College is one of the most costly endeavors for many Americans. In 2024, an in-state student’s average cost of attending a four-year college was $27,146 per academic year. A private, non-profit university costs an average of $58,628 per academic year.

With rising college costs, many people are saving for college with accounts, such as 529 plans, to help them save for college expenses. 529 plans offer a tax-advantaged savings plan that encourages saving for future educational expenses. 

Continue reading to learn more about a 529 plan, how it can help you save for college, and the important deadlines that must be met to receive full benefits.

What is a 529 Plan?

Named after section 529 of the IRS code, which governs the plan, a 529 plan is a tax-advantaged account designed to help save money to pay for future education costs. Initially started to cover postsecondary education expenses, the plans were expanded to cover the costs of K-12 education. 

Moreover, through the SECURE Act of 2019 and SECURE Act 2.0 of 2022, the government allows 529 funds for student loan repayment and Roth IRA contributions. 

529 plans provide a variety of investment options. These options vary by plan, but they typically include investment portfolios, such as an age-based portfolio, in which asset allocations are automatically adjusted as the beneficiary’s age approaches college. 

For example, at the early phase of the investment, it prioritizes allocating funds to stocks with higher returns but higher risks. However, as the beneficiary approaches college, these portfolios may adjust and shift to a more secure investment option, such as bonds or money market funds. 

Another option is a static portfolio, which allows investors to choose a specific asset mix regardless of the beneficiary’s age. Some plans may also offer customization, allowing investors to create portfolios from available mutual funds or exchange-traded funds.

The beneficiary is the individual who will receive the account and use it for educational purposes. There is no age limit for the beneficiary, nor is there a limit on the number of 529 accounts. However, the beneficiary will not have control over the account unless it is in their name. 

State governments or educational institutions sponsor and administer 529 plans. The plan sponsor provides the platform and oversees the plan’s operations and investment options. 

Types of 529 Plans

Prepaid Tuition Plans

Prepaid tuition plans allow you to pay for the entire or a portion of some colleges’ tuition fees at the current rate and lock it in until you need it for college. Tuition plans increase in value over time, and withdrawals from the account are not taxable. 

However, as the name implies, the plan only covers tuition and not other expenses like room and board. Therefore, careful consideration is required before investing in prepaid tuition plans.

Education Savings Plans

Education savings plans invest money in mutual funds or other types of investments. Education savings accounts, like prepaid tuition plans, grow in value over time, and withdrawals are tax-free. 

Unlike prepaid plans, college savings can be used to pay for tuition, room and board, other educational expenses, and K-12-qualified expenses. As previously stated, the SECURE Act of 2019 and 2022 expands 529 plan withdrawals to include registered apprenticeship program expenses and student loan debt repayment.  

Benefits of a 529 Plan

A 529 plan is an attractive option for an educational savings account because it offers many benefits. First, putting your money in a 529 plan allows you to grow its value over time and receive many tax advantages. For instance, withdrawals for qualified education expenses, such as tuition, room and board, books, and supplies, are not subject to federal income tax. 

Secondly, a 529 plan offers diverse investment portfolios, and the account holder can opt for one that suits their personal preferences. Options to change the beneficiary are also flexible, with the plan allowing the change of the account’s beneficiary to another family member or adding more plans to the existing beneficiary. 

Third, the contribution limit is high, with some states allowing total contributions over $300,000. And unlike retirement accounts, there’s no annual limit. 

Why Start Saving for College with a 529 Plan?

As the cost of attending college continues to rise, the time to begin saving for it is now. A 529 plan allows you to gain compound growth and make tax-free earnings, maximizing your savings for the eventual cost of your education. 529 plans provide financial security for the people you care about, allowing them to embark on one of life’s most important phases: education. 

If other issues are at hand, such as student debt, some plans, such as a college savings plan, allow funds to be used to repay student debts. A 529 plan is a useful tool for securing educational funds, with numerous advantages and flexibility. 

Important Deadline for 529 Plans

Staying up-to-date with the deadline for 529 plans is crucial for saving for college. Here are some dates to look for:

Year-End Contribution Deadline

The year-end contribution deadline requires contributions to be made by December 31st to receive tax benefits for the current year. Ensure you contribute before the deadline, as the processing time varies depending on the plan provider and could result in missing out on tax benefits. 

State-Specific Deadlines and Contribution Limits

Some states may have different contribution deadlines and limits. Therefore, you must check with your state’s representatives. Many states, including Pennsylvania, follow the December 31st year-end contribution deadline to qualify for income tax benefits. Each beneficiary can deduct up to $16,000, or $32,000 for married couples.

Another important contribution deadline in the state of Pennsylvania is August 31. Contributions made to the state’s GSP (Guaranteed Savings Plan) before August 31 receive tuition inflation, which is typically applied on September 1. 

How to Maximize Savings with a 529 Plan

1. Start Early and Make Consistent Contributions

As education is a long journey, you want to start saving for it early in the game. The earlier you start, the more you can benefit from the compound growth. It’s also a good idea to make regular contributions to your 529 savings account so that you can benefit from the value growth and tax-free withdrawal.

2. Choose the Right 529 Plan for Your Family

Every family has different needs and preferences. Therefore, spend some time researching what plans your state offers and which investment portfolio is best suited to your needs.  Assess the risks associated with each plan and weigh the costs and benefits for your family’s long-term growth.   

3. Increase Contributions as Needed

If you have the opportunity to put more funds into your 529 plan, such as when you receive a bonus or raise, consider increasing your contributions to strengthen your investment.  

Encourage family members to contribute to the savings account as a gift rather than traditional gifts for special occasions like birthdays or holidays. You can also take advantage of the super-funding option, which allows you to make up to five years’ worth of contributions in one year.

4. Understand Qualified Education Expenses

It’s of utmost importance that you understand what qualifies as education expenses, as the tax benefits you receive from a 529 plan only apply if you spend the money on those expenses. Using funds for non-educational purposes may result in penalties. 

5. Monitor & Adjust

Monitoring and evaluating your 529 account is important. Regularly checking your savings allows you to make decisions to maximize results and prevent mishaps. 

Butson Financial Advisors Can Help You Prepare for College Savings

With ever-increasing educational costs, saving for education is an important step everyone should take promptly. Savings account options, such as 529 plans, allow you to invest your money and watch it grow in value, with the added benefit of withdrawing funds tax-free when needed for education. 

Analyzing your finances and choosing the right 529 plan that aligns with your goals can be easier said than done. That’s why Butson Financial Advisors are here to assist you in personalizing your financial plan, navigating options such as the 529 plan, and developing an investment strategy that maximizes opportunities while minimizing financial burdens. 

Allow us to partner with you in this important endeavor. Schedule a consultation today, and we’ll be happy to answer any questions you have about saving for college, setting up a 529 plan, and more!