College savings plans
These are offered only by states. You’ll contribute after-tax income to an account, after which you can invest in mutual funds, stocks, bonds and more.
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If you’re worried about how you’ll pay for your child’s higher education, consider a 529 plan. The appeal is simple: Grow your funds in a tax-advantaged account and when your child is ready for college, they can use the funds to cover a variety of education expenses.
A 529 plan is an account that grows your after-tax contributions. The beneficiary can later withdraw the funds from this account tax-free to pay for qualifying educational expenses.
There are two primary types of 529 plans:
These are offered only by states. You’ll contribute after-tax income to an account, after which you can invest in mutual funds, stocks, bonds and more.
These are available from states and colleges. They allow you to prepay the cost of tuition at eligible institutions. The advantage of this is you’ll pay current prices instead of waiting until tuition rises.
All 50 states and the District of Columbia offer 529 plans. Most individuals elect to open a state-sponsored 529 college savings plan. With most state-run plans your investments may fluctuate in value, and you’ll pay tuition when your child starts college.
Prepaid tuition plans, such as Private College 529 plans, are promoted by more than 250 private colleges. These plans let you pay for tuition in advance to lock in current rates.
No, you’re not required to use your state’s 529 plan. You can invest in a 529 plan from any state or opt for a Private College 529 plan. Moreover, the 529 plan you choose has no impact on where your child can attend college.
Some states sweeten the pot with an incentive to invest in your own state’s 529 plan, with perks like:
Be sure to consider other factors when weighing your home state’s 529 plan. For example, look at the plan’s investment choices, target date options and portfolio performance, which may be more valuable than your home state’s plan benefits.
A 529 plan can offer multiple benefits for educational expenses and your pocketbook, including:
See if your state offers tax deductions and credits.
State | Tax deduction or credit | Applies to… | Maximum contribution deduction/credit applies to per year | Applies to contributions to other states’ 529 plans |
---|---|---|---|---|
Alabama | Deduction |
|
| No |
Alaska | None |
| N/A | N/A |
Arizona | Deduction |
|
| Yes |
Arkansas | Deduction |
|
| Yes |
California | None |
| N/A | N/A |
Colorado | Both |
|
| No |
Connecticut | Deduction |
|
Five-year carryforward for excess contributions | No |
Delaware | None |
| N/A | N/A |
District of Columbia | Deduction |
|
Five-year carryforward for excess contributions | No |
Florida | None |
| N/A | N/A |
Georgia | Deduction |
|
| No |
Hawaii | None |
| N/A | N/A |
Idaho | Both |
|
| No |
Illinois | Both |
|
| No |
Indiana | Credit |
| 20% credit on up to $5,000 per year in contributions (maximum credit of $1,000 per year) | No |
Iowa | Deduction |
|
| No |
Kansas | Deduction |
|
| Yes |
Kentucky | None |
| N/A | N/A |
Louisiana | Deduction |
|
You can apply the unused cap amount to future tax years | No |
Maine | None |
| N/A | N/A |
Maryland | Deduction |
|
10-year carryforward for excess contributions | No |
Massachusetts | Deduction |
|
| No |
Michigan | Deduction |
|
| No |
Minnesota | Both available |
|
| Yes |
Mississippi | Deduction |
|
| No |
Missouri | Deduction |
|
| Yes |
Montana | Deduction |
|
| Yes |
Nebraska | Deduction |
|
| Earnings of rollovers from non-Nebraska plans |
Nevada | None |
| N/A | N/A |
New Hampshire | None |
| N/A | N/A |
New Jersey | None |
| N/A | N/A |
New Mexico | Deduction |
| Fully deductible | No |
New York | Deduction |
|
| No |
North Carolina | None |
| N/A | N/A |
North Dakota | Deduction |
|
| No |
Ohio | Deduction |
|
Carryforward for excess contributions applies indefinitely | No |
Oklahoma | Deduction |
|
Five-year carryforward for excess contributions | No |
Oregon | Deduction |
|
Four-year carryforward for excess contributions | No |
Pennsylvania | Deduction |
|
| Yes |
Rhode Island | Deduction |
|
Carryforward for excess contributions applies indefinitely | No |
South Carolina | Deduction |
| Fully deductible | No |
South Dakota | None |
| N/A | N/A |
Tennessee | None |
| N/A | N/A |
Texas | None |
| N/A | N/A |
Utah | Credit |
|
| No |
Vermont | Credit |
|
| No |
Virginia | Deductible |
|
Carryforward for excess contributions applies indefinitely | No |
Washington | None |
| N/A | N/A |
West Virginia | Deductible |
| Fully deductible | No |
Wisconsin | Deductible |
|
Excess-contribution carryforward for one or more future years | Rollovers from non-Wisconsin 529 plans |
Wyoming | None |
| N/A | N/A |
Prepaid tuition plans may be an option to protect yourself from rising tuition in the future. See which states currently offer prepaid tuition plans.
State | Plan name | Guaranteed | Enrollment period | Maximum deduction per year |
---|---|---|---|---|
Florida | Florida Prepaid College Plan | Yes: full faith and credit of state | Enroll anytime | N/A |
Maryland | Maryland Prepaid College Trust | Legislative guarantee | Dec. 1 to June 30 |
Carryforward for excess payments indefinitely |
Massachusetts | U.Plan Prepaid Tuition Program | Yes: full faith and credit of state | May 1 to June 30 |
|
Michigan | Michigan Education Trust (MET) | No | Dec. 1 to Sept. 30 |
|
Mississippi | Mississippi Prepaid Affordable College Savings (MPACT) Program | Yes: full faith and credit of state | Sept. 1 to May 31 |
|
Nevada | Nevada Prepaid Tuition Program | No | Nov. 1 to March 31 | N/A |
Pennsylvania | PA 529 Guaranteed Savings Plan | No | Enroll anytime |
|
Texas | Texas Tuition Promise Fund | No | Sept. 1 to Feb. 28 (Feb. 29 in leap years). Deadline extended to July 31 for children under 1 year old | N/A |
Washington | Guaranteed Education Tuition (GET) | Yes: full faith and credit of state | Nov. 1 to May 31 | N/A |
Not state-sponsored | Private College 529 Plan | Each participating school commits to accepting tuition certificates for tuition and mandatory fees | Enroll anytime | N/A |
Many states have closed their plans to new enrollment. Virginia’s Prepaid529 plan closed for new enrollment in May 2019. But administrators say a similar program is in the works. Illinois’ prepaid plan is seeking funding from the state legislature, and enrollment is currently on hold.
Before enrolling in a prepaid plan, consider whether it’s guaranteed by your state. If it’s not, you may later find your payments are insufficient to cover tuition.
529 plans provide multiple benefits. But you’ll want to watch out for potential pitfalls to protect your money, including:
Look for a plan with low fees, so your contributions can grow as quickly as possible. Here are major fees to consider:
When you’re ready to open a 529 college savings plan, consider whether you want to work with a financial adviser or directly through a 529 provider.
A financial advisor will provide guidance and help you stay on track with funding your 529 plan. Your advisor may also assemble a unique mix of investments that you wouldn’t find with a direct-sold 529 plan.
But you’re likely to pay higher fees than you would with a direct-sold plan. Your adviser will charge you a commission and they may put your money into actively managed funds that come with higher fees, rather than passively manage your funds.
With direct-sold 529 plans, you’ll likely pay lower fees. It’s also easy to open one online without the help of an advisor.
Unlike advisor-sold 529 plans, a direct-sold plan requires you to pick your own investments. If you don’t want to spend time choosing your investments, see if your chosen 529 plan offers age-based portfolios.
This portfolio automatically adjusts its investments based on how old the beneficiary is now and when they plan to start college.
The portfolio typically seeks a higher return by investing in riskier instruments like stocks. As the beneficiary gets closer to college age, the portfolio protects your capital by moving the funds into more conservative investments, such as cash and bonds.
Open a 529 college savings plan in five steps:
Your beneficiary can make withdrawals tax- and penalty-free for qualified expenses, which are required costs for college enrollment or attendance. But be careful: Many reasonable-sounding expenses don’t qualify.
Below you’ll find a few common qualified and nonqualified expenses.
Expense | Qualified? |
---|---|
Books | Yes |
Computers | Yes |
Equipment, including for special needs | Yes |
Internet access | Yes |
Non-tuition K-12 expenses, such as books, supplies and tutoring | No |
Payments on student loans | No |
Room and board, if enrolled at least half-time | Yes |
Room and board spending that exceeds what the college deems standard for cost of attendance | No |
Sports fees | No |
Student health insurance | No |
Supplies | Yes |
Transportation spending | No |
Tuition and fees | Yes |
Tuition at public, private and religious K-12 schools (up to $10,000 per year) | Yes |
You can take a non-qualified withdrawal and incur taxes and a penalty.
Or you can change the beneficiary to a cousin, daughter-in-law or even yourself. As long as the beneficiary is an eligible family member, they won’t pay taxes or a penalty.
Another option is to leave the 529 plan as is, since your child may later decide to attend graduate school.
Before deciding on a 529 plan, you may want to consider other college-funding options, including:
529 plans are a great way to prepare for your child’s college education, especially as contributions grow tax-free.
But if you’re not comfortable putting your college savings at risk, consider savings accounts and other potentially lucrative options.
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