What is a 529 plan?
A 529 plan is a tax-advantaged investment account for education expenses. Contributions are not federally deductible, but more than 30 states offer a state income tax deduction or credit (New York up to $10,000, Illinois up to $20,000 joint, for example). Investment growth is federal and state tax-free, and qualified withdrawals (tuition, room and board, books, computers, K-12 tuition up to $10,000 a year, even student loan repayment up to $10,000 lifetime per beneficiary) are tax-free. Thanks to SECURE 2.0, unused 529 balances can be rolled to a Roth IRA for the beneficiary (subject to a $35,000 lifetime cap and 15-year account age).
Open a 529 at the kid’s birth and contribute $300 a month into an age-based portfolio. At ~7% blended return (more equity early, more bonds near college), the balance at 18 is roughly $130,000, plenty for in-state public tuition with room left over. If you live in a state with a deduction, the state tax break alone funds the first year of contributions for free.
Overfunding a 529 for a kid who ends up with a full scholarship or skips college. Withdrawals not used for education face income tax plus a 10% penalty on the earnings. The Roth rollover helps, but it’s capped. Right-size contributions to the realistic case, not the maximum dream.
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