With the average cost of college in 2024 coming in at over $38,000 per year, it’s no wonder families want to plan ahead as much as possible for the expense. Luckily, schools offer a variety of ways to pay for college — including tuition payment plans and federal financial aid.
But there’s an even more proactive way to save for college, perhaps even well before your kids are college age, and that’s through investing in a 529 plan. While the regulations around 529 plans may vary from state to state, they’re a great way to establish a long-term educational savings fund wherever you are.
For the unfamiliar, a 529 plan is a custodial account that offers tax-free, relatively low-risk investments. You can contribute money for your child starting at any time, watch it grow, and when you’re ready to use it to pay for your child’s education at a qualified school — generally any accredited school in the United States, and even some abroad — you can withdraw it, often tax free. They have high contribution limits and can grow substantially over time, meaning that the sooner you establish one and start investing in it, the more money you’ll have come college time.
Ready to learn more about 529 plans, including which type is right for you and some top tips? Read on.
Research the Right Plan for Your Family
To begin the process, you’ll want to make some basic decisions that are unique to you and your family: What can you afford to contribute monthly? How much are you hoping to contribute by the time your child reaches college age? How many children do you have, and should you open a 529 for each child or create one account that they’re expected to share? (P.S. Experts typically recommend one for each child to maximize benefits.)
With these basic questions and some preliminary answers in mind, you can begin researching which plan is right for you.
Plans by State
Many resources are available that show the available 529 plans by state. Most states offer two different kinds of plans — one in which you can prepay tuition for your local state university system, and another, more common form of 529 where you can save and invest for your child’s education at a state or private college of their choosing.
Depending on your state, there will be different regulations around your 529 plan, including minimum contributions, maximum contributions, tax benefits and more. And remember, some states have $0 minimum contributions to 529 plans, so it can’t hurt to open one as soon as possible.
Start Early & Contribute Regularly
There’s a saying that goes, “the best time to plant a tree was 10 years ago; the second-best time is today.” It’s the same with 529 plans — the best time to start is as early as possible. The earlier you start a plan, the longer your investment has to grow before your child is ready for college. Compounding interest is your strongest ally when it comes to investing.
Once you’ve started, keep on going! Regular contributions are the best way to build up a 529 plan. They don’t need to be large; as long as you contribute steadily, the account will grow. In fact, it’s often a bad idea to stretch yourself too thin by trying to maximize your contributions in an extreme way — you might find yourself stopping contributions altogether if you’ve made an unrealistic goal for how much you’ve been adding every month.
Instead, consider a budgeting plan that includes a line for 529 contributions based on a portion of your income that you can afford. How much to contribute will ultimately be up to you; after all, some parents want their college-age kids to also formulate their own financial wellness plans during college. While some experts recommend the “one-third rule,” the bottom line is that any contribution is a beneficial contribution.
Set Up Recurring Contributions
Just like an IRA or other retirement account, a 529 account can be maintained with regular contributions, but there is no requirement to make monthly contributions. You can use a 529 calculator to see how regular contributions will add up over time.
However, it’s easy to forget to make contributions. Unlike household bills, you’re not regularly notified when it’s time to contribute, and unlike an IRA, your employer won’t make automatic deductions for a contribution. Luckily, you can set up recurring contributions that are directly deposited to ensure that 529 payments don’t get lost in the shuffle, and many plans allow you to customize the automation to occur monthly, quarterly, or even bi-weekly. Some employers also offer the option for you to set up a direct deposit into a 529 account as part of your compensation package, which makes everything easy and streamlined. But if you’d rather manage payments yourself, you can mark your calendar or set an alarm for regular reviews of your 529 plan, setting aside time to make transfers.
Request Contributions as Gifts
At birthdays and holidays, many parents find themselves fielding questions from friends and family about what kind of gift they should get their child. Why not suggest a gift that will keep on giving into your child’s future? It’s not well known, but 529 contributions can be given as gifts — and, like all gifts, they are tax-free for contributions up to $15,000 as of 2024.
Now the etiquette for requesting gifts, particularly financial gifts, can be tricky, but many plans make it simple by offering a link that can be texted or emailed. And because 529 contributions are a gift that promotes education, they can be an especially suitable and thoughtful gift for certain milestones in your child’s life, such as graduations, big birthdays, or religious or cultural coming-of-age events.
One more thing to bear in mind about 529 contributions as gifts is the importance of discussing it with your child. For older children, be sure to explain to them that even though these aren’t gifts they can use right away, they’ll be helping them do something important and exciting when they’re older.
