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Back-to-School Investing: 529 Education Plans

Investing 101
Family enjoying spending time together outside

As families are starting the new school year, shopping for supplies, setting up new routines, and maybe even taking those classic “first day” photos, it’s also the perfect time to think ahead about a different kind of preparation: saving for education. Just like sharpening pencils or stocking up on notebooks, planning for your child’s future schooling should be part of the back-to-school checklist.

One of the smartest ways to do that? A 529 plan.

A 529 plan is like a backpack for your child’s educational journey: it carries the savings you’ll need along the way. Named after Section 529 of the federal tax code, these plans were designed by Congress to help families cover education costs. They’ve been around for almost three decades and continue to evolve, now covering not just traditional college tuition and fees but also:

  • K–12 tuition
  • Apprenticeships and technical schools
  • Mid-career training programs
  • Student loan payments

And new rules even allow families to roll over unused 529 funds into a Roth IRA (up to $35,000 lifetime, under certain conditions), giving your child’s future a boost whether they decide to pursue higher education or not. There are two types of 529 Plans:

  • Prepaid Tuition Plans: Prepaid tuition plans allow you to pay tuition ahead of time for specific colleges or college systems, shielding you from the rising costs of education. There are currently 11 prepaid tuition plans offered by 10 states.
  • College Savings Plans: College savings plans are the most common 529 plan and provide a broader range of investment options, allowing your contributions to grow tax-free over time.

529 plans deserve top marks when it comes to flexibility and tax advantages:

  • Tax-Free Growth & Withdrawals: Earnings grow tax-free, and withdrawals for qualified expenses don’t get taxed either.
  • Flexibility: If your child earns a scholarship or decides on a different path, you can change the beneficiary to another family member without penalty.
  • Choice of Investments: Families can customize portfolios with bond funds, target-date funds, and equities to fit their savings goals.
  • State Incentives: Some states add an extra “bonus point” with tax credits or deductions for contributions.

Contribution limits vary by state (though they’re generally high). Families can also front-load contributions by using five years’ worth of the gift tax exclusion all at once, a strategy for those looking to get a head start on saving.