What is a 529 Plan and at What Age Should I Start One for My Child?



As the cost of college continues to rise at alarming rates, you might be concerned by how much it will actually cost by the time your child is college age.

Understanding the best ways to save money for your children’s education — and how much to save — is key to easing the stress of the process. Starting a 529 plan can help you do so in a way that reduces the burden for you and your child.

What is a 529 plan?

A 529 plan is a savings account that you put money into tax-free. It won’t be taxed upon withdrawal if you spend it on college tuition or related expenses, such as room, board, or books. A 529 plan can also help save for tuition for private K-12 schools.

529 plans can be set up by anyone for any beneficiary, like a child, grandchild, or even for yourself. There is no limit on how many 529 plans you can set up, though there may be a limit on how much you can contribute tax-free.

If you are saving for college, a 529 plan is key to growing your investment. If you were to just open a regular savings account, any financial growth would be taxed. A 529 plan will protect you from these taxes, and could grow at approximately 8 percent annually if managed wisely.

How do I start a 529 plan?

Because there are limits to how much you can put into a 529 account, and there are tax deductions involved, it’s best to start by talking to an accountant or financial adviser.

Most states will provide a state tax deduction. For Pennsylvania residents, contributions to any plan (whether an in-state plan or an out of state plan) are tax-deductible. The PA529 Plan is managed by Vanguard and can be opened with as little as $25 – but you have the option to choose another state’s plan if you find the terms more favorable.

When choosing your investments, most people chose an aged-based plan. When your child is younger, you make riskier investments with a potential larger pay-out. As they become closer to college age, the plan will invest in more conservative options, protecting the funds.

When should you start a 529 plan, and how much do you need to save?

If you want to save as much as possible, you’ll want to start saving when your child is born.

But don’t worry- it’s never too late to start saving. Look at a college savings calculator, like Fidelity's, which takes into account your specific situation; income, child age, etc. 

Set a goal for yourself based on how much you want to save. Start factoring that in on a month-by-month basis to your budget.

Finally, put in all of the money your child receives as gifts for holidays and birthdays.

Here’s a breakdown based on your child’s age what you ideally should be saving:

  • Newborn to 10 years old: When opening your 529, it’s ideal to deposit as much as possible up front so you have the full 18 years of growth. But even $25 will help open an account and you can save a little each month.
  • 10 to 15 years old: This is a key time to help grow your savings. Five to seven years of growth at an average of 8 percent return can help mitigate the cost of college substantially.
  • 15 to 20 years old: It’s really never too late to start saving. Even if your child is now a junior or senior in high school, you can save money, and have two to five years of growth in your savings. You’d ideally leave it in the 529 for at least a few years, and pay for the final years of college tax-free.

What about private elementary and high schools?

529 plans also give tax-free advantages to families that want to send their child to a private school. 

The 2018 tax law for 529 plans allows up to $10,000 a year to be used for K-12 tuition. The earnings on any withdrawals are also currently tax-free on the federal level. It’s important to note most states have their own laws, so it’s best to consult with a financial advisor.

Sabrina is Co-founder of Edmit, which helps families make smarter financial decisions about college. She manages Edmit’s advising network and educational content. She was previously an AVP at Southern New Hampshire University, where she led growth and marketing for the College for America program. Sabrina has worked with leading higher education institutions throughout her career to better serve students and their missions. Her prior experience includes work with education technology companies, Pearson, and Ithaka. Sabrina has an MBA from Stanford and a BA from Yale.