Investing for your Child's Future: College Savings

If you are a parent, saving for college is likely a hot topic amongst your family and friends. With the cost of higher education rising each year, many parents feel overwhelmed about the idea of having enough savings for their children to attend the university or trade school program of their choice. Let’s face it, this can be a really scary topic and cause anxiety for so many of us as we juggle full time jobs, raising our kids and covering the ever rising costs of our everyday living expenses. But what many people do not know is that setting up a 529 college savings account for your child is a simple and cost effective way to get a head start on saving for higher education. In fact, what most people don’t know is that you don’t have to have a child born to set up a 529 account. This provides even more options for individuals to begin investing in their child’s future even before they arrive. 

In this post, I will break down the basics of setting up a 529 plan, explain the key benefits of these plans and help answer some frequently asked questions that you may have before setting up a 529 plan. I have also provided a few helpful resources linked in the appendix that I encourage you to explore before deciding on your investment decision. 

FAQ #1: What is a 529 college savings plan? 

A 529 plan is a tax-advantaged investment account designed to help families save for future education expenses. 

FAQ #2: What are the benefits of a 529 plan? 

1. Funds are easily transferable to other family members. This provides parents the ability to set up a 529 account with themselves as the beneficiary until their child is born and later transfer those funds into the child’s name or roll over unused funds for one child to a sibling. As long as the new beneficiary is a qualified family member (defined in the appendix), there are no tax consequences of transferring the funds to the new beneficiary. 

2. Contributions to 529 accounts grow tax-free. This means that as money is added to the account, any amounts that the account earns over time as it is invested in the stock market are not subject to federal income tax. 

3. Withdrawals from the account are not taxed by the federal government so long as the funds are used for qualified educational expenses. 

4. Qualified educational expenses include a wide variety of costs that are not just exclusive to college tuition or even higher education all together. For example, K-12 private school tuition is eligible up to a certain amount along with trade school programs. (See FAQ #3). 

FAQ #3: What are considered “qualified educational expenses?”

1. Tuition and fees

2. Room and board at a university to include: 

   1. On campus housing

   2. Off campus housing (with exceptions) - You can't claim expenses in excess of the school's estimates for room and board. This Fidelity article further helps outline this exception. 

3. Textbooks 

4. Certain Technology Costs

   1. Any computer technology, related equipment and/or related services such as Internet access. The technology, equipment or services qualify if they are used by the beneficiary of the plan and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution. 

   2. This means any computer and related peripheral equipment such as a printer.

   3. “Computer technology” also includes computer software used for educational purposes.

5. Private school tuition K-12 - Up to $20,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. (Note that this was updated from $10,000 in 2018 to $20,000 in 2019).

6. Apprenticeship programs related to the trades. Programs must be registered with the Department of Labor.

7. Professional certifications and licensing such as continuing education, testing materials and associated fees. 

8. Student loan repayment - Up to $10,000 lifetime limit for the beneficiary. 

FAQ #4: Are contributions pre or post tax? 

Contributions are made with after-tax dollars, meaning there is no federal income tax deduction for contributions. However, many states offer a state income tax deduction or tax credit for contributing to their state's 529 plan. Investment earnings grow tax-free and withdrawals are generally tax-free when used for qualified educational expenses. This is unlike a traditional brokerage account whereby you would pay taxes to the federal government upon selling and withdrawing funds from an ETF or similar financial asset regardless of what those funds are used for. 

FAQ #5: Are contributions limited each tax year? 

Yes. Federal gift tax limits do apply. In 2026, you can gift up to $19,000 per parent in a 529 account, or $38,000 combined as a couple. Grandparents can also contribute up to $38,000 as a couple per beneficiary per year. Contributing more than $19,000 per beneficiary would need to be reported to the IRS as a gift. However, there is a unique rule specifically for 529 contributions that was recently passed that allows contributions to be front-loaded for 5 years at once. For 2026, this would mean that an individual parent could contribute $95,000 and a couple could contribute $190,000. This is important and I encourage parents to look at this closer with their personal financial situation. 

FAQ #6: What are the costs associated with opening a 529 account? 

This varies by broker. I encourage you to review a few options before deciding on a brokerage firm that aligns with your financial goals. The Fidelity 529 Plan is what my husband and I have used to set up our account for our daughter because we are already holding our 401K plans and general investing accounts in Fidelity. Fidelity does not require a minimum or account fees to open a plan. Expenses to maintain the plan are taken from the account earnings. Total annual expense ratios for Fidelity 529 plans range from 0.08% to 1.20%, depending on the specific state plan. Our personal lifetime returns on our daughter's 529 plan are hovering around 23%, which we have been extremely satisfied with. Some other good brokerage options for opening a 529 are: Vanguard, Charles Schwab and Morgan Stanley. 

FAQ #7: What are 529 plans invested in? 

This varies by broker. The larger brokerage firms that I have listed will generally invest in similar age-based, index, blended stock and bond and stable value portfolios.These firms will take your contributions and put them into various funds that aim to diversify your total investment exposure based on your desired risk level. Target date funds are often used as they provide exposure to a variety of security types like US treasuries, bonds and corporate securities that are traded in the S&P 500 and they are adjusted based on your risk appetite. 

My recommendation is to think about what your risk tolerance is and divide your allocations accordingly among asset types that are offered by the brokerage. If your child is young and you will not be needing the funds for several years, it could be most beneficial to elect a higher allocation to riskier investment types and ETFs early on. You can always change your elections for future contributions if you decide to pull back to place funds in traditional, less risky target date funds. To assist you with your contribution allocations, brokerage firms will provide you with the investment profiles for each fund so that you can review the security types that the respective funds hold as well as their annual returns and general performance against the market. 

FAQ #8: How do I open a 529 account? 

I have linked in the appendix a few larger brokerage firms that offer 529 accounts. Each of these firms provide pretty easy to follow step by step instructions to set up the accounts and banking information. You will need to have your child’s social security number or your social security number if you choose to set up the account in your name before your child is born. Upon their birth and receipt of a social security number, the brokerage firm will prompt you to open a new 529 account for that beneficiary, but as I mentioned above, there are no tax consequences of doing this so the 529 when under your name is already starting to grow tax-free before your child is born. 

FAQ #9: Is a 529 plan right for my family? 

Although this is a personal financial decision, ultimately I do think that 529 plans are beneficial. The costs to open and maintain these plans are reasonable and your child is more than likely to have a use for these funds at some point in their educational journey. If you are going to have to pay for these costs anyways, you might as well allow your money to work for you in the market now! Over the past 10 years, the S&P 500 alone has returned a 14.8% annualized return (including reinvested dividends) on average. Investing just $50 a month into a 529 account allows you to take advantage of market gains without paying tax on those returns in the future when using the funds for educational expenses. Of course there is always risk with the stock market, but because education costs have historically increased over time and inflation reduces purchasing power, leaving your money in a low yield savings account may not provide enough growth to keep pace with future education expenses. Every family has a different financial situation, but keep in mind that grandparents can also contribute to 529 plans. Extra birthday or Christmas money is an easy thing to put aside into a 529 account that your child can benefit from at a later date. 

Appendix: 

Key Definitions: 

1. Qualifying educational expenses: tuition, mandatory fees, books, supplies, and required equipment needed for enrollment or attendance at an eligible educational institution. The IRS defines these expenses primarily to determine your eligibility for higher education tax breaks, tax-free distributions, or deductions. However, the exact definition and limits vary depending on the specific benefit you are trying to use.

2. Qualifying family member: Defined by the IRS as a spouse, children, step-children, foster children, grandchildren, siblings, parents, in-laws, aunts, uncles, nieces, nephews and first cousins. 

3. ETF: Stands for Exchange-Traded Fund. It is a pooled investment vehicle that holds a collection of assets—such as stocks, bonds, or commodities—and trades on stock exchanges just like an individual stock.

4. S&P 500 (Standard & Poor's 500): A stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. Because it covers about 80% of the total U.S. stock market value, it is widely considered the best barometer for the overall health of the American economy.

Resources:

1. IRS Website 529 Plans

2. Fidelity 529 Plan

3. Fidelity 529 FAQs

4. Vanguard 529 Plan

5. Charles Schwab 529 Plan

6. Morgan Stanley 529 Plan