Considerations When Choosing a 529 Plan
January 26, 2026
529 college savings plans can be a powerful tool to save for education. A 529 Plan is an investment account that allows families to save for future education costs. You can use withdrawals tax free at the federal level and many states treat withdrawals tax free too. In order to be tax free you must use the withdrawals for qualified expenses like tuition, books, room and board, trade schools, K-12 expenses and apprenticeships.
In most cases, a parent opens and owns the 529 and names a child as the beneficiary. But grandparents, other relatives (and even friends) can also open a 529 for a child. The important thing to know: the account owner stays in control of the funds and decisions.
Here’s the good news, you can make meaningful progress by walking through these five simple questions.
Does your state offer state income tax savings for your 529 plan contributions?
In addition to the Federal tax savings, your home state may offer a state tax deduction or credit for 529 contributions—but the rules vary widely. Some states require you to use the in-state plan to qualify; others allow a tax benefit even if you invest elsewhere.
Most people don’t realize that they can invest in another state’s 529 plan (even if your state sponsors one). Consider your state tax benefit and limitations before you choose.
The Vanguard 529 tax benefits by state tool can be used to calculate your potential state tax deduction. Indiana has one of the most generous state tax savings, offering a state tax credit of 20% of the contribution up to $7,500 (maximum credit $1,500 for married filing jointly).
What are the 529 plan costs for you and your family?
Review total costs of the plan including program management fees, account maintenance fees and underlying fund expense ratios. Over 15 plans have program management fees that carry maximum fees over 2%, therefore it is important to understand the fees and what they provide.
The 529 plan comparison tool from College Savings Plan Network can be used to compare up to three plans and shows the Program Manager, fees and expenses, investment options and other features.
What investments are available in the 529 plan?
Unlike brokerage accounts, you do not have the ability to invest in individual securities. The plans instead offer a selection of age-based portfolios and depending on the plan they offer select mutual fund and ETFs.
How much should you contribute to your child’s 529 plan?
Most families fund 529 plans with a monthly amount that they set and forget it, alleviating the monthly or annual decision fatigue on figuring out how much to contribute. Remember you can always start small and increase later taking advantage of the momentum from prior months or even years of savings.
If you are concerned about overfunding a 529 college savings plan, consider funding a parent-owned asset such as a taxable brokerage account for additional flexibility.
Parent-owned assets (including a parent owned 529 plan) are treated more favorably on college federal financial aid applications versus student-owned assets (e.g. UTMA or UTGMA accounts).
What college expenses are considered qualified in a 529 plan?
529 college savings plan can be used for qualified education expenses (e.g. tuition, fees, room and board, books, fees and other related expenses). If the beneficiary does not need the funds you have other options:
Withdraw amounts equal to scholarships without the 10% penalty, but you will still have to pay income tax on the earnings.
Ability to change the beneficiary or rollover funds to another qualifying family member once per year can be considered for planning purposes in families with multiple children.
Allows up to $35k in a remaining balance in the account can be used to fund a Roth IRA subject to specific IRS rules (e.g. the account having been open for 15 years), as changed by the Secure 2.0 Act.
Remember, you don’t have to figure it out on your own. At Clarity Point Financial we give you the financial clarity your family needs for the important decisions ahead.
Schedule a free Clarity Call with me today.
