Everything To Know About The 529 College Savings Plan

Everything you need to know about the 529 college savings plan
The College of William & Mary

The best gift any parent can give a child besides unconditional love is a great education. A 529 college savings plan is a solution that is designed to help families tax-efficiently save for future college costs.

You contribute after tax money with the benefit of paying zero federal and state income taxes on the profits when it's time to use the funds to pay for college.

If your child does not end up going to college, all is not lost. You can either name a new beneficiary (different kid) or just pay the taxes on profits.

My goal is to max out my son's 529 college savings plan before he turns 18. I want him to focus on his studies and graduate with zero student debt. By the year 2036, a 4-year private university education will likely cost over $725,000 all in.

The various complaints I read today about young adults with student debt are disheartening. The struggles range from saving for a house, saving for retirement, accepting a low-paying job, to starting a family.

Below are the most important pieces of information you need to know about making the best 529 plan decision. Feel free to provide feedback at the end on anything that I may have missed. I've tried to cover all the questions I had before opening up an account.

529 Plan Contribution Limit

There are two questions to answer here. The first is what is the total maximum you can contribute to your 529 plan. The second question is how much can you contribute each year to your 529 plan.

Total Maximum Contribution To A 529 Plan

To qualify as a 529 plan under federal rules, a state program must not accept contributions in excess of the anticipated cost of a beneficiary's qualified education expenses.

For example, 1 year at a mid-priced college for an in-state student can run around $24,000. A year of private school can cost around $45,000. Further, it is assumed that the average student would take no longer than five years to graduate.

Therefore, the average 529 plan limit is roughly $300,000, depending on the state. When the value of the account (including contributions and investment earnings) reaches the state's limit, no more contributions will be accepted.

For example, assume the state's limit is $300,000. If you contribute $250,000 and the account has $50,000 of earnings, you won't be able to contribute anymore. The total value of the account has reached the $300,000 limit.

These limits are per beneficiary. Thus, if both you and your father each set up an account for your child in the same state, your combined contributions and earnings can't exceed the plan limit.

Otherwise, a kid could possibly end up with multiple 529 plans worth millions. Just imagine parents, both sets of grandparents and long lost aunties and uncles making contributions to the same child.

529 Plan Annual Contribution Limit

You should only contribute a maximum of $18,000 a year for 2024. Anything more involves filing a 709 federal tax form taking a deduction against your lifetime gift-tax exclusion limit.

However, 529 plans allow you to superfund. In other words, you can gift an individual a lump sum of up to $90,000 in a single year (5 years X $18,000). That's up to $180,000 for joint gifts. Superfunding does not count against your lifetime exclusion. This is provided you make an election to spread the gift evenly over five years.

In other words, once you gift $90,000, you strategically shouldn't gift more money until the sixth year. This is a valuable strategy if you wish to supercharge the 529 immediately.

How to superfund your 529 college savings plan
How to superfund your 529 college savings plan

Who Can Contribute To A 529 Plan?

Anyone can contribute to a 529 college savings plan account and can name anyone as a beneficiary. Parents, grandparents, aunts, uncles, stepparents, spouses and friends are all allowed to contribute on behalf of a beneficiary.

There are no income restrictions for the contributor. The maximum contribution limit applies to the beneficiary, not the individual making the contribution. Balances designated for a specific beneficiary cannot exceed the maximum allowed by the state's 529 plan.

Can You Open A 529 Plan Before Your Child Is Born?

Yes you can. But to do so, you need to initially open a plan under your own name. Then, transfer the plan to your child after birth due to the need for a social security number.

But before you open a 529 plan for your unborn child, max out your 401k and IRA first. Make sure you also plan to have kids or are able to have kids. Sometimes nature has a way of changing outcomes.

Personally, I'd wait to open a 529 college savings plan until your child is born. Just make sure to set yourself a reminder. Sleep deprivation from a newborn is a given and could cause you to forget.

While you're at it, you might as well open up a custodial Roth IRA and custodial investment account for your children too. To contribute to a custodial Roth IRA, however, required a child to have earned income.

Does A 529 Plan Affect My Financial Aid Package?

When you apply for the Free Application for Federal Student Aid (FAFSA), it'll try to ascertain your income and total assets. Logically, the higher your income and higher your assets, the less aid you will receive.

Assets in a 529 plan owned by the student or her parents count against need-based aid. Those in a plan owned by anyone else (including grandparents) don't.

But once grandparents or other relatives start taking money out of a plan to help pay those bills, the reverse is true. The withdrawals can hurt you even more than if the plan was owned by the student or parent for next year's financial aid package.

The 529 plans owned by college students or their parents count as assets. Thus, they reduce need-based aid by a maximum of 5.64 percent of the asset's value. That means if you have $50,000 in a college-savings plan for your daughter, her aid would be reduced by roughly $2,820.

Learn more about how to navigate the financial aid system and get free money for college. You really need to be strategic with your income and assets for two years before your child attends college.

Have Grandparents Be Owners Of The 529 Plan And Grandkids As Beneficiaries

If the 529 plans are held by grandma and grandpa, they won't appear on the FAFSA as assets. Instead, as the money is withdrawn to pay for tuition or other educational expenses, that amount must be reported on the next year's financial aid forms as untaxed income to the student. It can reduce the amount of aid by 50 percent.

Let's say that same $50,000 529 college-savings plan was owned by the grandparents. If the student withdrew $10,000 from it one year, that withdrawal could increase the amount the family is expected to pay for college (and reduce the aid) for next year by about $5,000.

The Name On A 529 College Savings Plan Matters

Therefore, the logical conclusion is to either have the 529 plan under your child's name or your name. This will minimize the reduction. Or, draw down the 529 plan under the grandparent's name in the very last year of college.

It's worth investigating how to reposition assets and income two years before your child applies for financial aid. Although it may not be worth it due to tax and performance consequences.

Here are the different ways to pay for college. A 529 plan is one way, a Roth IRA, and from cash flow are other ways.

Can You Change The Beneficiary Of The 529 Plan?

If the existing beneficiary no longer needs the funds in your 529 account (e.g., he or she gets a full scholarship, decides not to go to college, or passes away), you may want to designate a new beneficiary instead of pay the taxes and penalty. Just fill out a change of beneficiary form and submit it to your 529 plan administrator.

If the existing beneficiary needs only some of the funds in your 529 account, you can also do a partial change of beneficiary. This involves establishing another 529 account for a new beneficiary and rolling over some funds from the old account into the new account.

The new beneficiary must be a family member of the old beneficiary in order to avoid paying taxes and penalties. According to Section 529 of the Internal Revenue Code, “family members” include children and their descendants, stepchildren, siblings, parents, stepparents, nieces, nephews, aunts, uncles, in-laws, and first cousins. States are free to impose additional restrictions, such as age and residency requirements.

Note, if you have a lot of funds, you can even use the 529 plan as a generational wealth transfer vehicle! A 529 plan is probably one of the best ways to gift money without gifting money.

What If You Have Money Left Over After Your Child Finishes College?

You can save the money for graduate school or transfer the remaining funds to another child. In addition, you could keep the money growing tax free for potential grandchildren. Or pay the 10% penalty and taxes on the profits.

The exceptions relate to withdrawals made on account of the beneficiary's death, disability, receipt of a scholarship, or attendance at a Unites States military academy.

A very small handful of 529 savings plans, and nearly all of the 529 prepaid tuition plans, impose a time limit on your 529 account. If you bump up against one of these limits, you can look to move your funds to another 529 college savings plan via a qualifying rollover.

New 529 Plan Rollover Rules Due To Passage Of Secure 2.0 Act

Money withdrawn from a 529 plan must use for qualified educational expenses. If not, you’ll pay ordinary state and federal income taxes (at the beneficiary’s tax rate) on the money, as well as a 10% penalty.

Now, the penalty can be waived if your kid wins a scholarship, gets into one of the U.S. military academies, receives support from an employer or for several other reasons – but that’s just the 10% penalty. You’ll still need to pay the tax bill.

You used to be able to get around that penalty by transferring the account to another beneficiary – even yourself or a spouse – in your family or extended family, including in-laws. But without an eligible recipient to use the money you were stuck paying both the tax and penalty – until now.

Rolling Over A 529 Balance Into A Roth IRA

The rollover allowance starts in 2024 and comes with several limits. First is that the amount rolled over can’t be more than the Roth contribution limit, which is $6,500 this year. You also can’t roll over more than $35,000 total in the beneficiary’s lifetime. You also can’t roll over contributions or earnings from the past five years.

Another condition is that the 529 plan must have been open for at least 15 years. Experts are unsure whether changing the account beneficiary requires a new 15-year waiting period. Also unknown until the IRS issues rules is whether withdrawals of earnings from 529 plans transferred to a Roth account will be subject to the rule that requires earnings to remain in the Roth account for at least five years.

However, the rollover contributions aren’t subject to the Roth IRA income limits of $153,000 for single filers and $228,000 for joint filers this year. Families who’ve contributed to 529 pre-paid tuition plans – where they purchase tuition credits at the current rates – haven’t had to deal with the issue, since those plans refund only the contributions, which are made with after-tax money.

Why The 529 Plan Rollover Is Now Allowed

“Families and students have concerns about leftover funds being trapped in 529 accounts unless they take a non-qualified withdrawal and assume a penalty,” a summary statement from the Senate Finance Committee said.

“This has led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education. Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education.”

Do You Need to Get A 529 Plan From Your State?

No. Every plan allows the profits to be withdrawn federal and state tax free if the funds are used to pay for higher education (e.g. college). If the funds are not used for college, then normal taxes on earnings apply. There is no tax due on contributions as the 529 was funded with post-tax dollars.

The reason you may want to choose your state's 529 plan is due to state tax deductions on your contributions. But some states, like California, offer no state income tax deduction. Therefore, it makes sense to search around the country for the best plan possible.

You can use your 529 from whichever state to pay for college in any state.

What Is The Penalty For Withdrawing Early From A 529?

If you withdraw the funds early to pay for something other than higher education for your beneficiary, then you must pay a 10% tax plus normal federal and state income tax on the profits.

However, if there are no profits, there are no penalties and taxes to be paid. For example, if you funded $20,000 and due to a bear market you now only have $15,000, all withdrawals are penalty and tax free.

Can You Dictate A Certain Percentage Of The Contribution To Be In Cash?

Let's say you plan to jump start your child's 529 plan with $75,000, but you're worried about a stock market correction. You can't tell the administrator to only invest $30,000 and keep the $45,000 in cash until you see better opportunities.

The solution is to just fund what you are willing to invest. For example, you can send five different deposits totaling $75,000 in a two year period up to five years.

Can you Spend The 529 Plan On Grade School Tuition?

Under the latest tax plan, up to $10,000 of a 529 college savings plan can be used per student for public, private and religious elementary and secondary schools, as well as home school students. In other words, a 529 plan isn't just for college tuition anymore. This is HUGE!

If you plan to send your children to private grade school and pay the big bucks, then a 529 plan becomes even more valuable.

Who Manages The 529 Investments?

Once you understand if there are any tax deduction benefits for choosing your state (e.g. state tax deduction), then you should go about identifying which state has partnered up with the best money management firm.

Given I live in California, there are no state tax deductions. Thus, I decided to focus on which states use Fidelity, Vanguard, and TIAA-CREF because I believe they are the best firms.

I've used Fidelity for the past 16 years due to them administering my company 401k and now my Solo 401k and SEP-IRA. As a result, I'm comfortable with their service, products, interface.

Vanguard is obviously a top choice due to its low expense ratio. Finally, TIAA-CREF is another money manager I've worked with in the past. My colleague of 13 years is a Managing Director there. And, they started off as a Teachers Insurance and Annuity Association—College Retirement Equities Fund (TIAA-CREF).

Here's Fidelity's various 529 plan strategies with expense ratios.

Fidelity's Age-Based Strategy includes portfolios that are managed according to the beneficiary's birth year. The asset allocation automatically becomes more conservative as the beneficiary nears college age.

Your beneficiary's birth year will help determine the Age-Based portfolio in which you'll invest.

This strategy offers a choice of three types of funds:

Fidelity Funds – 1.04% average expense ratio

  • Seek to beat a combination of major market indices over the long term
  • Portfolios invest solely in Fidelity funds.
  • Managed by dedicated Fidelity portfolio managers

Multi-Firm Funds – 1.2% average expense ratio

  • Seek to beat a combination of major market indices over the long term
  • Portfolios invest across multiple fund companies, offering an opportunity to diversify your funds.
  • Managed by dedicated Fidelity portfolio managers

Fidelity Index Funds – 0.13% expense ratio

  • Seek to closely mirror the performance of a combination of major market indices over the long term
  • Portfolios invest solely in Fidelity Index funds.
  • Passively managed; securities currently held in the respective index determine investments.
Fidelity Asset Allocation 529 Plan

Beware Of Management Fees

I hate spending money on excessive management fees because most fund managers underperform their respective indices.

As an example, for 2016, the performance for each category was 16.32% Index Funds, 18.33% Multi-Firm Funds, 19.34% Fidelity Funds. This means it may make sense to pay 0.91% more in fees for the Fidelity Funds due to the 3.02% outperformance.

However, over a 10-year period, it's unlikely the Fidelity Funds will outperform. Whereas you are guaranteed to pay 10% more in fees during that time period. Hence, I'm always going to select the Index fund route for a 529 plan.

Another important recommendation I have is to go with an INDEX target date fund and not an actively-managed target date fund. Given it's hard to outperform the index over a long period of time, you might as well save money by choosing the INDEX target date fund route. An Index target date fund has much lower management fees.

But perhaps better than an index target date fund is just investing directly in an S&P 500 index fund. I’ve been investing in a 529 plan since 2017, and the target date fund has tremendously underperformed the S&P 500. As a result, my 529 plan is likely not enough to pay for college.

The Best 529 College Savings Plans

Given you're free to choose any 529 college savings plan you want, focus on the best. Let's look at a list of the best 529 plans determined by Morningstar, one of the most trusted financial rankers.

Best 529 Savings Plans Rated By Morningstar

As you can see from the chart, you might as well choose a 529 plan from Nevada, Utah, Virginia, Maryland, or Arkansas. They are rated gold or were once rated gold.

In my opinion, the Nevada Vanguard plan looks like the #1 choice, followed by the California TIAA-CREF plan since I'm not familiar with T. Rowe Price or the other plans. I'm disappointed the Delaware Fidelity plan is only rated a neutral since it would be so easy for me to just go with them.

As written by Morningstar, “These plans follow industry best practices, offering some combination of the following attractive features: a strong set of underlying investments, a solid manager selection process, a well-researched asset-allocation approach, an appropriate set of investment options to meet investor needs, low fees, and strong oversight from the state and program manager. These features improve the odds that the plan will continue to represent a strong option for investors.

Related: How To Analyze And Reduce Excessive Fees In Your 401k

Profiling TIAA-CRF's 529 Plan

Here's a quick snapshot between the California TIAA-CREF 529 plan and the Nevada Vanguard 529 plan. Sorry the font size is so small. Just zoom in. Based on the comparison chart, there doesn't seem to make that big of a difference, especially if you are just buying index funds with similar expense ratios.

529 Plan Comparison Between California TIAA-CREF and Nevada Vanguard
529 Plan Comparison Between California TIAA-CREF and Nevada Vanguard

Here is another popular ranking by SavingforCollege.com. I'm looking at the 5-year and 10-year track record rankings instead of just the 1-year to iron out any anomalies.

The Best 529 Plans - 5 Year Ranking
The Best 529 Plans – 5 Year Ranking
The Best 529 Plans - 10 Year Ranking
The Best 529 Plans – 10 Year Ranking

Find A Plan You Like And Enroll

Once you've determined what you like, you can enroll directly with the plan. Simply Google the plan name or apply through your existing brokerage like Fidelity who has plans in Arizona, Deleware, Massachusetts, and New Hampshire.

They'll give you more information like I have provided in this post to make an informed decision.

Wealth Planning Recommendation

College tuition is now prohibitively expensive if your child doesn't get any grants or scholarships. Therefore, it's important to save and plan for your child's future.

Check out Empower's new Planning feature, a free financial tool that allows you to run various financial scenarios to make sure your retirement and child's college savings is on track.

They use your real income and expenses to help ensure the scenarios are as realistic as possible.

Personal Capital College Planning Feature

Once you're done inputting your planned saving and timeline, Empower will run thousands of algorithms to suggest what's the best financial path for you. You can then compare two financial scenarios (old one vs. new one) to get a clearer picture. Just link up your accounts.

There's no rewind button in life. Therefore, it's best to plan for your financial future as meticulously as possible and end up with a little too much, than too little! I've been using their free tools since 2012 to analyze my investments and I've seen my net worth skyrocket since.

Personal Capital Retirement Planning Comparison Chart

Pay For Your Children's Education Through Real Estate

In addition to investing in stocks and bonds in a 529 plan, I recommend diversifying into real estate as well. Real estate is a core asset class that has proven to build long-term wealth for Americans.

Real estate is a tangible asset that provides utility and a steady stream of income. If you buy one physical property when the child is born, it could fund your child's education after 18 years. You can either take out the equity in the property or pay for college with the rental income.

If you want to invest in real estate hassle-free, then take a look at private real estate investing.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and manages over $3.5 billion and has over 350,000 clients. It specializes in Sunbelt single-family homes. Investing in a diversified private real estate fund is a way to earn passive income.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.

I've personally invested $954,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000. 

127 thoughts on “Everything To Know About The 529 College Savings Plan”

  1. Worried Maryland Parent

    Though the tax benefits may seem good for some states, the risk of the government screwing up is too high for me to enroll in my state (Maryland’s). They miscalculated balances for years and then froze withdrawals – often meaning students could not pay their tuition and were at risk of not being able to enroll in classes. I’m using a financial institution such as Vanguard which I trust more over the possibility of saving some on state income tax. The counter-party risk is too high. https://wtop.com/maryland/2023/01/error-not-accurate-calculation-may-be-why-md-529-funds-seem-frozen/

  2. It amazes me that there is such a low percentage of people with children that even know about 529 accounts, and even less that utilize them. These are great ways to take advantage of compounding interest without taxes.

  3. Great article Sam, need your expertise on tax issue. 529 contributions are after-tax, so why can’t I claim AOTC tax credit on taxes if I paid my daughters college tuition using 529 funds? So many articles on the internet claim that it is double dipping, if so, how?

    Thank you,

  4. Sam, great article. Any advice for superfunding if in a state with a 529 state tax deduction? Georgia will offer an $8K state deduction (married) starting in 2020. The advice online is that you may not want to superfund if giving up a generous state tax deduction. But I’m wondering if married couples might be able to superfund and get the state tax deduction at the same time. For example, only husband superfunds for $75K in year 1. Wife contributes annually in years 2-5 up to the gift tax limit (currently $15K) to get the state tax deduction. Do you know if this hybrid approach is permissible?

  5. Daniel R. Marion

    We set up two 529 plans for our two children. One has since graduated and that plan has a $0 balance. Our son is in his third year. We are projecting money will be remaining in that account at graduation.

    Our has stafford loans she needs to pay off. I though I could transfer the remaining balance to my daughter’s account and use the balance to help pay off the stafford loans faster. Our 529 Administrator said this is not a qualified distribution. My question is why? The fact she has loans from college proves that money was used for tuition. This makes no sense to me.

  6. Krishnakanth Reddy

    Very useful article. Thank you for sharing this information with us!
    I just opened up a 529 account with Fidelity using their Age based portfolio and chose the Index fund investment option to keep the fees to the minimum.

    One thing to note, is that it seems like the $14,000 annual limit is per parent. So, if you file your taxes jointly with your spouse, you can contribute up to $28,000.

  7. Webbersworld

    We live in NJ and unfortunately don’t have any benefits to opening a 529 here.

    My question – what about a custodial account? Has anyone gone this route instead?

  8. Little late responding to this, but I am not sure your statement “Can You Dictate A Certain Percentage Of The Contribution To Be In Cash?” is correct.

    I have a plan in Virginia that my parents started for their grandchild, and that one I cannot dictate anything to cash since I chose the James Madison fund. But I also started a plan in Florida when we lived there. In that one, I can choose my investments, which I chose as 70% domestic equity, 20% International, and 10% Small Cap. I could have chosen some in cash but I didn’t. I’m now in Pennsylvania where they also have cash options. I am debating whether to put money on — on one hand, higher fees than Florida or Virginia, but PA colleges do not look at what is in a PA 529 for financial aid purposes.

    I only wish when I sold my house in Florida in April 2016, instead of renting it, which we discussed and you said you hope I had invested it well, I wish had put more of it in a college fund or index fund, instead of in cash.

    1. HAs the house in Florida not appreciated further one year later? I forget what you said. In SF, prices went up by another 5%-7% over the past 12 months, but are finally starting to slow.

      1. If I had kept my house with pool in Florida, it would have appreciated. However, because my employer was paying all selling costs (taxes, 6% commission), I sold it in April 2016. I had bought it as a short sale 2 years earlier (with my employer paying all closing costs then too since I had relocated for the job). I made $30,000 + $6500 bonus for selling it fast. I miss the house, but numerous maintenance issues became apparent as we sold it. Sold it for $451,000, could have rented it for $3,500 / month. Also, since my employer gave me advanced notice that I had to move 1,000 miles away, I bought my current house, brand new, prior to selling the FL one. So when I sold the FL one, I had that equity, but I didn’t invest it fearing market was going to crash, though I did increase my monthly investments.

        1. Ah, gotcha. Honestly, I think you made the right move to simplify. You can always go back and rent at a nice resort or Airbnb for nostalgia’s sake. That is GREAT your employer paid all those costs.

  9. Great article and congratulations on your boy! I have a 6 month old baby girl and I researched the hell out of 529s last year. Do consider the difference in expense ratios among different states. Here in Oklahoma, I can deduct up to $10000 a year from state taxes but I chose the NY 529 plan over this despite the deduction. The expense ratio for a total market fund in OK is 0.35% while an aggressive growth portfolio (vanguard institutional total stock market 70% and Vanguard Total International Stock Index Fund (30%)) from NY 529 is only 0.16%. I plan to put in 14-28K every year until I max out and that 0.20% difference over 18 years is much more than the measly state tax deduction.


  10. Any thoughts on qualifying for more financial aid by switching w2 income to 1099 or s-corp income?
    I also know the private and public schools include different assets when making aid determinations but I haven’t seen a good analysis on how to move assets around or how much money is too much to even bother.
    Thanks! I hope you have some thoughts or pointers on this.

  11. Up here in Washington state, we have the GET program, which is not actually a 529 plan, but a savings plan against tuition inflation (you pay today’s rate and it adjust as tuition increases). My husband used part of his (GI bill covered the rest), but the program has steadily gotten worse and more stringent when it comes to what is allowed to be charged to it.

    Through that experience, we’ve decided not to enroll in the GET program for our son, and I’m leaning heavily toward NV or UT. This is definitely the best summary of 529 plans I’ve seen, so thank you. At this point I think I just need to pick one and get it up and running.

  12. Thanks Sam for this post, it’s very timely as I too am in the same position of recently having a child and now thinking about how to fund their college education. I too live in California and have been eyeing either the UT or NV 529 programs. Also, I’ve been asking around and have read some people will instead open up a Roth IRA in their kids name as a Roth provides greater flexibility over a 529 plan, which can only be used for college: https://www.nerdwallet.com/blog/investing/roth-iras-trump-529-plans-battle-education-funding/

    I’m trying to think through the practicality and wisdom of this. Do you have any thoughts?

  13. Scott Thomas

    So Sam, which 529 plan did you go with and what allocation did you choose? (I also live in CA and I use Nevada’s 529 and I’m stumped about where to allocate this year’s money! All cash and wait for a correction, or keep DCA’ing into broad stock index funds?).

    Thanks for any thoughts!

    1. Hi Scott, I’m still deciding. There’s no rush since the market is at an all time highs. I’m leaning towards the Nevada Vanguard plan or the fidelity index fund plan which only cost 0.12%. The reason is I am already a client of Fidelity and have my solo 401(k) and my SEP IRA there. So I’m for Milyer with the interface and it’s easy to transact and the more you have a good one place the more benefits yet. Also, if I’m going to index Road, which I will, it doesn’t really matter where I am the best so I’m for Milyer with the interface and it’s easy to transact and the more you have a good one place the more benefits yet. Also, if I’m going to index Road, which I will, it doesn’t really matter where I invest so long as the institution is reputable. Fidelity is huge and will be around forever.

      Probably won’t superfund either. Instead, I’ll contribute $14,000 a year. Even at the market corrects 20% on $14,000, it’s not a big deal.

  14. Thanks Sam for writing this and weight on the pros and cons. My son is 16 months and I have been debating weather or not to open a 529 for him since he was borned. We live in a state that doesn’t offer any tax exemption. Still looking into it.

  15. I still remember that cold December night in 2015 when It was time to pay the spring semester bill. Low and behold there was $55,000.00 of student debt staring right at me (smack in the face reality check!). Soon the snow melted, the flowers bloomed, and the birds resumed their song. Another bill came in the mail demanding $15,000.00 (and notification of a 7% increase). I don’t know what burned hotter that day, the sun or my anger? But what I do know is that my drive for success became as unstoppable as Thor in a marvel movie. If one door shut, I opened two more.

    Fast forward to June 2017. I now posses two lucrative jobs: full time at a government defense contractor and part time at a manufacturing plant. I’m now paying $1000.00 a week towards paying off those villainous loans. They will be eradicated by 2019! And my first non-debt paycheck I will cash 100% in for 1 dollar bills and roll in their crisp form.

    I was always a good student at school with a good work ethic. Being in debt is what drove me to understand that good is not enough. I made myself into the best I could be. What I’ve seen first hand is students who don’t have any “skin in the game” and simply settle for good or worse, drop out. I might simply have a bias opinion, but I think paying for a child’s tuition can hurt them in the end.

    BTW, Financial Samurai also played a large part as I stumbled across this website back in 2015!



  16. serenity he

    Thank you so much!!! My second child is already 3 months old. for the longest time, I meant to start a 529 savings acct for my first child. I finally open an acct with wealthfront but did not contribute money to it. why? because I wasn’t sure if that’s where I want to place my money. now that you’ve mentioned that they use NV’s saving plan. I guess I’m going with them for sure. And I don’t mind the small fees, I’m an emotional investor, it’s best to have someone else take the rein.

    1. Growing up fast! Yeah, I was pretty impressed with Wealthfront’s 529 plan. The thing is, their all in fee is 0.43% – 0.46%. It’s not the highest, as I just spoke to USAA’s Nevada plan and they charge 0.99% for one of their funds. But, it’s higher than the plan vanilla index fund structures at ~0.2%.

      It does feel good to have piece of mind that someone else is on top of it though. a 0.26% difference on $100,000 = $260 a year. Not that much.

      1. Scott Thomas

        Sam, since you mentioned USAA, what do you think of them as an insurance carrier? Do you have any posts on personal (home, auto, umbrella) insurance? If so, would appreciate the link … thanks!

      2. I understand the emotional investor and someone else on top of mindset – but for me it smells too much ‘where are the customer’s yachts’.

        My last couple of 529s are at scholarshare costing 8 basis points and fidelity/NH at 11 basis points. I would get no peace of mind paying 4x the fees for holding essentially the same assets.

        Schwab will charge me 3 basis points for the same assets outside of a 529.

  17. FAFSA is just the application. Since my college days in the 80s the feds involvement in financing college has ballooned – much like medicine. Odd that those two have exploding costs.

    FAFSA get complicated fast but at the right income level there is no wealth level problem. Think at < 50K income one can be a billionaire and still get federal aid. And even above that level owner occupied houses and Romney level IRAs are irrelevant.

    In general I think 529s are much more likely to cause trouble. All this is irrelevant for those without a taste for the govt teat. We have been closing out all of ours as the boy started high school.

    1. Scott Thomas

      Interesting points Ken. Why do you think 529s are more likely to cause trouble? Thanks for your insights!

      1. It’s complicated and I’m certainly no expert; however 529 assets are reported on FAFSA and they feed into EFC(expected family contribution) thus often reducing financial aid. Here’s a piece on them:


        If the parents are high income though I think the EFC will be substantial anyway so I’m not sure it makes a lot of difference.

        Even if I wasn’t planning to suck on the teat though, many 529 plans have high expenses and if you’re not careful make more for the brokers than the customers. If I was planning on paying for my son’s college I think I’d be more likely to save in low expense index funds and take capital gains hits if and when need be.

        Given the limited investment options and limitations on trades and penalties if the money’s not used for college I think I’d stay away from them. Especially if there’s no state tax break – as in california.

        1. Why not do everything? Save in 401k, after-tax account, and 529 plan. That’s what I plan to do and more. Slicing and dicing the money for optimization. But maybe I’m weird b/c I find it fun to try and max everything out.

          1. Because 529 plans are more expensive and complicated than cheap simple index funds. That said if you plan to fund your children(s) college expenses yourself I think the tax advantages may well help, especially if you’re in a high bracket when your kid(s) bills come due.

            Me – I’d rather other taxpayers pay for my son’s education, course there are tradeoffs in minimizing MAGI as well.

            Note – less than 25% of stanford students pay the full fare. At least 40% of berkeley students pay no tuition. What can I say deadbeats are everywhere.

            Here’s a cute little snippet from Harvard:
            “To address this problem, Harvard’s message is fairly simple. Few realize that Harvard’s financial aid programs pay 100 percent of tuition, fees, room, and board for students from families earning less than $65,000 a year. Families with incomes from $65,000 to $150,000 pay between zero and 10 percent of their income.Nov 8, 2013”

            Retirees without gynormous pensions can often get below these income levels.

            1. The expense ratio for index fund 529 plans are around 0.15 – 0.2%, right in line with other expense ratios for index funds.

              I like how you keep saying teat of the government and getting other people to pay for your son’s education. Where does this attitude come from? I’m fascinated by this attitude.

              What do you do for a living and how old is your son? How do you plan to get other people to pay for your son’s education instead of yourself? Just make less money and get grants? Grants are based on merit. You can get loans, but you’ll have to pay them back. What am I missing here?

            2. Merit is no longer allowed. Stanford says it best:

              Is Stanford tuition really free?
              Under the financial aid program, which Stanford expanded in 2015, Stanford will continue to provide free tuition for typical parents with incomes below $125,000. Typical parents with incomes below $65,000 are not expected to pay tuition, mandatory fees, room or board.Feb 25, 2016

              This setup is why tuition and fees have gone up so much in the last 30 years – you can either adapt to the reality or be the one paying for everyone else. Your choice.

            3. Stanford/Harvard are just examples, plug in UC merced or sonoma state and you get the same scenario.

              The scarily high sounding tuition are the price a minority pay so that deadbeats like me don’t have to pay a thing. It’s just like obamacare. The main reason prices are so high is that so few are paying them.

              Again if you’re in a very high tax bracket 529 plans can work out but be wary of high expenses and trading/withdrawal traps and penalties. If you’re not sure of the future than dirt cheap index funds and capital gains rates might well work out better.

              Note – 15-20 basis points for a mainstream index fund is atrocious – and has been for over a decade.

  18. California also has their own 2.5% penalty on 529 withdrawals – I opened 100+ scholarshare accounts back in the old days when they were giving out target gift cards for each account. Some hassle closing them – but it was interesting.

    For those who can manipulate their MAGI the FAFSA is a very rich vein of teat sucking. Pretty sure my son can go to just about any school he can get in to for free. There’s a reason tuition costs are so high. He also gets free school lunch, free SAT tests, free just about anything.

    At the right income level the FAFSA has no asset tests anymore, strange world huh?

    Key phrases are ‘auto-zero efc’ and ‘simplified needs test’. Can have huge iras and if careful taxable assets and pay nothing for a child’s stanford education.

  19. I think the 529 plans represent an interesting dynamic on how the upper middle class and wealthy benefit all of society indirectly. Sound counter intuitive? Let me explain. For my home state of Illinois, the expense ratios in 2005 were ~1%. Now, the Illinois 529 plan will pay NO HIGHER than 0.67%, and possibly as low as 0.19% based on today options. This is a drop of from 33->80% Why did this happen? Because, among other things, the amount of money invested in these accounts has skyrocketed from $350 Million in Illinois in 2002 to $9 Billion in Illinois today. This has driven down the average expense ratio given that the fixed fees have a larger amount of money over which to spread. Who generally has invested all this money? Upper middle class and wealthier families looking for tax breaks.

    We should be thankful for the vast array of options provided as a result of these extra pools of money. I’ve seen some poorly written articles based on the “Dream Hoarding” concept written about how the upper middle class in particular have tried to screw the lower income rungs but I think they miss the mark by targeting things such as 529 plans, which are open to everyone.

  20. I love that you mentioned creating a plan in your name before your future child is born. Great way to get started.

    The Indiana CollegeChoice 529 plan is amazing. $1000 tax CREDIT on the first $5,000 contributed per year!

  21. Sam — I’m a huge believer that higher ed, as in a 4-year degree MINIMUM, is still the key to a good career path. I live in a state with a decent 529 plan. I want the state tax deduction. My kids are 5. I should be all systems go. However, I’m waiting to open up the account for a few reasons.

    1- I don’t want to invest in stocks right now. In my opinion, investing now is a good way to lose 30-40% of the 529 value within the next 5 years. No thanks. As such, I’d be sticking the money in a 529 savings account earning 0.5%. Blech.

    2- Occasionally other investment opportunities present themselves. I’d like some dry powder.

    3- I find it hard to lock up college money for a decade when my kids are just starting Kindergarten. I have no idea what their college path will look like, how much I’ll need, etc.

    So, what’s a guy to do? My plan is to use what I’m calling my Opportunity Fund to stay flexible. I’m planning to invest monthly in a State Muni Bond Fund that will grow, in theory, tax free with reinvested dividends (currently around 4%). Let’s say I’m a big conservative chicken and I do this for 15 years. I should have around $200k in the account.

    Then, suppose I realize at that point that my kids need $100k for college between the 2 of them. I’ll take advantage of my state’s unlimited tax deduction carry-forward. I could stick the $100k as a lump sum in the 529 (or do it annually), and then enjoy the state tax deduction for the next 6 years or so.

    I’m curious if you see any issues with this approach. Another option is we get a big market drop, in which case I’ll throw a lump into the 529 and invest in stocks more aggressively.

    Cheers –Rich

    1. Hi Rich,

      Sounds like a good plan. One of the fears is that we’re putting money in at an all-time high, and Superfunding $70,000 up front may be too much, so spread it out over several tranches.

      I don’t quite understand this statement:

      “I’ll take advantage of my state’s unlimited tax deduction carry-forward. I could stick the $100k as a lump sum in the 529 (or do it annually), and then enjoy the state tax deduction for the next 6 years or so.”

      How do you stick $100K lump sum in the 529 if you’re already been funding it and can’t superfund? Could you use some specific examples? What is this unlimited tax deduction carry-forward? The $3,000 a year?

      I like to have a challenge and not co-mingle any funds for different purposes. So, the challenge is to max out the 529 plan to $370,000 in 18 years and only use the 529 plan for education. It’s motivating. Otherwise, I could just pay $370,000 for education out of different funds, but that won’t make give me as much motivation. I like a single focus for saving/investing.


      1. I take your point about not co-mingling funds. It’s a bit cleaner. As I said, for now I’m going to stick most of my college earmarks into Muni Bonds, and I’ll decide exactly what to do with them later.

        Here’s what I mean by this: “I’ll take advantage of my state’s unlimited tax deduction carry-forward. I could stick the $100k as a lump sum in the 529 (or do it annually), and then enjoy the state tax deduction for the next 6 years or so.”

        In my state, there’s a limit on how much you can deduct on your state taxes each year. For example purposes, let’s say that’s $10,000. If my state tax rate is 5%, that’s a $500 deduction limit each year.

        However, my wife and I could put a much bigger lump sum into a 529 if we wanted, I think it’s something like $140,000 for a one time contribution to avoid gift taxes.

        So, let’s assume that when my kid is age 17, we have a clear idea of what he wants to do and so we decide to stick $100,000 in a 529. We can only deduct $10,000 of that in Year 1. BUT, unlimited carry-forward means I can deduct $10,000 in Year 2, and Year 3, and Year 4, etc, until the entire $100,000 is deducted (over 10 years).

        Make sense?

        The reason I was thinking about this is I wondered if there would be any benefit to superfunding a 529 just before college, when I have a better idea how much to put in there. Sure, you might miss the tax free growth along the way, but you could still get the full state tax deduction via the unlimited carry-forward provision.

        Let me know if it’s still unclear and I’ll try again.

        1. That makes sense. But I think super funding the 529 plan right before college completely defeats the purpose of the 529 plan.

          Because what’s the difference between just paying for college straight up with after-tax dollars?

          The goal to fund the plan early is to take advantage of compounded tax free returns over a potentially18 to 20 year period. So I think it’s best to have a mix of everything. But if you can afford to max out the 529 plan, Max out the 401(k), and Invest in an after-tax account then by all means.

          1. True about the compounded tax free returns. My plan to fund it later on doesn’t make sense unless:
            — I can use tax free Muni Bonds along the way.
            — I think the crappy 529 investment options are actually poised to drop (rather than compound) due to market valuations.
            — I can still get the full state tax deduction at the end.
            — I want to wait until I have a clearer idea of how much I’ll need to save for college.

            Totally agree, it’s unconventional and could possibly backfire.

  22. Hi Sam,

    For the longest time, I avoided 529 plans. Rationale was – I can invest anywhere else, say buy a rental property for each of the kid – let it pay for their monthly expense when they go to college; or invest in an after tax account myself with complete freedom to withdraw whenever I want for whatever purpose.

    But then in 2013, I decided to open the 529 plan for ONLY one reason: It saves on State Tax.

    If not for that tax saving, I do not see any use of a 529 plan.

    Also, I’d share with the readers where I invested – I used collegeinvest.org, and besides Vanguard, I also have a guaranteed 2.4-3% return using Stable Value Fund though MetLife Ins.


  23. Hopefully my kids get scholarships and I use their 529 to send myself to Europe on an exchange student program when I am 55 years old!!!

  24. A ton of info and very helpful, thanks! I didn’t know I could establish it in my name until my child is born because I asked about that. We established it a few months after his arrival until we got the SSN. But I do agree on maxing out other accounts first if at all possible.

  25. Hi Sam,

    I went a little different route with my daughter. When she was born I put 5k into Amazon stock at 33.00 a share intending to hold it till she went to college. I was convinced this was going to be the greatest company ever. I than sold it for 14.00 a share 2 years later when it looked like they were going bankrupt.

    My second great idea was to buy a 5 year equity linked CD linked to telecom stocks. The cd offered 100 percent downside protection with up to a 5 Percent gain depending on the performance of the underlying equities. I put 200k into this investment. In 4 years I’ve collected a grand total of $2500. in earnings.

    Where were you and this site 18 years ago!!!!

    Thanks, Bill

    1. Wow Bill!
      And I feel bad having to sell our 2nd home/lake house to finance their education! At least you have the 200k in the CD still….more than most people are saving I think.

    2. Ha! Man, imagine if you put the $200,000 in Amazon and let it ride instead.

      Ah, too bad we don’t have a time machine to make better investment decisions.

      I can understand why you invested in the principal production with a $200,000 investment. But yeah, that Return is not so good. If it was an annual return that would be a different story.

  26. Living in CA, I opted for the NV 529 plan through Vanguard as well.

    The maximum for Vanguard 529s is $370,000.

    1. Scott Thomas

      I live in CA and chose the NV 529 Vanguard plan as well. My understanding is that the California state limit for contributions to 529’s is $370,000, correct? (Even if you chose an out of state plan). I believe each state has it’s own limit, not Vanguard or the plan you chose.

      Somebody please correct me if I’m wrong.


  27. Scott Thomas

    Let’s say your state’s max contribution limit is $300K and you reach it. Then, the stock market pulls back and your account dips down to $250K. Can you start adding additional money at that time until you reach $300K again?

  28. Duncan's Dividends

    Great write up on something I’m super not familiar with. I’m single with no kids, but currently dating someone with a young one and it’s interesting to see what I may be getting into to ensure their success.

  29. Also, if you are flush w cash come time to pay for education, just pay out of pocket and let the 529 ride … it could end up funding generations of tuition that is passed down tax free.

    1. I wonder how long traditional higher education would be really around with the internet and the current state of our education system. Someone said 529 embellishes the difference between the poor and the wealthy.

  30. My son is 2 months old and I just opened a UTMA. I can’t see myself paying 200k for College and I prefer the flexibility. If he is really smart he will get a scholarship, if he isn’t a good student, 200k for private college isn’t going to fix it.

    Best thing you can provide is a family business and/or connections, aka Trump, Kennedys, etc. Or jump start into family business, law, medicine, accounting, real estate..

    And some states starting to offer free college (NY)

  31. Great write up. Thanks!

    You should only contribute a maximum of $14,000 a year. Anything more than that involves filing a …

    For couples, can we do $28k/yr?

      1. High Income Parents

        You could also give $14000 to grandma and grandpa who just happen to contribute another $28k to Junior as well. As long as you have trustworthy people to give money to you could add a lot more to your kid’s 529 plan without hiring the yearly limit. Step doctrine might be debatable though.

        Tom @ HIP

  32. I’ve always contributed the max ($14k per year) to my now 5-year old’s 529 plan. I did this in years it was really hard to do, and in years when it was a little easier. The hardest is when you pay for expensive preschool/day care (in order to work) and max out the 529 plan, on top of retirement accounts and other life expenses. I sure don’t regret it, though, as it feels great to know that if anything happens to me, my son can at least go to our public state school without debt. Now if his expenses go up as he gets older, or if I decide to retire early and I have to cut back on 529 contributions, it’ll be just fine.

  33. I invest in the NYS 529 plan as I live here and get the tax deduction. It is run by Vanguard so I get low cost index funds. I’m using the age-based option which has 3 choices (conservative, moderate, or aggressive). I originally went with aggressive but read a post on the Finance Buff who wrote that age based funds might be overly aggressive since the timeline is shorter (compared to retirement). But then I also read on I think the White Coat Investor who said that he was fine with it being aggressive since he wasn’t solely relying on the 529 to fund college or that if there wasn’t enough, then the kids would have to figure it out by themselves. Something like that…I don’t recall exactly. I considered moving back into the aggressive option but not at this point as it seems everyone is waiting for a pullback in the stock market. What are your thoughts? How does the fund you chose rebalance as your kid gets closer to college age?

    1. Andrew, curious to know what is the exact deduction you get in NYC? It applies only for NYS residents if you go the NYS 529 plan? I’m bummed California doesn’t have any deductions.

      My thoughts are to invest in tranches at current levels and invest closer to the way you’d invest your money since it is your money you are putting in and your thoughts you’ll have to deal with if bad things happen.

      BTW isn’t White Coat Investor a doctor? I’m not too familiar with the him or his site. I’ve done tons of research on health, weight loss, joint pain, chronic back pain, and now eye development and I’m wondering maybe there’s an opportunity to expand a Health/Spiritual wellness category on FS. Thoughts?

      1. Yea, it is only for NYS residents who use the NYS 529 plan. You get a deduction for your state income tax. Surprised California doesn’t have a deduction being that it’s so highly taxed. You guys do have a great state university system.

        I’d be interested on your thoughts on health and spiritual wellness. I’m sure most readers are here for the finance stuff but it’s fine to mix in other topics too.

  34. Scott Thomas

    Annual contribution limit — it’s important to note that the annual contribution limit is actually $14,000 per parent of the child, so the annual limit is actually $28,000.

  35. We opened up two 529 accounts in our home state of Georgia for our two children. This year Georgia doubled the amount you can deduct to $4,000 per beneficiary. Every little bit of tax savings helps. As you mentioned, my greatest concern with overfunding this account is reduced financial aid.

    1. Georgia is so awesome for promoting education. I’ve always admired the HOPE grant just for doing well in high school! Here’s the program in a nutshell.

      12 eligible program areas:

      · Certified Engineer Assistant

      · Commercial Truck Driving

      · Computer Programming

      · Computer Technology

      · Diesel Equipment Technology

      · Early Childhood Care & Education

      · Health Science

      · Industrial Maintenance

      · Movie Production/Set Design

      · Practical Nursing

      · Precision Manufacturing

      · Welding & Joining Technology

      These industries have been designated by the Governor’s office as some of the most in-demand trades in the state. They’ve decided to focus on where the jobs are.

      What you need to apply for the HOPE Career Grant:

      You must qualify for and be receiving the HOPE Grant (the HOPE Career Grant is a separate deal). To qualify for the HOPE Grant you’ll need the following:

      * Meet HOPE’s U.S. citizenship or eligible non-citizen requirements;
      * Be a legal resident of Georgia;
      * Meet enrollment requirements;
      * Be in compliance with Selective Service registration requirements;
      * Meet academic achievement standards;
      * Be in good standing on all student loans or other financial aid programs;
      * Be in compliance with the Georgia Drug-Free Postsecondary Education Act of 1990;
      * Not have exceeded the maximum award limits for any HOPE program;

      Program Eligibility

      Full-time enrollment is not required and students are not required to graduate from high school with a specific GPA, however, they are required to have a postsecondary cumulative 2.0 GPA, at certain checkpoints, in order to maintain eligibility.

      The two grants together will cover all tuition in the aforementioned programs. Remember, this is for tuition only. Students will still be responsible for student fees and any necessary equipment.


      Apply for the Free Application for Federal Student Aid (FAFSA) or complete the online Georgia Student Finance Application (GSFAPPS).

      Talk about forward thinking!

      1. It is a great deal for GA residents. Many friends and co-workers kids already take advantage of this. To think, all funded by revenue from the Georgia Lottery. Too bad more states don’t offer this great incentive.

        1. Dood, el Farbe

          I have relatives in GA who mention that there’s also a spillover effect from the GA Hope scholarship in that neighboring state flagship universities, which used to get a lot of GA students, now essentially match the amount of tuition waiver the student would have gotten at UGA or GT if instead they do decide to go to Alabama or USC-Columbia, Clemson, Auburn, etc.

          Curiously (to me, anyway), they said there’s not a similar effect at UF or FSU.

  36. We purchased a summer/lake home 18 years ago with the plan of selling it for our college costs for our 3 kids ages 18, 14, 13. We also opened up 2- 529 plans for each kid- we use Fidelity as one of them as well as Michigan. Both plans have done great obviously given the last 8 years of market gains. We are in the process of selling our lake home to cover all of our kids’ costs along with their 529 balances (private or public colleges). They don’t want to go to the lake house anymore. I am curious though…what is the average 529 balance per Fidelity or Vanguard- do you know? It was such a great investment tool for us! But have seen many couples not so smart with their savings for college.

  37. I am wondering that with the costs of colleges and universities skyrocketing if more than the 300k will be needed to fund a child’s education. If investments and growth are maxed out, then is there any penalty for growth beyond the limit? Besides tuition, do you know what other expenses qualify for use by the 529? For example, how does one use their 529 to pay for off campus housing or food expenses? ( sorry if this is an elementary question)

    1. Amy-
      Going through this now with my 18 year going off to college- we are using her 529. You pay for tuition, computer/software, dorms, but you cannot pay a 3rd party housing company. It has to be a university dorm to receive the 529 payment. You can be reimbursed from your 529 if you pay for off campus housing out of your own pocket. Many 529’s offer a direct payment/online to the university which makes it super easy.

      1. Thank you Chris! That’s very helpful. Do you know if there is a penalty or what happens in excess of a 300k limit ( if we ever get there) ?

        1. No, I do not…I never got to the 300K max. We had a summer home we sold to help cover part of their tuition costs.

        2. The penalty is the estate tax rate of 40% or so.

          Let’s say the 529 max is $300,000. You contributed $200,000, and the market grew it to $300,000. It can grow to $500,000 on its own, but you shouldn’t contribute more to it because of the estate tax.

          Just think: Number of years to college X $14,000. You’d be hard pressed to get to the max by contributions alone.

          1. But suffice to say we could use any accrued appreciation beyond 300 K without penalty as long as one doesn’t contribute after the 300 K limit is reached ?

            I have read many of your posts financial samurai and I just want to thank you. :)

  38. Very informative. What is the advantage of using the 529 plan vs an IRA? I know the contribution limits are much higher with the 529, but an IRA seems to provide more flexibility.

    1. IRA is for you that can’t be touched until 59.5 without a 10% penalty, although education is an exemption. The 529 is specifically for higher education. I strongly recommend folks not co-mingle i.e. use an IRA for retirement for your child’s college education.

      I suggest contributing to both, and your 401k if possible. Laser focus your savings/investments for specific purposes. It just takes time to set up.

        1. Great call. Here’s what it says:

          Qualified education expenses. For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.

          In addition, if the student is at least a half-time student, room and board are qualified education expenses.

          The expense for room and board qualifies only to the extent that it isn’t more than the greater of the following two amounts.

          The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

          The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

          You may need to contact the eligible educational institution for qualified room and board costs.


          I just strongly believe one should use their IRA to save for retirement only. Don’t touch it for other stuff. That’s when people start getting in trouble and end up at 60 wondering where their money went.

          Related: Only Petulant Fools Borrow From Their 401k

      1. I think there is an exception for distributions used to pay qualified higher education expenses so you can avoid the penalty. However, I think that the withdrawal may be counted as income for FAFSA purposes.

  39. Well written and informative. Thanks Sam. I used Louisiana the last 2 years because it provided a $100 supplement to my son’s account. Now I am in Cali and leaning towards Vanguard funds through Utah.

    My only counterpoint is that if your child decides not to go to college (despite all of your influences) then the money can not be used for his/her future endeavors. I have a colleague who had saved over $100K and then his son dropped out of college and never went back to any trade school, etc. He took that money out as a penalty. Now for his younger kids he is just saving in a taxable account. Sure it is not tax advantaged, but there is more flexibility.

    For me, it will be a combination. I am contributing small amounts into my son’s accounts, paying off my own school debt, and then saving a small amount in taxable accounts (under my name for now).

    1. I wonder why your colleague didn’t just roll the 529 over to one of his younger children instead of incurring the penalty? We’re currently struggling with how to balance wanting to maximize time in the market vs. over-contributing for our 1.5 year old son. We figure we can roll any excess funds down to our children’s children and use the 529 as part of our estate plan. It’s a little risky and assumes a lot about what his life will look like (i.e., his own children), but if we have multiple children, the plan becomes more solid.

      Sam, congrats on your son! I found the first few months to be difficult due to the sleep deprivation, but it just keeps getting easier and more fun. Hang in there!

      1. Thank you Abby! A parent’s worry never goes away… or at least that’s what every single parent has told me :) I’ve spent hours and hours reading, talking, watching videos of presentations about eye development as he might have issues. But there are solutions to make his eyes better and I’m hopeful!

        And I know that at the very least, I can provide him tons of love and attention as a SAH parent and at least not let him worry about the financial stuff. Least I can do!

        He slept 6 hours last night… a record so far! Been only doing 1-3 hours a time. Yay.

        1. I’m sure you’ve already found a REALLY good doctor there. I learned the hard way with that. Don’t think doctors have all the answers & don’t be afraid to question them or find a specialist- which I’m sure you have. You will be a great dad- don’t worry so much! Small kids…small problems is really the truth.

          1. I planted a good two or three opinions and then make the best decisions possible when the time comes to make them. There are two daughters I want to see, one in San Diego and another in Ohio. I’m thankful at the very least that I have the funds necessary to go visit them and not stress about money .

  40. Sam – this is really helpful! I opened up a 529 plan recently for my future kids but haven’t actually gotten around to contributing yet. Great to see all of this info in an easy to read format so thanks a lot for putting this all together. My parents were generous enough to cover half of my college costs but I was still left with $75k in debt. Would love for my kids to not have to worry too much about debt and start fresh at 22!

  41. We live in Ohio and have the CollegeAdvantage plan the state offers setup for our daughter. When I enrolled in it years ago, it was a sound option (still is pretty good on the list you have) and it gives us the state tax break, which is nice but not worth as much as a federal break would be.

    I have 100% in the Vanguard Aggressive Age-Based Portfolio: Vanguard Growth Index Portfolio and contribute a small amount to it every month.

    Although it’s a pretty good plan and idea, I would actually prefer some flexibility. I read a great article recently about paying your kids (around 7 or older) a fair salary to do work they’re able to on your rental properties and putting their earnings in a Roth IRA. If the salary is low enough for the year, there’s no taxes to worry about (or even filing).

    With the Roth being a retirement account, you don’t get dinged when doing the FAFSA, but you can still pull out all those contributions later without any penalty to pay for school. And if they don’t go to school for whatever reason, they still have a foundation of a retirement account.

    I haven’t dug much further into yet, but it seemed like an interesting option.

    — Jim

  42. Wow, super comprehensive. I live in Maryland and for what it’s worth, the state 529 website pales in comparison to this guide. Sure they have all this info, but man is it hard to find/read/digest. Not sure how other states are.

  43. What a great investment in your child’s future, Sam. A lot of parents (and aunties, uncles, and grandparents!) want to do this as a way of helping both he student and the family.

    I am looking to do this for my two nieces and two nephews. As with all investing, if time is on your side you are likely to come out ahead due to the compounding.

    But I wonder what you think about the implications for financial aid. I worry that by putting $ in a 529 in the student’s name that it will make them less eligible for school based grants. Could there be an argument that it is better to have the money invested on an account in my name, and I can subsequently pay part or all of the tuition at the time it is due?

    Alternatively, I could wait until the dear nieces and nephews graduate and then surprise them with a payoff of the loans (that way they still have the motivation while they are in school!).

  44. Grant @ Life Prep Couple

    Awesome write up and glad to know you are in favor of the 529 and not something like prepaying or a Coverdell.

    I actually used Wealthfront at first because the contribution limit for Vanguard was $3,000 which I didn’t have at the time. Probably not a problem for you ;) I liked Wealthfront but you can get basically the same thing with Vanguard for about 0.25% less in fees per year. Once I got to $3,000 the transfer from Wealthfront to Vanguard was super easy.

    Only thing that concerns me with Vanguard is when using the aggressive target date model it is 100% stock for the first few years.

  45. Should probably mention something about how the funds in the 529 (either in your name or even more so in your kids name) will count against your kid for getting financial aid (FAFSA). I make 6 figures, but also have 4 kids and stay at home wife. My strategy is usually to take advantage of all possible tax breaks, but in this case you also have to consider financial aid eligibility. I just rethought my strategy a couple weeks ago and now think it makes more sense to use all excess cash to pay off mortgage first since that asset along with retirement accounts do not show up as assets for financial aid purposes. If the house is paid off by the time they start college, then that will free up cash to pay for any difference (between tuition and financial aid). Additionally, I could quit work a couple years before they start college and be double sure to get max financial aid. Also, why would you not just teach your kids how to create their own digital empire? Then school become irrelevant. I’ve got a BS Engineering, MS Engineering, MBA, and MS Finance…so maybe not one to talk, but my company paid for all the Master Degrees. Love your site, keep the articles coming. Any thoughts on buying an online business using SBA financing?

    1. Great call. I’m impressed with anybody who can manage to raise 4 kids! Is that right, that your primary residence and your 401k, SEP IRA, Roth IRA etc don’t count as assets under the FAFSA program? If so, right on for using the money to pay down the mortgage, maxing out the retirement accounts AND not work for a couple years before your children go to college if you can afford not to do so. All these things should be done for FIRE purposes anyway.

      I definitely plan to teach my son how to write, speak, market, brand, and do all sorts of stuff in the digital media space. Let’s see if he wants to learn! Well done on all your education. I don’t think we’ll be going that route as everything can be learned online for free nowadays. I got my MBA part-time, and wouldn’t do it any other way if I had to do it again.

      I’ve added this section:

      Does A 529 Plan Affect My Financial Aid Package?

      When you apply for the Free Application for Federal Student Aid (FAFSA), it’ll try to ascertain your income and total assets. Logically, the higher your income and higher your assets, the less aid you will receive.

      Assets in a 529 plan owned by the student or her parents count against need-based aid, while those in a plan owned by anyone else (including grandparents) don’t. But once grandparents or other relatives start taking money out of a plan to help pay those bills, the reverse is true. The withdrawals can hurt you even more than if the plan was owned by the student or parent for next year’s financial aid package.

      The 529 plans owned by college students or their parents count as assets and reduce need-based aid by a maximum of 5.64 percent of the asset’s value. That means if you have $50,000 in a college-savings plan for your daughter, her aid would be reduced by roughly $2,820.

      However, if the 529 plans are held by a grandparent, they won’t appear on the FAFSA as assets. Instead, as the money is withdrawn to pay for tuition or other educational expenses, that amount must be reported on the next year’s financial aid forms as untaxed income to the student, and it can reduce the amount of aid by 50 percent.

      So if that same $50,000 college-savings plan was owned by the grandparents, and the student withdrew $10,000 from it one year, that withdrawal could increase the amount the family is expected to pay for college (and reduce the aid) for next year by about $5,000.

      Therefore, the logical conclusion is to either have the 529 plan under your child or your name to minimize the reduction, or use draw down the 529 plan under the grandparent’s name in the very last year of college.

      1. I had always viewed 529 programs as the best program for funding college as well. However, similar to what you mention above, some college funding experts are now indicating 529 programs are a negative. The logic goes that once you have been accepted into a particular college program, especially private schools, they use the FAFSA needs analysis to see what they need to offer you in grants and loans to convince you to attend their school. When schools see 529 money, they view that as captive money that they are going to get no matter what. The schools then reduce your grants by the 529 money already available to them. A student with no 529 funds that has been accepted will need more grants in order to convince them to attend.

        1. Totally makes sense with your analysis. That being said, you can make gains tax free and if you’re a high income earner your kids are screwed either way on getting aide (outside off merit based scholarships) so if you’re in that boat you might as well get some tax free gains on your side. When I was in college my parents made way too much so aide was out of the question and only merit based scholarships was what I was allowed to chase. I had no 529 but received full rides so it all worked out but just keep that in mind.

          Now something you didn’t point out Sam was using the 529 for grad school. Can you just keep money in the 529 and apply it towards graduate school later or do you have to cash it out right away? If you’re 22 and planning for a MBA can you just start your own 529 and put money in there to get tax free gains if you plan on going for the MBA in the 26-30 year range? Always wondered about this one but never bothered to research it, but maybe you (or someone else here) already does know?

          1. Good question on graduate school. Yes, you can use the 529 plan proceeds to pay for graduate school. That helps in terms of excess funding. But don’t go to graduate school just because you have money to spend on it!

        2. I feel that no matter what, my income will be too high to get any grants (due you do passive income alone ). All I want are grants, and not loans. And it seems like the grants are mostly based off of merit.

  46. Mr. Freaky Frugal

    Sam – Very nice info for 529 plans.

    I had Pennsylvania 529 Investment Plans for both my sons that I started not long after they were born. The plan worked great for my first son.

    For my second son, it got a little trickier. He had an academic scholarship and he joined ROTC. ROTC pays the university the full tuition even though the my son did not pay full tuition. It made it hard to use the entire 529 for qualified expenses.

    1. One very important point that Sam missed is that you are allowed to withdraw 529 funds up to the amount of any scholarships without paying taxes or penalties. I.E., if you saved $80k in your child’s 529 and they end up getting a $20k/year scholarship, you can take $20k/year from the 529 penalty and tax free. This is a great benefit that really reduces the risk of ‘over saving’ in a 529.

      1. That’s an interesting point. So when you say scholarship, you are talking about a grant, as in FREE MONEY right?

        So let’s think about this fun situation: After 18 years, you max out your child’s 529 plan at $300,000. Let’s say he gets a full $300,000 ride when the time comes. I can withdraw the full $300,000 to spend on a new Ferrari penalty and tax free given he no longer has college education costs? Or does the $300,000 Ferrari have to go to my son?

        1. I just reread my first post and realized I mistakingly said ‘tax free’. I wish! Scholarship-matching withdraws are only penalty-free. Scholarships basically turn the 529 into an IRA.

          As for who the withdrawals have to go to, it can be either you or your child. This may be one of those ‘Your State May Vary’ rules, so would be worth verifying.

    2. What did you end up using the rest of the 529 money for and did you have to pay any penalties?

      I’m just wondering how does one figure out the optimal amount of money to contribute b/c I definitely plan to max out the 529 plan in 18 years, market performance willing ($14,000 X 18 = $252,000 + any appreciation). How would you think about the contribution scenario for those who can max contribute?

      1. I have an 18 year old and we make too much money to get any scholarships/grants, etc. I think you definitely should max out $14K per year for the next 18 years. Most colleges now are about 50K! What will they be in 18 years?!?! You will be so happy you have that money saved because lots of our friends did not…they bought fancy cars and country club memberships- now their kids are limited in where they can go to college.
        Which is fine…but like you said- it’s our jobs as parents to educate our kids and let them soar where they want to be.

      2. Mr. Freaky Frugal

        Most of the money went towards the Room and Board qualified expenses which was a little tricky once he started living off campus. I had to use what the college estimated was Room and Board and use that. Then he went and studied in China during the summer so I could use some for that.

        I think I ended paying tax and penalty on around $2000 when he was all done. Not the end of the world.

  47. This is so helpful. Thank you so much for sharing, Sam! Mr. FAF and I haven’t contributed anything to our son’s education plan. I have heard about the 529 plan but didn’t know much detail about it until I read your post.

    Mr. FAF hope that our children will get a full ride scholarship to attend college and grad school like we did. But I think we still need to have another plan in case things don’t work out.

    1. I highly recommend the Utah 529 (UESP). I have my daughters’ 529s with UESP – 9 years and counting -, and unless you get a state income tax incentive to stay in your home state, I don’t see why anyone would choose another 529 over Utah’s.

        1. Rock-bottom fees, flexible investment options, Vanguard index funds; What more could you want in a 529? You have the 2016 Morningstar ratings in your article above, and although plans pop in and out of the Gold ranking year-by-year, Utah remains a stalwart. To make it even better, they keep lowering their fees as their plan grows.

          1. Derek is right. I live outside of UT but have my kids’ 529 plans in UTEP for the same reasons.

            1. Ditto. Utah is also very transparent and has an easy-to-use website. MAkes sense a state with a large Mormon population would offer a great plan (higher birth rates, culturally a strong focus on education).

        2. Nicoleandmaggie

          Utah used to be the best option (lowest fee, good vanguard choices)– now it is one of the best because other plans have caught up. We’ve been using them for 10.5 years.

  48. Welp…I am bookmarking this for when I have kids. Thanks for a very thorough summary. I was anticipating having to do a lot of research into 529s in the relatively near future, so thanks for doing the hard work for me!

    1. Lol me too Matt! We don’t have kids yet but I see it in other people’s portfolio and their child is only like 3 years old but there’s already 100K in this thing call 529! Wow. I’m like “I know I can Google this but…*never actually does and I flip to Imgur for cat memes instead*”

      It’s kinda like Sam decided to hand me a cheat sheet before a pop quiz muahahaha!

    2. Same. I had started to research this but my state (WA) offers a weird prepaid tuition program instead of a 529. I didn’t realize you could sign up for any state’s program… NV’s does look quite nice. Thanks!

  49. Career politicians keep propping up a wasteful education system. A part reason is cause it will give them votes, and another part is spending their entire 30 year careers paid by taxpayers they don’t know any better. The system needs to be split into 2, research and teaching. Teaching needs to die should if fail to deliver on well paying job in the $70-100k range. Every student needs to be measured and tracked for 10 years in their career and pay range starting at age 22 when they have their degree. These studies need to be released for transparency. But then what will all the high school teachers who couldn’t cut it and weren’t intelligent enough to get engineering, computer science, medicine do? Idk. Will they go work at the clothing stores, work at a retail mall?

    The market small, medium and large companies are only about skills. Skills beat degrees anyday in real society. Only in bureaucrat jobs do degrees beat market skills. Does your company care that you memorized 4 textbooks on chemistry, biology, history, music, greek? No. Only the government cares. Did NFL players, musicians, celebrities memorized 4 textbooks on chemistry, biology, history, music, greek? No. Your company cares about your network, your ROI, do you have technical know how, how much $ can you make your boss.

    1. Will @ Fillennial


      I am not sure if it is as simple as that. Companies are hiring individuals more so than the government. Most companies DO care about degrees for entry level positions. Don’t get me wrong beyond that first position the case is exactly what you pointed out. However, just because someone isn’t going into a STEM field does not mean they aren’t successful and/or intelligent. I agree education is an extrememly wasteful system but it is propped up by more than a greedy government; there are business owners, a generation that saw college educations as the gold standard and an education system that has not been redesigned in over a hundred years.

  50. I am a huge fan of the VA 529 plan. Plus we get to deduct up to $4k a year for my son. Definitely a worthwhile investment considering how many of my peers struggle with student loan debt. Definitely one of the greatest gifts you can give your son is a debt free start after college.

    1. MSM,

      You can actually do $8k a year per child for the VA 529 plan. You and your spouse can each do $4k per beneficiary and deduct that from a joint state tax return. You have to open two accounts, one for each contributor. Baby Widget has this in place. :)

      Mr. Widget

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