EDITOR'S NOTE: This article was originally published in the October 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.
Dan Danford used 529 college-savings plans to send his three daughters to college. This fall, the 53-year-old St. Joseph, Mo., resident plans to use a 529 account to save money on his own education.
Danford, the chief executive officer of Family Investment Center, an investment-management firm, will enroll in Kansas State University’s graduate program for personal finance. By funneling the $5,000 tuition through one of his state’s 529 plans before he pays the bill, he’ll save 6% on his state income taxes -- a tidy $300 sum. “If you can save some money on taxes, why wouldn’t you do that if you have the chance?” he says.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For years, 529 college-savings plans have been marketed as a way for parents and grandparents to help fund a young adult’s college dreams. But less widely known is that 529 plans can be used by students of all ages, whether they’re seeking a degree to change or advance a career, or to take a single class to learn Spanish.
Every state offers at least one 529 program. Although details differ by state, all plans allow people to contribute after-tax dollars to an account. Withdrawals used for qualified education expenses -- tuition, books and computers -- are tax-free.
For parents of young children, years of tax-free compounded growth are a big plus. For adults who plan to take classes within a year or two of opening the account, there is a more-immediate benefit: More than 30 states offer an income-tax deduction or credit for contributions. (Check your state’s deductions at www.finaid.org/savings/state529deductions.phtml.)
Even if your state doesn’t offer a tax break, you can still benefit, especially if you anticipate a hefty tuition bill, says René Kim, a senior vice-president at Charles Schwab. “By investing in a 529, any interest and dividends that would accumulate while the account is being used would be tax-free,” she says.
Let’s say you plan to go to school in a year. If you set aside $20,000 in an account with a 6% rate of return, you’ll have $21,200 by the time classes start. If the money is in a taxable account and you’re in the 25% tax bracket, you’ll pay $300 in taxes on the earnings. With a 529, you’d have that cash to buy textbooks.
Still, there are some limitations, says Ken Clark, a certified financial planner and blogger for About.com’s Saving for College guide. First, you’ll need to be sure that the school you’re considering qualifies as a 529-eligible institution. “The official definition is a college, university, vocational school or post-secondary institution that is eligible to participate in financial aid,” he says. “So taking a cooking class at your community college will qualify, but taking a class at Williams-Sonoma will not.” To find out which programs qualify, visit www.savingforcollege.com/eligible_institutions.
You also shouldn’t invest more money than you will use. If you withdraw assets for something other than education, you’ll incur a 10% penalty on top of taxes on all earnings. However, you can make a child or grandchild the beneficiary of the leftover money without tax or penalty.
Consider Investment Options and Taxes
State plans have a variety of investment options. If you think it may be a few years before you return to school, look for a plan that includes stocks as well as bonds or other reasonably conservative investments that have some potential for growth.
For those with less than a year or two before enrollment, Joseph Hurley, founder of SavingForCollege.com, recommends conservative investment options, such as fixed income or cash. Hurley says that 529 investors need to be sensitive to costs. “Compare expenses of the investments within the plan and between different plans,” he says. “The lower the expenses, the more you’ll have in your account.”
Some state plans will charge you $25 in fees before your investment earns a dime. Several plans charge fees of up to 2% of assets each year. Avoid plans sold by a broker because commissions may gobble close to 6% of your investment. You might find that you end up losing money instead of saving it.
For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger’s Retirement Report.
-
Stocks Chop as the Unemployment Rate Jumps: Stock Market TodayNovember job growth was stronger than expected, but sharp losses in October and a rising unemployment rate are worrying market participants.
-
Should You Renew Your CD?With rate cuts impacting earnings, we examine if now is a wise time to renew CDs.
-
7 Ways to Plan Now to Save on Medicare IRMAA Surcharges LaterUnderstand the critical two-year lookback period and why aggressive planning before you enroll in Medicare is the most effective way to minimize IRMAA.
-
Amazon Resale: Where Amazon Prime Returns Become Your Online BargainsFeature Amazon Resale products may have some imperfections, but that often leads to wildly discounted prices.
-
457 Plan Contribution Limits for 2026Retirement plans There are higher 457 plan contribution limits in 2026. That's good news for state and local government employees.
-
Medicare Basics: 12 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2026SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $70,000 in 2025, and up to $72,000 in 2026.
-
Roth IRA Contribution Limits for 2026Roth IRAs Roth IRAs allow you to save for retirement with after-tax dollars while you're working, and then withdraw those contributions and earnings tax-free when you retire. Here's a look at 2026 limits and income-based phaseouts.
-
SIMPLE IRA Contribution Limits for 2026simple IRA For 2026, the SIMPLE IRA contribution limit rises to $17,000, with a $4,000 catch-up for those 50 and over, totaling $21,000.
-
457 Contribution Limits for 2024retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
