Saving for your child’s college can be a daunting task, given how quickly and how high education costs have climbed. The average annual tuition and fees for in-state students at public institutions reached $10,230 in 2018—more than doubling (after inflation) in just two decades. The average for private four-year colleges was $35,830—up 58% during the same period.1
Fortunately, there’s a flexible, tax-advantaged way to help accumulate the funds you need for higher education: a 529 plan. Such college-savings accounts allow you to invest after-tax dollars, usually in a selection of stock and bond mutual funds. What makes these plans so popular? Let us count the ways:
- Tax advantages: Not only do 529 plans provide federal tax-free growth and tax-free withdrawals for qualified expenses, but many states offer residents a full or partial tax credit or deduction for contributions to their state’s plan, and some states allow you to deduct contributions to any plan (see “What you can do next,” below). Such funds can now be used for kindergarten through 12th-grade tuition at private schools—up to $10,000 per child per year—as a result of the 2017 Tax Cuts and Jobs Act. That said, not all states permit 529 plan spending on K–12 tuition expenses, so be sure to check your plan’s rules, lest you be subject to state income tax plus penalties.
- Minimal impact on financial-aid eligibility: Unlike funds in, say, a custodial brokerage account, only 5.64% of the assets in a parent-owned 529 are factored in to the Free Application for Federal Student Aid (FAFSA®), which helps determine eligibility for grants, work-study programs and loans.
- Flexibility: Once the beneficiary has earned an undergraduate degree, any remaining funds can be used at any point in the future toward graduate, trade or vocational education. You can also reassign a 529 to any direct relative, meaning not just offspring but also nephews, nieces, cousins, aunts and uncles—even yourself.
1“Trends in College Pricing,” The College Board, October 2018.
What you can do next
Do your homework, as fees, investment options and performance vary greatly from state to state, and tax advantages in one state may not be available in another.
See if your state offers a tax benefit for 529 plan contributions with a 529 State Tax Calculator.
Learn about the benefits of a Schwab 529 College Savings Plan.