including:

  1. Tax benefits: Contributions to a 529 plan are made with after-tax dollars, meaning they are not deductible from federal income taxes. However, some states offer a tax deduction or credit for 529 plan contributions, which can provide a significant tax benefit for parents.
  2. Control over the funds: Unlike custodial accounts, which become the property of the child when they reach the age of majority, parents retain control over the funds in a 529 plan. This means that parents can decide when and how to use the funds, as well as who can access them.
  3. Flexibility: 529 plans can be used for a variety of education expenses, including tuition, fees, books, and supplies. They can also be used for room and board expenses if the student is enrolled at least half-time. Additionally, if the child decides not to attend college, the funds can be transferred to another family member who is attending college.
  4. Investment options: 529 plans typically offer a range of investment options, including age-based portfolios that automatically adjust the asset allocation as the child gets closer to college age. This can help parents maximize their investment returns while minimizing risk.
  5. Estate planning benefits: Contributions to a 529 plan are considered gifts for tax purposes, which means they are not subject to federal gift tax as long as they are within the annual gift tax exclusion ($15,000 per year as of 2022). Additionally, parents can make a lump-sum contribution of up to five times the annual gift tax exclusion ($75,000 as of 2022) and elect to treat it as if it were made over five years for gift tax purposes. This can be a useful estate planning tool for parents who want to reduce their taxable estate while also providing for their child’s education.

Saving for college doesn’t have to be a daunting task. With a 529 plan, you can make it fun and exciting! We hope this guide has given you all the information you need to start saving for your child’s education. Remember, the earlier you start, the better off you’ll be. Happy saving!

It is important to note that while saving for your child’s education is a priority, it should not come at the expense of your own retirement savings. Parents and/or contributors should make sure their own retirement is on track before prioritizing contributions to a 529 plan. Saving for both goals simultaneously is ideal and can be achieved through careful financial planning and budgeting.

You're so much more than your past money mistakes.

It’s time to focus on now and making a plan that works for you in this season of life. I’ve been exactly where you are and trust me, I know it feels like an endless quest to get your money in order. Together, we’ll begin tending your money garden and planting the seeds for financial freedom.

Women sitting at a desk, writing in notebook, next to a warm beverage and plant.