How to Maximize Your College Savings with a 529 Plan

Steve Petrillo, First Republic Private Wealth Management
September 24, 2021

  • Most financial planners recommend saving for college and retirement at the same time.
  • As college costs increase, investing in a 529 plan can help your family rely less on student loans.
  • 529 plans enjoy tax-deferred growth and income tax-free withdrawals when used for eligible education expenses.

If you’re like many parents, helping your children pay for college is probably on your list of top financial goals. In fact, according to a 2020 Gallup poll, 33% of U.S. parents are either very or moderately worried about having enough money to pay for their children’s college education.

That’s because meeting that goal can be quite challenging, considering the high and ever-growing price of higher education.

According to College Board’s Trends in College Pricing and Student Aid report, for the 2020–2021 school year, the average cost of one year at a four-year public college for in-state students (include room and board and living expenses) is $26,820. Out-of-state students pay an average of $43,280, while those at a four-year private college shell out $54,880.

And those figures are expected to continue to grow. To give you an idea of what college may cost in 5 and 10 years, here’s a chart based on current costs, assuming a 4% annual inflation rate.

School Year

Four-Year In-State Public College

Four-Year Private College







In other words, the cost of your child’s college education may be one of the most significant expenses your family will face. Unfortunately, without ample savings, many parents and students end up taking on student debt burdens that can be difficult to manage. As of 2020, Americans had over $1.57 trillion in outstanding student debt, collectively.

To try to keep up with the rising costs of college, and ultimately borrow less in student loans, it’s most advantageous to start saving when a child is young, and invest wisely. That’s where 529 plans come in.

What is a 529 plan?

There are two types of 529 plans: Savings plans and prepaid tuition plans, both of which fall under Section 529 of the Internal Revenue Code (hence the name).

The most popular is the savings plan, which offers a professionally managed investment portfolio. Available in every state, these 529 plans are open to anyone who wishes to save money for college in an individual investment account. You can invest in any state’s 529 plan regardless of where you live, but the specifics of each state’s plan and tax benefits vary.

What they all have in common is that they can be used to pay for your student’s educational expenses at any accredited college or graduate school in the United States or internationally. This includes tuition, fees, room and board, books, and certain other expenses deemed eligible.

As for 529 prepaid tuition plans, those are less common (only 10 states are currently accepting new applications) and are generally limited to state residents. If available to you, it’s something to consider as prepaying tuition can provide you with some control over the ever-increasing cost of college. Just note that prepaid plans can only be used to cover the costs of tuition and fees, not room and board.

The benefits of 529 savings

The biggest advantages of 529 savings plans are they enjoy tax – deferred growth, and when you make withdrawals to pay for the beneficiary’s qualified education expenses, those withdrawals are income tax free. In other words, if used for their intended purpose, you’ll never be taxed on 529 earnings.

If funds are not used for educational expenses, though, the earnings portion of any withdrawals will be taxed at the recipient’s tax rate, plus a 10% penalty. Note: If your child decides not to attend college, you have the option to transfer the 529 savings account to a qualified family member without income tax consequences.

In addition to the federal tax advantages, many states offer tax deductions or credits for making 529 plan contributions. For example, in New York, individuals can deduct up to $5,000 per year and married couples filing jointly up to $10,000 per year, on their New York State tax return.

Who should save in a 529 plan?

Everyone who can afford it should consider opening a 529 plan. Unlike some other investment vehicles, 529 plans have no income limits, age limits or annual contribution limits.

The only word of caution is to make sure you don’t save so much for college that you do so at the expense of your own retirement. This can cause you to miss out on years of portfolio growth necessary to retire comfortably. With guidance from a financial professional, however, you can prioritize both goals, and 529 plans are widely considered the best way to save for college in a tax-advantaged manner.

How much should you save?

The amount of money you save for college is best determined by how much you can afford while still saving for retirement and other short-term and long-term financial goals. Although it would be ideal to save enough to cover the full cost of attendance, that’s just not feasible for most American families. But that’s OK.

Instead of aiming to pay for the full cost of college, think of 529 plans as just one piece of the college financing puzzle. When you combine 529 savings with other forms of financial aid (like grants, scholarships, and work study), it can help keep student loan debt at a manageable level.

The key is to start early and make regular contributions, just as you do with your retirement accounts. If you start from the time your child is born, you’ll have 18 years of compound interest growth. Take a look at how a monthly investment can grow over time (assuming a 6% rate of return):

Monthly investment

5 Years

10 Years

18 Years

















Even if you decide you can only make minimal contributions or add a lump sum here and there, every dollar counts, especially since they can grow exponentially over time. Consider setting up automatic deposits for an amount you can afford so you don’t even have to think about it. You can also ask family and friends to contribute to the fund in lieu of other gifts for your children.

Adding a college savings strategy into your overall financial goals is doable, and 529 plans are a very attractive way to get started. When you’re ready to open one, seek out an experienced financial planning professional to help you with your investment choices, and to find the right balance for each of your savings goals.


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