529 College Savings Plan


What Is a 529 Plan?

A 529 plan is an investment plan designed specifically to help families save for college. It functions much like an IRA or 401k: you have the choice to contribute regularly and benefit from tax-deferred growth. All of the distributions you take out of the plan are also tax-free, as long as the money is spent on education-related expenses. 529 plans also offer parents quite a bit of flexibility, since you can use the funds for both college and vocational school, as well as to pay for room and board.


All fifty states and the District of Columbia have at least one 529 plan and are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. ­ There are two types of 529 plans:­

  1. Pre-paid tu­ition plans
  2. College savings plans 


The process of setting up a 529 plan is relatively straightforward. You begin by selecting a 529 plan from one of the thirty-two states or the District of Columbia. Each of these states/jurisdictions offer their own unique 529 plans, and the fees or benefits associated with each one will vary. Once you’ve selected a plan, you’ll need to decide who will be the plan beneficiary – typically, it will be the parent’s dependent child or grandchild. Once this is established, you can begin contributing to the plan on a tax-advantaged basis.


Features of a Prepaid Tuition Plan 

  • Locks in tuition prices at eligible public and private colleges and universities.
  • All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.
  • Most plans set lump sum and installment payments before purchase based on the age of beneficiary and number of years of college tuition purchased.
  • Many state plans are guaranteed or backed by the state.
  • Most plans have an age/grade limit for the beneficiary.
  • Most state plans require either owner or beneficiary of the plan to be a state resident.
  • Most plans have a limited enrollment period.


Features of a College Savings Plan 

  • No lock on college costs.
  • Covers all "qualified higher education expenses," including Tuition, Room & Board, Mandatory Fees, Books, and Computers
  • Many plans have contribution limits up to $200,000.
  • No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value. Members can invest in the stock market, mutual funds, and other investments.
  • No age limits. Open to adults and children.
  • No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.
  • Enrollment is open all year.


How does investing in a 529 plan affect federal and state income taxes? 

Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. You should consult a Tax Advisor before starting a plan.


What fees and expenses are associated with a 529 plan? 

Fees and expenses vary from plan to plan. You should see the plan prospectus to learn more. Certain state-sponsored plans have no fees. Certain institution-sponsored plans may have very low fees.


What other things should I consider or keep in mind?

  • Are you looking to get Financial Aid? If yes, then a 529 plan may reduce the amount of aid.
  • Do not invest in a 529 plan at the expense of your 401K. Your 401k should be a priority as your child can always get financial aid or a student loan.
  • Learn about all the fees and restrictions before selecting a plan.


Co-parents and College Savings Plan

If you’re a co-parent or separated-parent, planning for college as a single parent requires that you take special considerations into account. The key here is to ensure that each parent is financially responsible for their share of the future tuition or living expenses. To make this happen, both parents should set up a separate 529 plan, and specify that it’s for their own, specific share (their children’s mother’s 529 plan and her children’s father’s 529 plan, for example). Generally speaking, each parent is allowed to contribute up to $15,000 per child, depending on the 529 plan.



Parents who are divorced or separated may also want to consider the impact their 529 plan might have on other financial aid that may be available to their children. For example, when a student applies for financial aid through the Free Application for Federal Student Aid (FAFSA), only the value of one parent’s 529 plan will be counted as part of the student’s assets. This means that both parents can save on a tax-advantaged basis and use their savings for college expenses, without the value of their respective 529 plans impacting the student’s ability to obtain other forms of financial aid.


Staying on Top of Contributions and Extensions

It’s important for co-parents and separated parents to stay on top of their 529 plan contributions, as well as any extensions that may be available. To insure that each parent’s 529 plan remains independent of each other, each parent should make contributions to their own accounts on a regular basis. This will not only make it easier to track each parent’s share of college expenses, but also ensure that neither parent’s account is unduly impacted by the other’s contribution. In addition, if the co-parent or separation occurred while the student was enrolled in school, some 529 plans may offer an extension to help cover ongoing costs. This kind of option may vary by state, so it’s important to review the specifics of your plan to ensure you are taking advantage of all available opportunities.


Getting divorced or separated is an emotionally and financially difficult situation for families. When children are involved, it’s even more important to ensure that each parent's financial responsibilities are taken seriously and that adequate funds are available to cover their share of the college costs. With a 529 plan, co-parents can save on a tax-advantaged basis to fund their part of the college education for their children. By keeping the accounts separate, each parent can independently contribute to their own 529 plan and be assured that their savings won’t impact the amount of financial aid their children may be eligible for. In this way, 529 plans can be a powerful way for separated or divorced parents to contribute to their children’s future success.


What if both parents disagree on the idea of a 529 plan?

A disagreement about the 529 plan is very well possible if both parents are not on good terms.  If required, an agreement should be part of a divorce decree, and only a financial hardship should give a parent an exception. Co-parents can consult their financial advisor to determine how much money they need to set aside to fund their children's education. If they wish to go to college themselves, they can also start a 529 college saving plan. 


Things to consider while setting up a 529 plan

When setting up a 529 plan, there are several things that divorced or separated parents should consider.

  1. Choose the right plan. The first step is to choose the right 529 plan. While there are several options available, it is important to find a plan that meets the needs of you and your child. Different plans may have different features, so it is important to research and compare the various plans before making a decision.
  2. Understand the rules and restrictions. 529 plans have certain rules and restrictions that it is important to understand. For example, some plans may have age or residency restrictions, and withdrawals may be limited to qualified higher education expenses. It is important to read the fine print and make sure that the 529 plan you choose meets your needs and the needs of your child.
  3. Set up a budget. Once you have chosen a 529 plan, it is important to set up a budget for contribution amounts. It is important to make sure that contributions are manageable, as each parent is responsible for covering their share of the costs. It is also important to have a plan for covering unexpected costs, such as tuition increases.
  4. Make sure to save regularly. In order to make the most of the 529 plan, it is important to save regularly. This means setting up automatic contributions to the account or creating a reminder system to make sure the plan stays on track. Putting the plan on autopilot can help to ensure that the funds will be there when they are needed.
  5. Consider other options. 529 plans are not the only way to save for college, so it is important to explore other options as well. Scholarships, grants, and other forms of financial aid may be available, as may tax credits and deductions. It is important to research all of these options in order to find the best way to fund your child’s higher education.


529 Plans by State




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Warning:  This post is neither financial, health, legal, or personal advice nor a substitute for the advice offered by a professional. These are serious matters, and the help of a professional is recommended as it can impact your future.

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