How To Open A 529 College Savings Plan for 2025

Student Finance & Loan Expert

According to a report by the College Board, the average tuition and fees for full-time undergraduate students in 2022 to 2023 are $10,940 for in-state students at public four-year institutions and $28,240 for out-of-state students at public four-year institutions. While numerous financial aid options are available through scholarships and grants, families can provide their college students with additional financial support by saving early and consistently for education costs. One effective option is a 529 college savings plan, a tax-advantaged plan specifically designed to help cover education expenses.

Key Things You Should Know About 529 College Savings Plan

The average tuition and fees for full-time undergraduate students in 2022-2023 are $10,940 for in-state students at public four-year institutions.
For out-of-state students at public four-year institutions, the average tuition and fees are $28,240.
529 college savings plans offer tax-free growth and tax-free withdrawals for qualified educational expenses.
Contributions to 529 plans can qualify for the federal annual gift tax exclusion, which is $18,000 per individual and $36,000 for married couples filing jointly in 2024.
529 plans generally have a lower impact on financial aid eligibility compared to savings accounts held directly in the beneficiary's name.

What are the steps to setting up a 529 account?
What are the tax advantages of using a 529 plan for college savings for 2025?
How do 529 plans compare to other college savings options?
What investment options are available in different 529 plans?
What documents do I need to open a 529 plan?
Who can be a beneficiary of a 529 plan?
Can multiple people contribute to the same 529 plan?
What are considered qualified education expenses for a 529 college savings plan?
How are 529 plan assets counted on the FAFSA form?
What fees and expenses should I consider with a 529 plan?
Can 529 Plans Fund Graduate Studies?
What are the most common mistakes people make with 529 plans?
Exploring Private Student Loans with No Credit Check
Alternative Education Pathways and 529 Plans
Can a 529 Plan complement alternative education financing options?
How can a 529 Plan influence future career opportunities?
Can a 529 Plan be used for funding doctoral and advanced research degrees?
Can a 529 Plan fund online education programs?
What should you do if your 529 plan funds are insufficient for college expenses?
Can a 529 Plan be used for K-12 education expenses?
What happens if the beneficiary receives a scholarship?
Other Things You Should Know About 529 College Savings Plan

What are the steps to setting up a 529 account?

1. Choose a 529 Plan

Decide between two types of plans: prepaid tuition or a savings plan.

Prepaid tuition: This plan allows you to make payments in advance and ensure that when your child goes to college, they pay today’s tuition costs instead of future higher rates.

Savings plan: This plan allows you to save for various college-related expenses, including transportation and childcare. Contributions can be tax-deductible in some states, and the earnings grow tax-free. Withdrawals are also tax-free if used for qualified education expenses.

2. Designate a Beneficiary

After selecting your plan type and opening your 529 account, you must name a beneficiary who will receive the funds. You can have the same beneficiary for multiple 529 plans, and you can change the beneficiary at any time without incurring a penalty.

3. Open the Account Online

Look through various federal and state plan options. You are not restricted to choosing a plan from your home state; some plans are available to everyone, regardless of where they live. Be sure to check for any residency or attendance requirements, as some state plans may have these conditions.

4. Select Your Investments or Portfolio

If you choose a 529 savings plan, you will need to build an investment portfolio. Contributions are invested similarly to retirement plans. You can either actively manage the investments yourself or opt for a passively managed account handled by professionals. Investment strategies can be adjusted as your child grows older; you might start with a higher allocation in stocks and gradually shift to safer investments as the time for withdrawals approaches.

5. Set Up Funding

Establish regular contributions to ensure consistent growth of the account. Many plans allow for an initial deposit to begin investing immediately, particularly with savings plans. You can set up automatic recurring transfers from your bank account to your 529 plan, similar to setting up auto-pay for bills.

What are the tax advantages of using a 529 plan for college savings for 2025?

There are two main tax advantages of using a 529 plan for college savings:

Tax-free growth: Money invested in a 529 plan grows tax-deferred, meaning you do not pay capital gains taxes on any earnings within the account.
Tax-free withdrawals: Withdrawals from a 529 plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses. This can include tuition, fees, books, and even room and board.

Increased gift tax exclusion: Contributions to a 529 plan can qualify for the annual gift tax exclusion. Starting January 1, 2024, the federal annual gift tax exclusion has risen from $17,000 in 2023 to $18,000 for an individual and from $34,000 to $36,000 for married couples filing jointly.

The chart below illustrates the average cost of college, particularly the tuition and fees for full-time undergraduate students at public four-year institutions, highlighting the advantages of having a 529 college savings plan.

How do 529 plans compare to other college savings options?

529 plans offer several advantages over other college savings options, but also have some drawbacks to consider:

Advantages

Tax benefits: Contributions may be tax-deductible in your state, and earnings grow tax-free if used for qualified education expenses. Withdrawals are also tax-free for these expenses.
High contribution limits: There are high contribution limits per year, allowing you to save a significant amount.
Financial aid impact: A 529 college savings plan generally has a lower impact on financial aid eligibility compared to savings accounts held directly in the beneficiary's name.
Investment options: Many 529 plans offer a variety of investment options with varying risk profiles.
Flexibility: Funds can now be used for a wider range of qualified educational expenses beyond just traditional four-year colleges (e.g., apprenticeships, K-12 tuition in some cases).

Disadvantages

Restrictions: Funds must be used for qualified educational expenses or face penalties.
Investment control: You typically have less control over investments compared to a brokerage account.
State tax benefits: Tax benefits may only apply if you contribute to your own state's plan.

Here is how a 529 college savings plan compares to some common alternatives:

Savings accounts: Less tax advantage, but offer more flexibility in how the money can be used.
Coverdell Education Savings Accounts (ESAs): Similar benefits to 529 plans, but ESAs have lower contribution limits and no state tax benefits.
Custodial accounts: Can be used for any purpose, but earnings are typically taxed and may affect financial aid eligibility.
Brokerage accounts: Offer the most investment control but lack the tax benefits of a 529 college savings plan.

The chart below shows a summary of the gift tax exclusions of a 529 college savings plan.

What investment options are available in different 529 plans?

Investment options in 529 plans can vary depending on the specific plan you choose. However, most plans offer a similar range of options, which can be broadly categorized into three main types:

Target-date portfolios (Age-based): These portfolios automatically adjust their asset allocation (mix of stocks, bonds, and cash) over time as the beneficiary gets closer to college. They typically become more conservative (less risky) as the target date approaches.
Asset allocation portfolios (Static): These portfolios maintain a constant asset allocation throughout the investment period. They offer different risk profiles (aggressive, moderate, conservative) to suit your investment goals and risk tolerance.
Individual investment options: Some plans allow you to choose from a selection of individual investment options, such as mutual funds, exchange-traded funds, or even money market accounts. This gives you more control over your investment strategy but requires more knowledge and management.

Here are some additional details to consider:

Index funds: Many 529 plans offer low-cost index funds that track a specific market index. These can be a good option for investors seeking a diversified and passively managed approach.
Managed funds: These are actively managed funds where professional investment managers make investment decisions for you. They typically come with higher fees compared to index funds.
Insured options: A few plans offer options insured by the FDIC (Federal Deposit Insurance Corporation) like certificates of deposit or high-yield savings accounts. These offer lower potential returns but provide capital preservation.

The table below shows a sample calculation for the investment options mentioned above.

Investment Option

Initial Investment

Annual Contribution

Years to College

Expected Annual Return

Value at College Start

Target-date Portfolios

$5,000

$2,000

$68,629

Asset Allocation Portfolios

$5,000

$2,000

$79,281

Individual Investment Options

$5,000

$2,000

$91,214

Index Funds

$5,000

$2,000

6.5%

$84,908

Managed Funds

$5,000

$2,000

5.5%

$73,467

Insured Options

$5,000

$2,000

$55,299

What documents do I need to open a 529 plan?

The documents you need to open a 529 plan typically include:

Social Security number

Date of birth

Driver's license or other government ID

Contact information (address, phone number, email)

Name of beneficiary

Date of birth of beneficiary

Social Security number of beneficiary (optional, but recommended)

Additional documents might be required depending on the specific plan:

Proof of residency (for state tax benefits)
Employment information (for payroll deduction contributions)

Who can be a beneficiary of a 529 plan?

There are two main requirements for someone to be a beneficiary of a 529 college savings plan:

Citizenship: The beneficiary must be a U.S. citizen or a resident alien.
Tax ID: They must have a Social Security number or a federal tax identification number.

In most cases, anyone can be named as a beneficiary of a 529 college savings plan, regardless of their relationship to the account owner. This means you can open a 529 plan for your child, grandchild, niece, nephew, or even yourself.

Can multiple people contribute to the same 529 plan?

Yes, multiple people can contribute to the same 529 college savings plan. Here is how it works:

Account ownership: One person establishes the 529 plan and is the account owner. They manage the account and make investment decisions.
Third-party contributions: Anyone can contribute to the plan regardless of their relationship to the account owner or beneficiary. This includes grandparents, aunts, uncles, friends, or even employers offering matching contributions.

Here are some things to keep in mind:

Contribution limits: Each state may have its own contribution limits per beneficiary, per year. These limits apply to the total contributions from all sources, not just the account owner.
Gift tax implications: Contributions from someone other than the account owner may be considered taxable gifts. However, the annual gift tax exclusion amount can help mitigate this.

What are considered qualified education expenses for a 529 college savings plan?

Qualified education expenses for a 529 plan encompass a broader range than just traditional four-year college costs. Here are the expenses that you can typically cover:

Tuition and fees: This applies to qualified educational institutions like colleges, universities, vocational schools, and even some apprenticeship programs.
Room and board: Expenses related to on-campus or off-campus college housing and meal plans while enrolled at least half-time.
Books, supplies, and equipment: Required course materials like textbooks, notebooks, computers, and related accessories needed for enrollment or attendance.
Special needs services: Expenses for qualified disability-related services or equipment that assist the beneficiary in their studies.

Recent tax law changes also allow for:

Up to $10,000 per year for K-12 tuition: This applies to public, private, or religious elementary or secondary schools (restrictions may apply, check with your plan).
Qualified student loan repayments: Up to a lifetime maximum of $10,000 per beneficiary can be used to repay student loans for the beneficiary or their siblings.

Keep in mind that the expenses must be for the beneficiary and related to their education at an eligible institution to qualify for tax-free withdrawals. Distributions exceeding qualified education expenses may be subject to taxes and penalties.

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How are 529 plan assets counted on the FAFSA form?

The impact of 529 plans on your Free Application for Federal Student Aid (FAFSA) application depends on who owns the account:

Parent-owned or Dependent Student Owned: If the 529 plan is owned by a parent or a dependent student, the account value is reported as a parent asset on the FAFSA application form. Parent assets are assessed at a rate of up to 5.64% to determine their impact on financial aid eligibility.
Non-custodial parent owned: If the non-custodial parent (parent who does not live with the student) owns the 529 plan, the account value is not reported as an asset on the FAFSA. However, distributions from the plan in the year preceding the FAFSA filing are considered untaxed income to the student. This can potentially reduce their financial aid eligibility.

Here are some additional points to consider:

Grandparent or Other Owned: If someone other than a parent or dependent student owns the plan, only annual distributions are reported on the FAFSA form, not the total account value.
Impact is relatively low: The assessment rate for parent assets is lower compared to student assets (which are assessed at 20% or 50% depending on their dependency status). So, even with a 529 college savings plan, a significant portion of the value may not significantly affect aid eligibility.
Tax-free earnings: Importantly, any earnings within the 529 plan do not affect your FAFSA application.

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What fees and expenses should I consider with a 529 plan?

When assessing a 529 plan, it is crucial to scrutinize the fee structure as these costs can affect long-term growth. Be sure to review management fees, administrative charges, and record-keeping expenses, as these vary by plan and investment option. Additionally, understand the implications of expense ratios on overall returns and remain aware of any penalties for non-qualified withdrawals. Comparing fee structures among available plans and consulting with a financial advisor can help ensure that the selected plan aligns with your financial objectives while minimizing unexpected costs. For further assistance on managing educational financing costs, including advice on student loans, consider reaching out to Aidvantage customer service.

Can 529 Plans Fund Graduate Studies?

529 plans extend beyond undergraduate expenses to cover qualified costs for graduate-level education. The IRS allows expenses such as tuition, mandatory fees, and essential educational supplies associated with an eligible postsecondary institution to be funded from a 529 account. For graduate studies, it is prudent to confirm that expenses unique to advanced programs, including specialized course materials or lab fees, meet the criteria for qualified expenditures. Prospective students should verify these details with their plan administrator or a financial advisor to ensure compliance. For guidance on pursuing advanced academic opportunities, consider exploring easy master's degrees online.

What are the most common mistakes people make with 529 plans?

Here are some of the most common mistakes people make with 529 plans:

Not opening a plan or procrastinating: The sooner you start saving, the more time your money has to grow through compound interest.
Not shopping around and comparing plans: Different states offer various plans with varying fees and investment options. Choose a plan that aligns with your needs and goals.
Overlooking tax benefits: Not taking advantage of federal and state tax deductions for contributions and tax-free withdrawals for qualified education expenses.
Forgetting about contribution limits: There are annual contribution limits per beneficiary. Exceeding these limits can lead to tax penalties.
Not considering all investment options: Many plans offer a range of options beyond just target-date funds. Choose an investment strategy that suits your risk tolerance and time horizon.
Taking non-qualified withdrawals: Withdrawing funds for anything other than qualified educational expenses can result in taxes and penalties on the earnings portion.
Not coordinating with other financial aid: Misunderstanding how 529 plans affect financial aid eligibility. Remember, the impact is usually lower compared to other assets.
Not contributing throughout college: Thinking you only need to save for the first few years. Consider ongoing costs throughout the entire college journey.
Ignoring withdrawal rules: There may be specific deadlines or requirements for qualified withdrawals depending on your plan.
Prioritizing college savings over retirement: While saving for college is important due to increasing tuition fees, do not neglect your own retirement savings needs.

Exploring Private Student Loans with No Credit Check

While 529 college savings plans offer tax advantages and flexibility, they may not be the right fit for every family. For students and families who did not save in advance or need immediate financial assistance, private student loans with no credit check can be a viable alternative.

What Are No Credit Check Student Loans?

Private student loans with no credit check are designed to help students who may not have a strong credit history or a co-signer. These loans focus on the borrower’s academic potential or future earning ability rather than their credit score, making them an accessible option for many students.

Benefits of No Credit Check Student Loans

Inclusive Eligibility: These loans are ideal for students who lack a credit history or have a limited financial background.
Quick Access to Funds: They often feature a streamlined application process, ensuring that students can quickly secure the necessary funding for their education.
Flexible Repayment Terms: Many lenders offer tailored repayment plans that align with the borrower’s financial circumstances post-graduation.

Supplementing Financial Aid with Other Resources

If a no-credit-check loan does not fully cover the cost of education, consider supplementing it with grants, work-study programs, or additional aid. For more information, explore our guide on student loans no credit check.

Alternative Education Pathways and 529 Plans

529 college savings plans are traditionally associated with funding tuition, room, board, and other essentials at four-year colleges and universities. However, they are flexible enough to support specialized education and training programs, including certain certificate programs, vocational schools, and even flight training academies. These options allow families and individuals to reimagine the utility of their 529 plans beyond conventional degrees.

For example, aspiring pilots often require advanced and specialized flight training from accredited institutions. While 529 plan funds can sometimes be applied to these programs if they meet specific eligibility requirements, many students also turn to specialized financial solutions like flight training loans to supplement the cost. These loans can bridge the gap when 529 savings are not enough or when additional financial flexibility is needed.

Understanding how to align a 529 plan with alternative education pathways requires careful planning, especially given the eligibility requirements tied to qualified education expenses. Families should review the plan details or consult a financial advisor to ensure optimal use. Specialized training often represents lucrative career paths, making these investments worthwhile for many individuals.

Can a 529 Plan complement alternative education financing options?

For families encountering funding gaps, leveraging complementary financing can optimize education spending without jeopardizing long-term savings. A 529 plan may be integrated with other funding sources to address excess educational costs, ensuring that tax-advantaged benefits remain intact. For instance, when personal savings fall short, students may explore options such as private student loan lenders no cosigner to bridge the deficit. Financial advisors emphasize the importance of evaluating both current assets and future needs to design a balanced strategy that minimizes high-interest borrowing while preserving the advantages of a 529 plan.

Here’s What Students Say About the 529 College Savings Plan

“Juggling textbooks, late-night study sessions, and a part-time job was tough, but thanks to my 529 plan, I never had to worry about the financial burden of college. It allowed me to focus on my studies and land internships that gave me a head start in my dream career. Now, with my first job offer in hand, I'm so grateful for the peace of mind and freedom the 529 plan gave me throughout my college years.” - Sarah

“College opened my eyes to new cultures and ways of thinking. Studying abroad in Spain was an unforgettable experience, and thanks to the flexibility of my 529 plan, I could afford the additional costs without stressing my parents' finances. It felt amazing to know that my education was an investment everyone in my family supported.” - David

“My 529 plan wasn't just about the money, though that was definitely a huge help! It showed me the importance of planning for the future and gave my parents a way to contribute to my success. Knowing they were invested in my education, not just financially but emotionally, made a world of difference.” - Emily

How can a 529 Plan influence future career opportunities?

A 529 plan not only alleviates the burden of tuition costs but also indirectly broadens the scope of post-education career prospects. With reduced financial constraints, students can focus on skill-building and pay attention to emerging market trends that may offer competitive returns. For example, certain career paths require shorter schooling durations yet yield significant earnings, as demonstrated by the insights on medical jobs little schooling. Integrating long-term career planning with education financing can optimize investment in both academic and professional growth.

Can a 529 Plan be used for funding doctoral and advanced research degrees?

A 529 plan may cover qualified expenses for doctoral and advanced research degrees if the costs meet IRS guidelines. Applicants should ensure that tuition, mandatory program fees, and essential supplies required by specialized programs are eligible expenses under the plan. Verification of these expenses with the plan administrator or a financial advisor is recommended, as some advanced programs may include costs that do not qualify. For additional insights into advanced academic opportunities, explore easy doctorate degrees.

Can a 529 Plan fund online education programs?

Accredited online education programs may qualify for funding through a 529 plan if they meet IRS requirements for eligible institutions and qualified expenses. Students pursuing online degrees should confirm that their chosen school holds proper accreditation and that its tuition and fees are considered qualified expenses. In this context, it is advisable to verify program eligibility and cost structures before allocating funds. Additional guidance can be found by reviewing online colleges that accept FAFSA.

What should you do if your 529 plan funds are insufficient for college expenses?

When 529 funds fall short of covering all qualified education expenses—whether due to rising tuition, additional fees, or unanticipated costs—families can consider a balanced strategy to bridge the gap. This may involve exploring additional scholarship opportunities, evaluating cost-saving measures in tuition or housing, and supplementing savings with external financing options. Professional financial advisement can help determine the optimal mix of resources while protecting the tax advantages of the 529 plan. For further guidance on borrowing options to complement your savings, review When should you apply for student loans?.

Can a 529 Plan be used for K-12 education expenses?

While primarily designed for postsecondary education, current IRS guidelines permit up to $10,000 per year in withdrawals from a 529 plan for qualified K-12 tuition expenses at eligible elementary or secondary institutions. It is important to verify any state-specific restrictions or additional requirements with your plan administrator to ensure compliance and avoid unintended tax consequences. This option allows families to address early education costs without depleting funds reserved for higher education, such as pursuing a least expensive bachelor's degree online when the time comes.

What happens if the beneficiary receives a scholarship?

When a beneficiary is awarded a scholarship, IRS guidelines allow for a penalty-free, non-qualified withdrawal up to the amount of the scholarship; however, taxes may still apply to the earnings portion of the distribution. This adjustment permits families to withdraw funds equivalent to the scholarship without incurring the typical 10% penalty on non-qualified earnings. Remaining funds may be reallocated for other qualified education expenses or alternative educational goals, such as investing in high paying bachelor degrees. Consulting with a financial or tax professional is recommended to align redistribution strategies with current regulations.

Key Findings

529 plans provide significant tax benefits, including tax-deferred growth and tax-free withdrawals for educational expenses.
Compared to other college savings options, 529 plans offer high contribution limits and potential state tax deductions.
Investment options in 529 plans include target-date portfolios, asset allocation portfolios, and individual investment options.
To open a 529 plan, you typically need your personal information, beneficiary information, and bank account details.
Anyone, regardless of relationship to the account owner, can be named as a beneficiary of a 529 plan.
Multiple people can contribute to the same 529 plan, subject to state contribution limits and gift tax implications.
Qualified education expenses for a 529 plan include tuition, fees, room and board, books, supplies, and equipment.

Other Things You Should Know About 529 College Savings Plan

What happens to a 529 if the child does not go to college?

If your child is undecided about college or prefers to delay applying, you can keep your 529 plan active until they eventually use it for qualified education expenses.

What age is too late for a 529 college savings plan?

Starting early is ideal, but it is never too late to open a 529 education savings account.

What is the 30-year rule for 529 plans?

You have ample time. Utilize the account assets within 30 years of the beneficiary's high school graduation or within 30 years of opening the account, whichever comes later. Alternatively, you can designate a new beneficiary if there are unused funds.

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