529 Account: The Smart Way to Save for College

Have you ever worried about how you’ll pay for your children’s’ college tuition? Do you know how much it’ll cost? Let’s estimate how much it may cost. This calculation is just a rough estimate taking into account that a child may choose to go to a state college vs a private college. 

College can range from a few thousand a year to over $50,000 a year so for this calculation, I chose a tuition cost of something within that range. Unless you’re set on your child(ren) attending a top private university, using a middle ground would be a good start. And who knows? Your child(ren) might get some scholarships to help with the costs!

This calculation estimates for 2 semesters for 4 years which ends up being 36 months total (or 9 months per academic year). 

Child 1:
Tuition = $35,000
Housing = $15,000
Textbooks = $1,000
Food = $2,400

Annual cost  = $53,400
4-year cost = $213,600

Child 2:
4-year cost = 213,600

Total Cost Of Higher Education For 2 Children:
$427,200

That’s A LOT of money. Thankfully, a 529 account can be used to help save for college expenses.

A 529 account is a tax-advantaged savings plan designed to help families save for higher education expenses. There are two types of 529 plans: prepaid tuition plans and college savings plans.

Prepaid tuition plans allow you to purchase credits at participating colleges and universities at today’s prices, to be used for tuition and certain fees at a later date. These plans are typically offered by states, and the credits are generally transferable to other participating schools.

College savings plans, on the other hand, allow you to save money for future education expenses such as tuition, books, and room and board. These plans are typically offered by states and financial institutions, and the money in the account can be used at any eligible educational institution.

One of the main benefits of a 529 account is the tax advantages. Contributions to a 529 plan are generally not tax-deductible at the federal level, but some states offer a tax deduction or credit for contributions. Some states even contribute to it! 

Earnings in the account grow tax-free, and withdrawals for qualified education expenses are also tax-free at the federal level (some states have different tax rules for withdrawals so it’s important to check).

Another benefit of a 529 account is that it offers flexibility in terms of how the money can be used that include tuition, fees, books, and room and board. It doesn’t have to be just for college but also vocational/trade school tuition and fees. 

They can also be used for certain K-12 tuition expenses, although these withdrawals may be subject to taxes and penalties, again depending on the state.

With the passage of the SECURE Act in 2019, student loan borrowers can use $10,000 of tax-free 529 funds to pay off student loans. However, there’s a $10,000 lifetime limit. 

Off-campus housing costs also count! Your child doesn’t have to live on campus housing to benefit from the 529 account. Off-campus housing and board are qualified up to the cost of room and board on campus. 

College meal plans are covered! I can recall that my meal plan cost over $2,000 a semester, which is really high! However, I admit that the dining hall was fantastic at my school! 

Books and supplies are qualified expenses. Textbooks are so ridiculously expensive that it doesn’t make sense. Some of my professors were actually co-authors for the textbooks they require for the course, which is really shocking since they receive royalties based on the number of textbooks bought. I recommend looking into used previous editions of the textbook which are a fraction of the cost and almost the same! It’s better to spend $40 than $250 on a textbook and then resell it for the same cost to another student who has the same idea.

Every college student needs some sort of laptop or tablet. Those are qualified expenses! 

As you can see, qualified expenses are quite flexible for the 529 account and I can assure that once your child(ren) start college, the account’s balance will quickly decrease with the cost of college and everything that comes along with it.

529 accounts are easy to set up and manage and they offer an easy way to save for higher education expenses. If you’re planning to send a child to college or vocational school, a 529 account may be worth considering as part of your financial planning.

529 accounts can be opened at any time (even if your child isn’t born!). If that’s the case, you can use your own Social Security number as the beneficiary’s number and update it later when you have the necessary information. There’s no age limit to open one and you can start contributing as soon as you open the account. 

Keep in mind that some states may have a minimum initial contribution requirement, but it’s usually a small amount. You can make one-time contributions but you can also set up automatic contributions through payroll deduction or bank transfer if you want to automate it.

If you are considering opening a 529 account, you should research the different plan options available in your state and choose the one that makes the most sense. Many big named custodians that offer retirement accounts also offer this type of account. 

You can easily open an account online and the process is fairly straightforward. Like all financial accounts, you’ll need to provide some basic information, such as your name, address, and Social Security number. You will also need to designate a beneficiary for the account, which is the person who’ll use it for education expenses.

If your child ends up NOT going to college for whatever reason or doesn’t need the funds, you can designate a new beneficiary like a grandchild or another family member who can use the funds.

There’s also a new provision that will likely pass and start in 2024 will allow savers to rollover 529 account funds to Roth Individual Retirement Accounts without incurring any penalties or taxes. However, the provision has some significant restrictions from allowing a flexible rollover:

Restrictions include:

• A $35,000 lifetime cap on transfers.
• Rollovers are subject to the annual Roth IRA contribution limit, which is $6,500 in 2023
• The rollover must only be made to the beneficiary’s Roth IRA — not that of the account owner so as the account owner who owns the 529 account can’t roll it over into their own Roth IRA (If you want to learn how to do a Backdoor Roth IRA Conversion, check out this post)
• The 529 account must’ve been open for at least 15 years and changing beneficiaries may restart that clock
• Contributions from the last five years and earnings on those contributions cannot be rolled over

While these restrictions may not help you directly, opening a 529 account before your children are born can be a smart financial decision as it allows you to start saving and investing long before your child needs those funds.