Saving for college is one of the most common financial goals for many parents. College costs are high and rising every year, and families with higher incomes often have fewer options for financial aid, but they are in a fortunate position to save to help cover costs.
This raises an important practical question for many parents early on: Do we need to start a 529 plan for our child, and if so, when?
Before getting into the details, it helps to understand how these plans work at a high level.
A 529 plan is a tax-advantaged savings account designed to help families save for education costs. Contributions are invested, and any growth can be withdrawn tax-free when used for qualified expenses like:
There are no income limits for contributions, and funds can generally be used at most accredited colleges, universities, and trade schools.
529 plans are sponsored by individual states, and several states offer more than one option. However, you are not required to use the plan from the state you live in. Some states provide tax incentives to their residents, but the market is competitive, and you might find another state’s plan more appealing for various reasons.
For example, if you live in Texas, you can use Virginia’s 529 plan to save for your child even if they end up attending college in Florida.
The main advantage of a 529 plan is that contributions can be invested in a variety of options within the plan based on your goals, time frame, and comfort with market volatility. Any growth is not subject to federal tax and generally not subject to state tax when used for qualified education expenses, such as tuition, fees, books, and room and board.
Unlike most other types of accounts, which provide tax-free withdrawals, there is no income restriction on who can set up or contribute to 529s, so they’re a great option for high-income families.
For many families, choosing to start a 529 plan depends on timing and priorities. Starting earlier gives more time for potential growth, but it isn’t the only factor to consider. Families often consider:
A 529 plan can be a helpful tool, but it’s usually just one part of a larger financial strategy rather than a standalone decision.
Even though 529 plans are straightforward in concept, some situations often add complexity.
| Situation | Why It Matters |
| Saving more than ultimately needed | May require reallocating or withdrawing excess funds later |
| Children with different education paths | Requires flexibility across beneficiaries |
| Scholarships or reduced expenses | Creates decisions around unused funds |
| Limited access to other tax credits | Increases reliance on 529 tax benefits |
| Balancing multiple financial goals | Requires coordination with broader planning priorities |
Even with their flexibility, 529 plans can pose unexpected challenges if not used carefully. Here are some common problems families encounter:
It’s natural to want to start saving for college early, especially when children are young. However, putting in more than what's needed can reduce flexibility later, particularly if education plans change.
Plans vary by state in terms of investment options, fees, and potential state tax benefits. Choosing a plan without comparing these factors can impact long-term outcomes.
While 529 plans cover many education-related costs, not all expenses qualify. Misunderstanding this can lead to unexpected taxes or penalties on withdrawals.
Children don’t always follow a traditional path. Scholarships, career shifts, or alternative education routes can all affect how much of the 529 plan is ultimately used.
A 529 plan is just one part of a broader financial picture. Focusing too much on education savings without considering other priorities can lead to tradeoffs elsewhere.
A family begins contributing aggressively to a 529 plan when their child is in elementary school, with the goal of fully funding future college costs. Over time, the account grows more than expected.
By the time their child reaches high school, they receive a partial scholarship and begin considering a less expensive in-state option. The family now has more in the 529 plan than they anticipate needing for qualified education expenses.
At that point, they have several options, such as reallocating the funds to another family member or using newer rules that may allow a portion to be rolled into a Roth IRA, subject to limitations. While the situation is positive overall, it highlights how early decisions can create new considerations later on.
For a deeper look at this type of scenario, you can read more about managing excess 529 plan funds.
One common question people ask is: What should I do with the 529 plan if my child receives a scholarship?
If your child receives a scholarship, you might not need all the money you've saved in your 529 plan for college expenses. In that case, there are several options for using the remaining funds.
While scholarships are one of the most common reasons families find themselves with unused 529 funds, these same options can apply anytime the account balance exceeds what’s ultimately needed for qualified education expenses.
You can keep the funds in the account and use them later for expenses like graduate school or additional training.
You can transfer the 529 plan to another eligible family member, such as a sibling or even a future grandchild.
You can withdraw the unused portion. Earnings will be subject to income tax, but the usual 10% penalty is waived up to the amount of the scholarship.
Under rules effective January 1, 2024, certain 529 funds can be transferred into a beneficiary-owned Roth IRA without tax or penalty, within the set limits.
In effect, the scholarships have turned your tax-free 529 investment into a tax-deferred 529 account. Of course, most scholarships don’t cover all college expenses, so you’ll still be able to use the 529 for other costs like room and board, books, and supplies.
The best approach depends on how your child’s education plans develop and how you want the funds to support future goals.
Yes. There are no income limits to contribute, and tax-free growth can be especially beneficial for families who might not qualify for other education-related tax benefits.
Funds can be transferred to another beneficiary, saved for future education, withdrawn (with taxes on earnings), or possibly rolled into a Roth IRA under current rules.
Yes. Qualified expenses may include room and board, books, supplies, and certain other education-related costs.
529 plans are still among the most flexible and tax-efficient options for saving for education, especially for high-income families. At the same time, deciding when and how much to contribute isn’t usually made in isolation. It’s often part of a broader set of financial priorities that change over time.
If you're thinking about when — or whether — to start a 529 plan, it’s useful to consider that choice within the context of your overall financial goals.
We partner with families to align education savings with retirement planning, tax strategies, and long-term priorities, so every decision supports the bigger picture. Connect with our team now.
• IRS Publication 970: Tax Benefits for Education
• SECURE Act 2.0 (529 to Roth IRA rollover provision)
• Savingforcollege.com – 529 Plan Overview
• College Board – Trends in College Pricing
There is no guaranteed rate of return. The risk with a 529 Plan is that the investments may not perform well enough to cover the rising cost of college as anticipated. Past performance does not guarantee future results.
The state where you reside or pay taxes may offer its own qualified state tuition program under Section 529 of the Internal Revenue Code with state tax advantages or other benefits exclusively for its residents or taxpayers. You should carefully review information about and consider such a plan, if any, as well as any tax advantages and benefits it offers, before choosing to contribute to it or another 529 plan program. Depending on your state of residence, a particular 529 savings plan program might not afford you state tax benefits. As with all tax-related decisions, consult your tax advisor. 529 Plans are state-sponsored investment programs. Municipal fund securities are sold by offering statement, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. 529 Plans are state-sponsored investment programs. There is no guarantee by the issuing municipality or any government agency. There may be tax benefits and other advantages to plans offered by your resident state. You should consider the potential benefits (if any) offered to residents by your own state’s plan (if available) prior to considering another state’s plan. With very few exceptions, if withdrawals are made from a 529 Plan for purposes other than education, they are considered non-qualified withdrawals, and they are subject to federal - and possibly state - tax penalties. Specifically, the earnings portion of the non-qualified withdrawal will be included in the recipient’s gross income for federal tax purposes, the earnings will be subject to a 10% federal tax penalty, and in some states, additional state tax penalties may apply to the earnings. As with all tax-related decisions, consult with your tax advisor. Please note that assets in a 529 Plan could impact the beneficiary’s ability to qualify for grants and student loans. Annual asset charges for a 529 plan may be higher than corresponding share classes of underlying mutual funds.
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Shane Tenny, CFP®, is the Managing Partner of Spaugh Dameron Tenny and a nationally recognized financial advisor. Since 2000, he has combined extensive financial knowledge with a passion for behavioral finance—helping clients make informed decisions based on both data and mindset. Shane often contributes to industry publications, appears as a guest on podcasts, and has been a leader in the financial planning field for years. He is known for making complex topics clear and practical for busy, high-income professionals seeking personalized advice they can trust.
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