How 529 College Savings Plans Work, and The 5 Best Out There

profile Brett Holzhauer  |  May 22, 2023

Saving for college can be an anxiety-filled goal for many as millions struggle with student loan debt. But with this current crisis fresh in our heads, it can be all the more reason to begin saving for college for your children, or any other beneficiary you wish to help with education costs. You can save in a tax-advantaged account called a 529 plan.

529 plans are state-sponsored accounts funded with post-tax dollars (similar to a Roth IRA) generally associated with saving for a child’s college tuition. You can also use them from K-12 education expenses as well.

Within a 529 account, you can choose the investments you want to put your money towards to begin hopefully growing your dollars. However, if the funds aren’t used for education related expenses, there may be penalties associated with getting the funds out of the account.

There are many 529 plans to choose from, and you don’t need to necessarily use the 529 plan associated with your state. Some states offer their residents even more benefits, so be sure to look at your home state first before considering others.

Here’s what you need to know about 529 plans, and the best ones currently available.

How 529 Plans work

If you have aspirations of your children eventually pursuing a higher education, or you plan on sending them to private school, a 529 plan is a tax-advantage plan to help you begin saving towards those goals.

You’re able to take post-tax dollars and invest them within a 529 plan for your children or other designated recipients. All 50 states and Washington D.C. have their own versions of the 529 plan, and you’re able to select any state plan — regardless of where you live.

Additionally, if you have multiple children that you want to save for, you can transfer beneficiaries of who will receive the funds — rather than having to open multiple accounts for multiple children. You can also do this in the case where your kids don’t need the funds, or decide to not pursue a secondary education.

If the funds aren’t used for education-related expenses and you wish to withdraw the funds, you will owe federal income tax on the gains and a 10% penalty — similar to a Roth IRA.

Lastly, there is no contribution amount for a 529 plan. However, it’s important to be mindful of how much you’re investing in the case where your ideal beneficiaries may or may not need the full amount.

Examples of investing in a 529 plan

Here are a few hypothetical examples of how much you could potentially stash away for your children in a 529 college savings plan. Remember that “time in the market beats timing the market” — meaning the sooner you invest and give your money time to work, the likelihood your investment could pay off.

Example #1

Let’s say you just welcomed your first child to the world. An exciting and hectic time to say the least. But along the way, you prioritize saving for college by putting $100/month away in a 529 plan. By the time your child is ready to go to college (let’s assume at 18 years old), you have put in $21,600 of your own money. However, by investing that money and earning a 7% return over the 18 years, your money could potentially double to over $43,000.

Example #2

As life progresses, maybe you decide to have more than one child. Let’s say you have a family with three children, and you want to save for all three. Let’s say you contribute $150/month for a total of 20 years before you pull the brakes. This equates to $36,000 of your own money, and at a 7% rate of return — your kids will have nearly $79,000 in money to use towards their higher education costs.

Example #3

Let’s say during your children's early years that contributing to a 529 plan wasn’t in the picture — that’s okay! You can definitely catch up and still earn valuable returns.

Let’s say you have a child that is 10 years old and you want to begin saving for college today. Let’s say you get aggressive by saving $500/month for the next eight years. This is a total of $48,000 of your own money. At a 7% return rate, you can grow that to $65,000. And as your child is in college, you can take out what you need and let the remainder continue to grow as they study.

The best 529 plans available

While each 529 plan has the same goal, they aren’t all created equally. Each state-sponsored plan comes with its own unique investments, fees and potential benefits for those that are in-state residents. So as you’re searching for plans, it’s best to compare each of them to find the best plan provider for you — while first looking at your home state for any potential tax benefits.

I live in Florida, and because Florida has no state income tax, the Florida 529 Savings Plan doesn’t offer any additional tax benefits.

However, there are a few that have ranked highly as some of the best 529 college savings plans available. They are:

This is not an exhaustive list, so be sure to search for the best 529 college savings plan that works for you and your family.

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