A 529 plan offers tax-free growth for education expenses, and new rules allow unused funds to roll over to Roth IRAs. This guide explains how to choose the best plan and maximize your savings.
529 Plan Quick Facts 2025
- Tax benefit: Tax-free growth and withdrawals for education
- Contribution limit: Up to $18,000/year (gift tax free)
- Superfunding: $90,000 at once (5 years of gifts)
- New in 2024: Roll unused funds to Roth IRA (up to $35K lifetime)
- Use for: College, K-12 tuition, trade schools
Best 529 Plans 2025
| State Plan | Min Investment | Expense Ratio | State Tax Benefit | Rating |
|---|---|---|---|---|
| Utah my529 | $0 | 0.11-0.16% | Utah residents | |
| Nevada Vanguard | $3,000 | 0.14% | None | |
| New York 529 | $25 | 0.13% | NY residents ($5K deduction) | |
| Ohio CollegeAdvantage | $25 | 0.17% | OH residents ($4K deduction) | |
| California ScholarShare | $25 | 0.05-0.43% | None (no CA income tax) |
How 529 Plans Work
TAX-FREE
Tax Benefits
- Contributions: After-tax (but some states offer deductions)
- Growth: Tax-free while invested
- Withdrawals: Tax-free for qualified education expenses
- State benefits: 35+ states offer tax deductions or credits
Qualified Expenses
- College tuition and fees
- Room and board (if enrolled at least half-time)
- Books and supplies
- Computers and internet access
- K-12 tuition (up to $10,000/year)
- Apprenticeship programs
- Student loan repayment (up to $10,000 lifetime)
New Roth IRA Rollover Rule
Starting 2024: 529 to Roth IRA
Unused 529 funds can now be rolled into a Roth IRA for the beneficiary:
- Lifetime limit: $35,000
- Annual limit: Roth IRA contribution limit ($7,000 in 2025)
- Account age requirement: 529 must be open 15+ years
- 5-year rule: Contributions from last 5 years excluded
This eliminates the fear of "what if my child doesn't go to college?"
How Much to Save
| School Type | 4-Year Cost (2024) | Monthly Savings (18 yrs) |
|---|---|---|
| Public In-State | $100,000 | $350 |
| Public Out-of-State | $180,000 | $600 |
| Private University | $240,000 | $800 |
| Elite Private | $320,000+ | $1,100+ |
*Assumes 5% tuition inflation and 7% investment returns
Choosing the Right Plan
Consider Your State's Plan If:
- Your state offers a tax deduction or credit
- The plan has low fees (under 0.3%)
- Good investment options available
Consider Out-of-State Plans If:
- Your state has no tax benefit
- Out-of-state plan has much lower fees
- Better investment options elsewhere
Investment Strategies
Age-Based vs. Static Portfolios
- Age-based (recommended): Automatically becomes more conservative as child approaches college
- Static: You choose and maintain allocation (more work)
- Index funds: Lower fees, better long-term performance
Common 529 Mistakes
- Choosing wrong state: Not checking if your state offers deduction
- High fees: Some plans charge 1%+ (should be under 0.3%)
- Starting too late: Compound growth needs time
- Overfunding: Can trigger penalties if unused
- Wrong beneficiary: Can easily change, but plan ahead
- Not using for K-12: Up to $10K/year now allowed
529 vs. Other Education Savings
| Option | Tax Benefit | Use Restrictions | Best For |
|---|---|---|---|
| 529 Plan | Tax-free growth | Education only | Most families |
| Coverdell ESA | Tax-free growth | $2K/year limit | K-12 flexibility |
| UTMA/UGMA | Kiddie tax rates | No restrictions | Non-education use |
| Roth IRA | Tax-free growth | Retirement (mostly) | Dual-purpose savings |
Getting Started
- Check your state's plan: Look for tax benefits and fees
- Compare top plans: Utah, Nevada, New York often best
- Open account online: 15-30 minutes, need SSN for beneficiary
- Set up automatic contributions: Even $100/month helps
- Choose age-based portfolio: Simplest for most families
- Share with family: Grandparents can contribute too