Kitchen Table Economics

How 529 Plans Help You Save for College

As you know, college is expensive. According to the College Board, a “moderate” college budget for an in-state public college for the 2016–2017 academic year averaged $24,610, while a moderate budget for a private college comes out to $49,320. Today’s most expensive colleges hover around $70,000 per year.

Saving enough money to attend one—or send your children to one—can be a daunting task.

Fortunately, there’s something out there called a 529 plan. This is an education savings plan operated by a state or educational institution designed to help families invest and set aside funds for future college costs. It can be used to meet costs of qualified colleges nationwide. You can be a California resident, invest in a Vermont plan, and send your student to college in North Carolina.

As long as the plan satisfies a few basic requirements, the federal tax code provides you special tax benefits (the invested money grows tax-free). 529 plans are usually classified as either prepaid or savings plans:

  • Savings Plans work like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan offers you several investment options.
  • Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges.

You can see a list of 529 plans here.

Watch this video to learn more about 529 plans: