529 plans and funding college

A 529 plan is a state-sponsored savings account for education expenses. Contributions grow tax-free and withdrawals are tax-free when used for qualified education costs. It's the best purpose-built tool for college savings — but it's also widely misunderstood.

How it works

• You open a 529 in any state (you don't have to use your own state's plan, though some states offer a tax deduction only for their own).
• You name a beneficiary — usually your child.
• You invest the balance, typically in age-based portfolios that get more conservative as college approaches.
• Qualified expenses: tuition, fees, books, room and board for college. K-12 tuition up to $10k/year. Apprenticeships. Student loan payments (up to $10k lifetime).

The 2024 rule change: Roth rollover

Starting in 2024, if your kid gets a scholarship or doesn't use the full 529, you can roll up to $35,000 (lifetime) from the 529 to a Roth IRA in the beneficiary's name, subject to annual Roth contribution limits. This dramatically reduced the 'what if I overfund?' risk that used to plague 529s.

How much to save

There's no right answer, but the 1/3 rule is a common target: save for 1/3 of expected costs, plan to pay 1/3 out of current income during college years, and expect the student to cover 1/3 through scholarships, work, and loans. This keeps you from overfunding and keeps your kid invested in the outcome.