A Beginner’s Guide to 529 Plans

By Ashley Andrews (Estimated reading time: 5 min) 

Raising a child can be one of the most joyous and rewarding things you do with your life. It can also be an incredibly expensive endeavor, and families can benefit from planning accordingly as early as they can. With the estimated cost of raising a child (from birth to age 18) in the U.S. at just over $230,000, this can mean anything from focusing on day-to-day budgeting to considering long-term savings plans. 

Now, that’s not quite as scary a number as it may seem given that it’s stretched out over nearly two decades. But it is still a lot to prepare for. Ultimately, one of the most helpful steps parents can take to manage expenses is to open up a 529 plan. A 529 is a savings plan meant to cover some education costs, which can be some of the heftiest financial burdens associated with having children (and keep in mind that $230,000 doesn’t include college tuition). Perhaps even more importantly, savings of this nature can also decrease the likelihood of children ending up in college debt — which can be a massive burden well into adulthood. 

This article will share what a 529 plan is, what it’s for, who is eligible for one, and what to consider before opening one; information that can help any parent exploring financial options to make better-informed decisions about saving for their child’s education tuition. 

What is a 529 plan? 

A 529 plan is a state-administered investment account that can also be known as a qualified tuition program. By and large, it is meant to help people save money for certain education costs without burdening them with significant taxes in the process. However, there are different structures for these plans. 

1) An “Education Savings Plan” – a straightforward investment arrangement. It allows you to put money away for a beneficiary (often children or relatives, but this can be anyone you’d like to help out) so that it appreciates over time. These funds can ultimately be applied to a number of costs, which are outlined in more detail below. 

2) A “Prepaid Tuition Plan” – is meant specifically for college costs and allows you to begin paying tuition in advance — locking in a current rate in the process (which is helpful given how steadily college tuition rates tend to rise). This means that if a family is paying off a portion of a given tuition rate, you continue to owe only what’s left of that rate, rather than any inflated rate that may come into play in the coming years. It is important to note that these plans only apply to specific colleges or universities, meaning they are not universal or state-specific. 

The details and specific conditions of these plans can vary from one state to the next, so it is best to consult a financial professional or a local resource such as Washington College Savings Plans if you live in Washington State. 

What can a 529 plan cover? 

Strictly speaking, a 529 plan is said to cover “qualified education expenses,” which, of course, raises the question of what precisely a qualified expense might be. 

For an Education Savings Plan, these expenses include costs you might associate with schooling at all levels: K-12 tuition costs, school supplies, college tuition, and even college room and board costs. A Prepaid Tuition Plan, on the other hand, applies strictly to tuition. In both cases, each beneficiary can be covered for $10,000 per year maximum. 

It is also important to point out that there have been recent changes regarding what a 529 plan can cover. Earlier in 2020, the approval of a new act expanded these plans so that $10,000 per year can also be applied toward student loans or apprenticeships. These uses might not be as relevant upfront to parents looking to establish savings for their children. But particularly with regard to the idea of covering large swaths of loan payments, they are essential additions. 

Applying funds toward student loans, in particular, can open up significant opportunities for students upon graduation. They will be better able to start their lives free of financial burdens. They may even be able to justify spending money on additional education, such as a graduate school program. 

Who is eligible for a 529 plan? 

There is not much complication regarding who is eligible to open up a 529 plan in the United States. You need only be a legal resident of the USA with a valid Social Security number and over the age of 18. Provided you meet these conditions, you can open a plan and begin saving for any beneficiary of your choice, provided they are also a permanent U.S. resident. 

One more thing to consider 

One primary consideration is how the state you reside in specifically handles 529 plans. Different states can have the final say on how much you can contribute, the details of the plans, and how they may affect your taxes. 

For example, Washington State’s versions of these savings plans — GET and DreamAhead — allow for “flexible contribution options” and make all earnings and withdrawals tax-free. That said, it is not mandatory to apply for a 529 plan to be administered by your home state if, for some reason, it makes sense for your plan to be in a different state. However, there may be particular benefits you have access to specifically as a resident if you choose the plan provided by your home state. 

There is no way around the fact that a large budget is needed to raise a child and handle the high costs of pursuing an education. With a bit of planning and dedication towards saving, a future that includes your child attending college, pursuing an apprenticeship, or learning a trade can be bright. 

The details of this article are not meant to replace the advisement of a financial or legal professional. We encourage readers to consult such professionals when considering and/or opening a 529.