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written by: victoria mcgruder, cpa, cpwa®

There are a few ways that we can save for our children’s future (refer to my last blog post where I focus specifically on the Top 3 Ways to Save for our kiddos’ future). But if our main focus is on saving for kids college education, the 529 College Savings Plan is going to be, in my opinion, the best way.

529 College Savings Plans

A 529 College Savings Plan is a tax advantaged investment account that’s sole purpose is to pay for higher education costs. Almost every state in the country offers their own 529 College Savings Plan. A few other brokerage firms like Vanguard & Charles Schwab offer their own as well.

Pros of the 529 Plan:

  • Tax Free Growth & Withdrawals
    • All of your future earnings within the account grow tax free and future withdrawals are tax free SO LONG as the withdrawals are used for qualified education expenses. If they are not, you will trigger a 10% penalty and will be taxed on the earnings portion of your withdrawal. (You will not be penalized or pay tax on your original contribution amounts – only the earnings).
  • In State Tax Benefits
    • If you are a resident of a state and you open and contribute to that particular states 529 College Savings Plan, many (but not all) states will provide you with either a state tax credit or deduction on your state tax return. Each state credit or deduction is different. This is something you will want to consider when comparing different 529 Plans to invest in.
  • Owner of Account Remains in Control
    • The owner of the account will remain in control. The beneficiary or student has no legal rights to the 529 account and will not have access to take out withdrawals or make investment decisions.
  • No Time Limit
    • The funds invested in the 529 account are not required to be withdrawn within a certain time period. You could allow this account to grow for years to come. Let’s say your child does not end up going to college, you have the ability to continue to invest the 529 and perhaps save it for future grandchildren.
  • Simple & Low Maintenance
    • It is very easy to open an account as each of the 529 State Sponsored Plans have their own dedicated websites and platforms to open accounts, contribute to accounts, etc. Many of the investment options are age based per the beneficiary and thus making your investment choices more limited. That limitation could be viewed as a pro or con depending on who you ask!


Cons of the 529 Plan:

  • Investment Options are Limited
    • As stated above as a pro, depending on who you ask, the investment options tend to be more limited and you do not have access to invest in whatever it is that you want. There is a specified list of investments to choose from.
  • Fees Can Be Steep
    • State sponsored 529 College Savings Plans fees range anywhere from 0.25% to 1.5%. This will be an important number to know before agreeing to open an account in any one particular state.


Frequently Asked Questions I’ve Answered Over The Years

  • What happens if you move?
    • You can continue to invest in the 529 account as is or you may have the opportunity to roll it over into a new 529 plan if you choose to do so. If you continue to contribute to the old 529 plan and are no longer a resident of that state, you may no longer receive the state tax benefit for your contributions. Worth considering rolling over into new state plan in which you reside (depending on fees & state tax benefit offered).
  • Are your kids required to go to a specific college or attend a state university within the state 529 college savings plan you are contributing to?
    • No. They may attend any eligible higher education institution they would like.
  • Can I transfer the 529 account or change the beneficiary?
    • Yes. If your named beneficiary on the 529 account chooses not to go to college or does not use all the funds, you are able to change the beneficiary to another individual within the family.
  • Do I have to contribute and invest in my states 529 Plan?
    • No. You may opt to open a 529 account in any state you wish (or go through Vanguard, or another institution that offers their own). When comparing 529 plans – look at the fees, the in state tax benefits & past performance.
  • What happens if my child gets a full scholarship?
    • (Please be mine!!) You are able to withdraw the same amount of funds as the scholarship from the 529 and use for non-educational expenses penalty free. You will only be responsible for paying the tax on the earnings from the withdrawal.


What are the Exceptions to the 10% Penalty for Non-Qualified Withdrawals?


If any of the below become relevant to the beneficiary of the 529, the 10% penalty may no longer apply. If the beneficiary….

  • Becomes incapacitated
  • Attends a U.S. Military Academy**
  • Receives educational assistance through an employer provided program**
  • Receives a tax free scholarship**

**You may withdraw funds from the 529 Plan in the amount of said military academy tuition, tax free scholarship or employer provided education assistance. Any withdrawal in excess of those amounts may be penalized.


A Few (not all) Examples of Qualified Education Expenses:

  • College tuition & fees
  • Vocational and trade school tuition and fees
  • Room & board fees
  • Off campus housing (up to the cost of room & board fees)
  • On campus meal plans
  • Books & supplies
  • You are able to take tax-free withdrawals of up to $10,000 (per year, per beneficiary) for K-12 tuition expenses
  • $10,000 student loan payoff (lifetime limit, not per year)


Two Outside Resources Worth Sharing:

Vanguard has it’s own 529 Plan offering as well and it’s biggest draw is the low fee structure. To compare the Vanguard 529 and your other state sponsored 529 plans, please click on this Vanguard link to see which offering makes the most sense for you.

Another great resource for commonly asked questions and state by state comparisons as it relates to the 529 college savings plan is the the Saving for College website.

Hope this is helpful information as you navigate saving for your kiddos education!

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