Initiated in 1996, 529 plans are one of the best ways to save for your child’s college education. These state-sponsored investment accounts offer tax-free earnings and withdrawals that can be used for tuition, books, computers and more.
Initially, the funds could only be used for educational expenses. If you withdrew money for another reason, you’d pay income tax and a stiff penalty. That could be a real problem if your child didn’t go to college or didn’t need all the money for education.
That restriction was lifted in 2024, however, and money in a 529 plan can be rolled over into a Roth IRA account without a tax penalty.
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What is a 529 plan?
A 529 college savings plan, also known as a qualified tuition program, is an investment account with tax-deferred earnings and tax-free withdrawals. Initially, the funds had to be spent on post-secondary education, but over the years the parameters expanded to include tuition for kindergarten through high school, continuing education, apprenticeships and up to $10,000 in student loans.
Each state offers its own 529 plans, though most are available to all US residents. In-state account holders may enjoy special benefits, like tax deductions and matching grants.
There are two main types of 529 plans: Education savings plans, which grow tax-deferred and have tax-free withdrawals if used for educational expenses, and prepaid tuition plans, which enable account holders to pay current tuition rates for future attendance at specific state institutions.
One of our top picks is My529 (Utah), which has a range of age-based portfolios that automatically rebalance to become more conservative as the child approaches college age. Fees are relatively low, and there is no minimum contribution or balance requirement.
my529 (Utah)
Information about my529 has been collected independently by CNBC Select and has not been reviewed or provided by the issuer prior to publication.
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Minimum opening balance
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Maximum overall contribution
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Portfolio options
4 age-based options with various risk tolerance, which automatically rebalances each year; 10 static options based on risk tolerance and U.S. stocks and bonds (investors will need to manually change their allocations); 2 customizable options (either age- or static-based)
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Underlying funds
Investors can choose from Dimensional Fund Advisors mutual funds, PIMCO Interest Income Fund, Vanguard Group funds and FDIC-insured accounts from Sallie Mae Bank and U.S. Bank
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Fees and expenses
Total asset-based expense ratio: 0.131% to 0.136% for my529 target-date options; 0.130% to 0.455% for customized static and age-based options, depending on investment mix; 0.211% for stable value option
While it offers unique tax breaks to Buckeyes, the CollegeAdvantage (Ohio) 529 plan is also available to residents nationwide. It’s one of the top-performing plans for 10-year returns, according to data from SavingforCollege.com, with low-fee portfolios that can be age-based, risk-based or custom-designed.
CollegeAdvantage (Ohio)
Information about CollegeAdvantage has been collected independently by CNBC Select and has not been reviewed or provided by the issuer prior to publication.
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Minimum opening balance
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Maximum overall contribution
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Portfolio options
Choose from age-based, risk-based, DIY options and FDIC-insured accounts
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Underlying funds
Age- and risk-based portfolios from Vanguard; individual options includes ones from Dimensional Fund Advisors and Vanguard
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Fees and expenses
Total asset-based expense ratio: 0.145% to 0.435%
How have 529 plans changed?
Originally, any withdrawals from a 529 plan not used for educational expenses were subject to federal income tax plus a 10% penalty on the earnings portion of the distribution. As of January 2024, however, unused funds from a 529 plan can be rolled over into a Roth IRA account tax-free, in essence turning it into a retirement account.Â
A Roth IRA from Charles Schwab allows you to contribute after-tax money with no monthly service fee or minimum deposit requirement. There are no commission fees for stock and ETF trades and no transaction fees for thousands of mutual funds.
Charles Schwab
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
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Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
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Bonus
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Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account
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Investment options
Stocks, bonds, mutual funds, CDs and ETFs
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Educational resources
Extensive retirement planning tools
The change is one of many updates to retirement savings resulting from the Secure 2.0 Act, passed in December 2022. There are still some restrictions on 529 plans: The account must have been open for at least 15 years before rolling over into a Roth IRA and money contributed in the last five years is not eligible.
Any money rolled over is subject to yearly Roth IRA contribution limits and there is a lifetime transfer cap of $35,000.
FAQs
What is the maximum I can contribute to a 529 plan?
Who has control of a 529 plan?
529 plans are custodial accounts, so an adult has legal control over contributions, investments and disbursals on behalf of a minor. Once the beneficiary turns 18, they can assume control of the account.
Are there fees associated with a 529 plan?
The fees vary depending on the state sponsoring the account. Most frequently, account holders pay an expense ratio, an annual charge based on a percentage of the assets in the account. If you work with a broker, your expense ratio will likely be higher and you may have to pay a commission. 529 plans may also come with enrollment fees, annual fees or monthly account maintenance fees.
Do I have to pay gift tax on contributions to a 529 plan?
You can generally contribute up to $17,000 a year (or $34,000 for married couples) without being subject to the gift tax. Alternatively, you can make a one-time contribution of up to $85,000 ($170,000 for couples).
What’s the disadvantage of 529 plans?
You may have fewer investment options with a 529 plan and the fees may be higher. If you withdraw funds for non-qualified expenses, you’ll have to pay income tax and a 10% penalty on the earnings.
Can you split a 529 plan between siblings?
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