College costs have outpaced inflation for decades. A four-year degree at a private university now averages $220,000+. A 529 plan won't fully solve that — but it's the best tool available to chip away at it tax-free.
How 529 Plans Work
- •After-tax contributions go in (no federal deduction, but 34 states offer a state tax deduction)
- •Money grows tax-free in investment funds similar to a Roth IRA
- •Withdrawals for qualified education expenses are completely tax-free
- •Qualified expenses: tuition, fees, books, room & board, computers, K-12 tuition (up to $10k/year)
- •Non-qualified withdrawals: earnings taxed as income + 10% penalty
2025 Rules and Limits
- •No annual contribution limit set by IRS (it's a gift tax question — $19,000/year per donor without gift tax filing)
- •Superfunding: Contribute 5 years of gift tax exclusions upfront ($95,000 per donor, $190,000 per couple)
- •Account balance limits: Vary by state, typically $300,000–$550,000 per beneficiary
- •New in 2024: Up to $35,000 of unused 529 funds can roll into a Roth IRA for the beneficiary (after 15 years)
- •Ownership: Parent-owned 529s count less against financial aid than student-owned accounts
Which State's 529 Should You Use?
- •If your state offers a tax deduction: Use your home state's plan first (up to the deduction limit)
- •If your state has no deduction or poor investment options: Utah (my529), Nevada (Vanguard), or New York plans are highly rated
- •You can use any state's 529 at any college in any state (and many international schools)
- •Compare expense ratios — even 0.1% difference compounds significantly over 18 years
Start early. $200/month from birth to 18 at 7% return = ~$92,000. Waiting until age 8 and investing the same total = only ~$48,000 — nearly half, because of 8 fewer years of compounding.