One of the most common questions I hear from parents is: "Should we be saving for college—even if we think we’ll qualify for financial aid?"
Short answer? Yes. And one of the smartest tools available to families across the U.S. is the 529 college savings plan.
In this article, I’ll break down the most important things to know about 529 plans—how they work, how they affect financial aid, how much they can save you in taxes, and how they compare to other savings options.
❓ What is a 529 Plan?
A 529 plan is a tax-advantaged investment account created to help families save for education. These plans are offered by states and can be used nationwide. You contribute after-tax money, invest it, and when it’s time to pay for school, you can withdraw the money tax-free for qualified education expenses.
❓ What are the benefits of using a 529 instead of a regular savings or investment account?
529 plans offer several unique advantages:
✅ Tax-Free Growth: Your money grows without triggering federal income tax.
✅ Tax-Free Withdrawals: No taxes due when used for qualified education expenses like tuition, room and board, books, fees, and supplies.
✅ School Flexibility: Funds can be used for college, vocational school, grad school, and even up to $10,000 per year for K–12 tuition.
✅ Loan and Roth Options: You can use up to $10,000 lifetime toward student loans, and under certain conditions, roll unused funds into a Roth IRA.
✅ Gifting-Friendly: Family and friends can easily contribute—making it a great gift alternative.
❓ How much more can I save using a 529?
Let’s look at an example:
If you save $100/month for 18 years with a 6% annual return:
In a 529 plan, your account grows to $38,793—completely tax-free.
In a taxable investment account, you’d owe 15% capital gains tax on the $17,193 in growth. That’s a $2,579 tax bill, leaving you with $36,214.
💡 Result: A 529 plan could leave you with over $2,500 more than a taxable account—just from tax savings.
❓ Do any states offer extra tax perks?
Yes! Many states offer income tax deductions or credits for contributions to their own 529 plan—and some even offer benefits regardless of where your plan is held. For example:
- Massachusetts: Up to $2,000 state deduction for married filers ($1,000 for single).
- New York: Up to $10,000 state deduction for married filers ($5,000 for single).
- Connecticut: Up to $10,000 deduction for married filers ($5,000 for single).
- Rhode Island: Up to $1,000 deduction per taxpayer.
- New Hampshire: No state income tax, so no deduction—but 529 funds grow free of state interest and dividends tax.
You don’t need to live in a state to use its plan—but it’s worth comparing for tax benefits, fees, and investment options.
❓ How does a 529 affect financial aid?
This is one of the biggest concerns for families—and one of the most misunderstood.
Parent-owned 529 plans are considered parental assets on the FAFSA and are assessed at a maximum of 5.64%.
Student-owned assets are assessed at 20%, which can significantly reduce eligibility.
💡 So, if you save $10,000:
In a parent-owned 529, it might reduce aid eligibility by about $564.
In a student-owned account, it could reduce aid by $2,000.
❓ What is the best way to own a 529 plan for financial aid purposes?
If you have a grandparent (or another relative) who wants to help with college costs, having them open and own the 529 plan can be a big financial aid advantage.
Why? Grandparent-owned 529 plans are not counted at all on the FAFSA as assets.
Starting in 2024–2025, even distributions from grandparent-owned plans will no longer be treated as student income, which removes the previous financial aid penalty.
🎯 Best-case scenario: The money grows tax-free, supports your child’s education, and doesn’t reduce your eligibility for need-based aid.
❓ What if my child doesn’t use the money?
529 plans are designed to be flexible:
🏆 Scholarship Exception: If your child receives a scholarship, you can withdraw up to that amount without the 10% penalty (you’ll still owe income tax on the earnings).
🔄 Change the Beneficiary: You can switch the 529 to another child, relative—or even yourself—for qualified education use.
💰 Rollover to Roth IRA: Starting in 2024, you can roll up to $35,000 from a 529 into a Roth IRA for the beneficiary (conditions apply, including a 15-year account age and annual Roth contribution limits).
❓ How do I choose the right 529 plan?
When comparing plans, consider:
- State tax benefits
- Low fees
- Strong investment choices
- Ease of use and online tools
You can use any state’s plan, so shop around and pick one that works best for your family.
Final Thoughts: Is a 529 Plan Worth It?
Yes—without a doubt.
A 529 plan is one of the most effective, tax-smart, and flexible ways to save for education. It gives you more control, more savings, and fewer last-minute surprises when tuition bills arrive. Saving for college doesn’t have to be overwhelming—you just need the right plan and a little time on your side.
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