If you’re a parent, you might be preparing for your child to start their college journey at the end of the summer. If so, you’re not alone. In 2024, there were over 3.2 million college freshmen enrolled, a number that has been steadily increasing each year. You know what else has been steadily increasing? The cost of that education. Education costs can be a significant expense for families but there are some solutions to help you save with tax advantages included. In this article, we’ve broken down one of the most popular ways to save: a 529 plan.

A 529 plan is also known as a “qualified tuition plan” and it’s the most well-known and utilized savings method for higher education. Its primary purpose is to encourage tax savings for the cost of post-secondary education by allowing post-tax income to accumulate untaxed and be withdrawn for education purposes untaxed. Similar to a health savings account, the money must explicitly be used for qualified education expenses, such as tuition, fees, books, supplies and equipment, otherwise they are subject to both income tax and a 10% penalty. Room and board can also be included as a qualified education expense under certain thresholds.

Anyone can contribute to a 529 savings plan – parents, grandparents, family friends and even beneficiaries themselves. There are no limits on yearly contributions but contributions are considered gifts and thus subject to gift tax provisions over the annual gift exclusion (currently $19,000 for 2025). Also, each state imposes a maximum contribution balance per each beneficiary, intended to be sufficient for a four-year college as well as graduate school. This usually ranges around $235,000 to $550,000. Once these accounts have reached the maximum limit, no further contributions can be made but any investments still have a chance to grow beyond that. Owners can also change beneficiaries without penalty as long as the new beneficiary is a member of the former’s family (loosely defined.)

What are the additional tax benefits beyond growing and withdrawing your money tax-free in a 529 savings account? It varies by state. Most states offer their own version of a 529 plan and if your state has income tax, they likely also offer a tax credit or deduction for the contributions made to their specific state plan. Some states even offer a tax credit or deduction regardless of whether the plan is state-sponsored or not. However, if your state does not have income tax, you won’t receive this benefit and a few states do not offer a tax deduction or credit for contributions even though they do have income tax. You are not limited to solely your own states’ plans and have the option to set up your 529 plan anywhere you choose.

We’ve barely scratched the surface of 529 plans – they can be extremely variable and flexible to fit the needs of each unique saving situation. They are also only one of the options for education savings – Coverdell accounts, education savings bonds and even Roth IRA accounts offer other potential savings opportunities. Furthermore, recent tax bills have expanded the use of 529 plans to include K-12 education for public, private and religious schools in some circumstances, and potentially include paying off a portion of student loan debt as well. Adjustments and changes are always being made to 529 savings plans and the tax code overall so it’s important to speak with a qualified tax advisor on what the best avenue for your hard-earned savings is. At ClarkSilva, we are well-versed in helping clients tax-plan for all major changes in life – including sending your children off to college. Reach out to us today!