How do I save for college with a 529 plan?

A 529 plan is the most tax-efficient account most families can use for education savings — contributions grow tax-free and withdrawals for qualified education expenses are never taxed federally. The mechanics are governed by Section 529 of the Internal Revenue Code and administered through state-sponsored programs. You don't have to use your own state's plan; you can open any state's 529 regardless of where you live or where the student will eventually enroll.

Step 1: Choose a plan

Start by checking your own state's plan first. Many states offer a state income tax deduction or credit for contributions to their in-state 529 — that's free money on top of the tax-free growth. If your state offers no deduction (or you've already maximized it), compare plans from other states on factors like investment options, fees, and flexibility. The SEC's investor bulletin on 529 plans explains what to look for when comparing plans.

Step 2: Open the account and name a beneficiary

You — the account owner — open the 529 and name a beneficiary (typically your child). The owner controls the account and can change the beneficiary at any time to another qualifying family member with no tax consequence. This flexibility matters: if one child doesn't need the funds (scholarship, alternative path), you can redirect to a sibling or even yourself for graduate school. Under SECURE 2.0, up to $35,000 of unused funds can also be rolled into a Roth IRA for the beneficiary after 15 years.

Step 3: Choose an investment strategy

Most 529 plans offer age-based portfolios that automatically shift from growth-oriented investments (stocks) toward conservative ones (bonds, stable value) as the student approaches college age. This is the most common starting choice for new savers — you set it and the plan handles the glide path. You can also build a custom portfolio from the plan's menu of investment options if you want more control. You are not choosing individual stocks or specific fund companies — just portfolios within the plan's lineup.

Step 4: Contribute consistently — and consider superfunding

• Regular contributions: Set up automatic monthly transfers from your bank account. Even modest monthly amounts accumulate substantially over 18 years when compounded.
• Lump-sum contributions: Family members (grandparents, relatives) can contribute directly to the 529 — 529 plans accept third-party contributions, making them practical for gifts.
• Superfunding: A special 529 rule lets you front-load five years of the annual gift-tax exclusion in a single year — up to five times the current exclusion per donor — without triggering federal gift tax, as long as no additional gifts are made to that beneficiary during the five-year period. See IRS Publication 970 for full gift-tax rules.

What counts as a qualified expense — and what happens to unused funds

Qualified expenses include tuition and fees, room and board (for students enrolled at least half-time), books, supplies, computers, and up to $10,000 per year in K–12 private school tuition. Non-qualified withdrawals trigger ordinary income tax plus a 10% federal penalty on the earnings portion only — your contributions come out penalty-free. The IRS Topic 313 covers the full expense list. If your child receives a scholarship, you can withdraw up to the scholarship amount penalty-free (though income tax still applies to earnings).