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Understanding 529 Plans: A Guide to Smart Education Savings

May 29, 2024

Understanding 529 Plans: A Guide to Smart Education Savings

What is a 529 Plan?

A 529 plan is a specialized savings and investment account designed to help you save money in a tax-advantaged way for future education costs. Here are three key aspects to understand about 529 plans:

  1. Tax Deductions for Contributions: As the account owner, the money you contribute to a 529 plan may qualify for a state tax deduction, especially if you reside in Georgia. Not only can you contribute, but family and friends can also add to the account. For instance, even though I don’t have kids, I contribute to my two nieces’ 529 plans because I want to support their future education.

  2. Tax-Free Growth: The earlier you start contributing to a 529 plan, the more you benefit from tax-free growth, thanks to the power of compound interest.

  3. Tax-Free Withdrawals for Qualified Expenses: Perhaps the most significant benefit of a 529 plan is that you can withdraw money tax-free for qualified education expenses, which encompass more than just college tuition.

Types of 529 Plans

There are two main types of 529 plans: Prepaid Tuition Plans and Savings Plans. It's crucial to understand the differences between them:

  • Prepaid Tuition Plans: These plans allow you to pre-pay for a specific college’s tuition at current rates. This can be highly beneficial given the rising costs of education. However, they are best suited for families who are confident that their child will attend a participating school.

  • Savings Plans: These are more flexible and typically a better fit for most families. They can be used for any qualified education expense, including: 
    • Private school tuition for K-12
    • College tuition
    • Vocational or trade school costs, such as culinary or cosmetology school
    • Room and board
    • Books
    • Computers and printers
    • Internet service

What If My Child Doesn’t Go to College?

A common concern among parents is what happens to the 529 funds if their child doesn’t go to college. Fortunately, there are several options available:

  • Withdraw the Money: You can withdraw the funds, although you will incur taxes and penalties unless certain conditions are met.
    • If your student receives a tax-free scholarship, attends a U.S. Military Academy, dies or becomes disabled, the penalty could be waived. 


  • Change the Beneficiary: You can change the beneficiary at any time to another qualifying family member (even yourself) and still get the money out tax free if it is used for qualified education expenses.

  • Rollover to a Roth IRA: A new option allows you to roll over a portion of unused 529 funds into a Roth IRA in the student's name. Not only does this alleviate parents’ and grandparents’ fears of the money being left unused, but it also helps your child jump start their tax-free savings for retirement.

    • The Details: If you have a 529 account that’s at least 15 years old, you will be able to roll over up to $35,000 of unspent funds into a Roth IRA account, thanks to a provision from the SECURE Act 2.0 of 2022. This option is brand new and has some restrictions, so we recommend consulting with a professional to help with this process.

No Savings for College? You’re Not Alone
It’s common for families to struggle with saving for college amidst other financial responsibilities. In fact, I recommend building a sound financial house for yourself first. This starts with tackling consumer debt, then building up a solid emergency fund, and finally contributing to retirement or investment accounts for your own future. After all, your student can take advantage of scholarships, grants, and loans for college, which aren’t available for your retirement. Here’s some advice if you find yourself in this situation:

  • Explore Scholarships, Grants, and Loans: There are numerous financial aid options available. In Georgia, the HOPE and Zell Miller Scholarships have helped over 2 million students afford college. There are resources that can help match students to scholarships:

Online Scholarship Databases

  1. Fastweb: One of the largest and most popular scholarship search engines. It offers a comprehensive database of scholarships, financial aid information, and career planning resources.
  2. College Board Scholarship Search: A trusted source that matches students with scholarships and other financial aid options based on their profiles.

Government Resources

  1. Federal Student Aid: The U.S. Department of Education’s website provides information on federal grants, loans, and work-study programs. It also links to the FAFSA (Free Application for Federal Student Aid) application, which is essential for accessing federal financial aid.
  2. State Education Agencies: Each state has its own education department or agency that offers grants and scholarships for residents. For example, in Georgia, the Georgia Student Finance Commission provides information on the HOPE and Zell Miller Scholarships.

  • Be Flexible and Open-Minded: Sometimes, the best financial decision might not be the most glamorous one. For example, I initially wanted to attend college in California but chose to stay in Georgia to take advantage of the HOPE Scholarship. This decision allowed me to save money and ultimately, I fell in love with my school. Trade schools have also become more popular than ever, with the high cost of college prompting many Gen Zers to change their career paths.

Remember, it’s never too late to start saving or exploring options to support your child’s education. The earlier you start, the more time your money will have to compound and work for your benefit. For more information and personalized advice, schedule a one-on-one meeting with one of our advisors! 

Sources: 

Saving for College

529 Plan: What It Is, How It Works, Pros and Cons (investopedia.com)

HOPE | Georgia Student Finance Commission

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