It’s August, and if you have kids, back-to-school season is in full swing. New backpacks, fresh school supplies, maybe a new laptop or tablet for the school year.
But beyond the immediate costs of getting kids ready for the new school year, August is also a great time to think about the bigger picture. How are you going to pay for college?
If you’re a tech professional with a solid income and growing equity compensation, you’re probably in a better position than most to fund your kids’ education. But that doesn’t mean you should do it without a plan.
Let’s talk about 529 plans, education savings strategies, and how to balance funding college with your other financial goals (like, you know, retiring someday).
What Is a 529 Plan and Why Should You Care?
A 529 plan is a tax-advantaged savings account designed specifically for education expenses.
You contribute after-tax dollars (no federal tax deduction, though some states offer a state tax deduction). The money grows tax-free. And when you withdraw it to pay for qualified education expenses, the withdrawals are also tax-free.
Qualified expenses include:
- Tuition and fees
- Room and board (if enrolled at least half-time)
- Books and required supplies
- Computers and internet access
- Up to $10,000 per year for K-12 tuition (at private or religious schools)
529 plans are one of the best tools available for education savings because of the tax benefits and flexibility.
The Two Types of 529 Plans
There are two main types of 529 plans, and they work very differently.
Education Savings Plans (The Most Common Type)
This is what most people think of when they hear “529 plan.” You contribute money to an investment account, choose from a menu of investment options (usually age-based portfolios or individual funds), and the money grows over time.
When your kid goes to college, you withdraw the funds to pay for qualified expenses.
You can use these plans at any accredited college or university in the U.S. (and many abroad). You’re not locked into a specific school.
Prepaid Tuition Plans (Less Common, More Restrictive)
Some states offer prepaid tuition plans that let you pay for future college tuition at today’s rates. You’re essentially locking in tuition prices and protecting yourself from inflation.
The downside? These plans are usually limited to in-state public colleges. If your kid decides to go to an out-of-state or private school, you’ll have to transfer the value (which may not cover the full cost).
Prepaid plans are less flexible, so most people opt for education savings plans.
How Much Should You Be Saving in a 529?
This is the question everyone asks, and the answer is (frustratingly): it depends.
Here’s a framework to think about it.
Step One: Decide How Much of College You Want to Fund
Do you want to cover 100% of your kid’s college costs? Or are you planning to cover tuition while they handle room and board through part-time work or loans?
There’s no right answer. Some parents want to fully fund college so their kids graduate debt-free. Others believe kids should have some skin in the game.
Figure out your philosophy first, then build your savings plan around it.
Step Two: Estimate the Cost of College
College is expensive, and it’s getting more expensive every year.
For the 2025-2026 academic year, the average cost of college (including tuition, fees, room, and board) is roughly:
- $30,000 per year at in-state public universities
- $50,000 per year at out-of-state public universities
- $60,000+ per year at private universities
If your kid is 10 years old right now, college is eight years away. Assuming 5% annual inflation in college costs, that $30,000 in-state public school will cost about $44,000 per year by the time they enroll.
Four years of college at that rate? About $185,000.
That’s a big number. But here’s the thing: you don’t have to save it all at once.
Step Three: Work Backwards from Your Goal
Let’s say your goal is to save $185,000 for your kid’s college, and they’re currently eight years old. That gives you 10 years to save.
If you invest $1,000 per month in a 529 plan and earn an average 7% annual return, you’ll have about $173,000 in 10 years. Close enough.
If you can’t afford $1,000 per month, that’s okay. Save what you can. Even $300 or $500 per month adds up significantly over time.
Tax Benefits of 529 Plans (Beyond the Federal Tax-Free Growth)
We already covered that 529 plan growth is federally tax-free. But there are additional benefits depending on where you live.
State Tax Deductions
Many states (but not all) offer a state income tax deduction or credit for 529 contributions.
California, where many tech professionals live, does not offer a state tax deduction for 529 contributions. But if you live in a state that does (like New York, Illinois, or Colorado), you can save significantly on state taxes.
Check your state’s rules to see if you qualify.
Gift Tax Exclusion
529 plan contributions qualify for the annual gift tax exclusion. For 2026, that’s $19,000 per person, per beneficiary.
That means you and your spouse can each contribute $19,000 to a 529 plan for your child ($38,000 total) without triggering gift tax.
There’s also a special rule that lets you front-load five years’ worth of contributions in a single year. So you could contribute $95,000 in 2026 (5 x $19,000), treat it as if you spread it over five years, and avoid gift tax.
This is particularly useful for grandparents or high-income parents who want to get a large sum of money into a tax-advantaged account quickly.
Estate Planning Benefits
Money in a 529 plan is removed from your taxable estate (as long as you don’t die within five years of making the contribution if you used the five-year front-loading rule).
This makes 529 plans a useful estate planning tool for high-net-worth families.
The Biggest 529 Plan Mistakes to Avoid
Let’s talk about what not to do.
Mistake #1: Choosing the Wrong State’s Plan
You don’t have to use your own state’s 529 plan. You can open a plan in any state.
Some states have better investment options, lower fees, or better performance than others. Do your research and choose the plan that’s best for you, not just the one that’s closest geographically.
(That said, if your state offers a tax deduction for contributions, it might make sense to use your state’s plan to capture that benefit.)
Mistake #2: Investing Too Conservatively (or Too Aggressively)
529 plans offer a range of investment options. Many people default to age-based portfolios, which automatically shift from aggressive (stocks) to conservative (bonds) as your child gets closer to college.
This is generally a good approach. But make sure the glide path matches your risk tolerance and timeline.
If you’re investing too conservatively when your kid is young, you’re leaving growth on the table. If you’re too aggressive when they’re 16, you could get hit by a market downturn right before you need the money.
Mistake #3: Not Using the Money Because You’re Afraid of Penalties
Some people are so worried about the 10% penalty for non-qualified withdrawals that they under-fund their 529 or don’t use it at all.
Here’s the reality. If your kid doesn’t go to college, or if they get scholarships and don’t need all the money, you have options. You can change the beneficiary to another child or relative. You can use it for graduate school. You can even roll it into a Roth IRA for your child (up to $35,000 lifetime, subject to certain rules).
The penalty is not as scary as people think. Don’t let it prevent you from using one of the best education savings tools available.
Mistake #4: Prioritizing College Savings Over Retirement
This is the big one. A lot of parents sacrifice their own retirement savings to fund their kids’ college.
Here’s my advice: don’t do that.
Your kids can get loans for college. You can’t get loans for retirement.
Max out your 401(k) and IRA first. Build your emergency fund. Get your own financial house in order. Then, if you have money left over, contribute to a 529.
I know it feels harsh. You want to give your kids every advantage. But putting yourself in a position where you can’t retire comfortably doesn’t help them. It just means they’ll have to support you financially later in life.
What If Your Child Doesn’t Go to College?
This is a common concern, especially as more young people are exploring alternatives like trade schools, apprenticeships, coding bootcamps, or entrepreneurship.
Here’s the good news. You have options.
Option One: Change the Beneficiary
You can change the beneficiary of a 529 plan to another family member (sibling, cousin, even yourself if you want to go back to school).
The money stays tax-advantaged and you avoid penalties.
Option Two: Use It for Non-College Education
529 funds can be used for qualified expenses at trade schools, vocational programs, and certain certification programs. You can also use up to $10,000 for K-12 private school tuition.
Option Three: Roll It to a Roth IRA
Starting in 2024, you can roll up to $35,000 from a 529 plan into a Roth IRA for the beneficiary (subject to annual Roth contribution limits and a 15-year account holding requirement).
This is a great way to jumpstart your child’s retirement savings if they don’t use all their 529 funds for education.
Option Four: Withdraw It and Pay the Penalty
If none of the above options work, you can withdraw the money for non-qualified expenses. You’ll pay ordinary income tax on the earnings plus a 10% penalty.
It’s not ideal, but it’s also not the end of the world. You still got years of tax-free growth, and the penalty only applies to the earnings portion, not your original contributions.
Beyond 529 Plans: Other Education Savings Strategies
529 plans are great, but they’re not the only option. Here are a few alternatives.
Roth IRA (Yes, Really)
You can use Roth IRA funds to pay for college without the 10% early withdrawal penalty (though you will pay taxes on the earnings portion).
This is a dual-purpose strategy. You’re saving for retirement first, but if you need the money for college, it’s available.
Taxable Brokerage Account
Some people prefer the flexibility of a taxable brokerage account. You don’t get the tax benefits of a 529, but you also don’t have restrictions on how you use the money.
If you’re not sure whether your kid will go to college, or you want to keep your options open, a brokerage account might make sense.
UTMA/UGMA Custodial Accounts
These are custodial accounts where you save and invest on behalf of your child. When they turn 18 or 21 (depending on the state), the money becomes theirs.
The downside? The money is legally theirs at that point, and they can use it for anything (not just college). And custodial accounts can hurt financial aid eligibility more than 529 plans.
Financial Aid and 529 Plans: What You Need to Know
One question I get all the time: will having a 529 plan hurt my kid’s chances of getting financial aid?
The short answer: it can, but not as much as you think.
How 529 Plans Affect Financial Aid
529 plans owned by a parent are counted as parental assets on the FAFSA (Free Application for Federal Student Aid). Parental assets are assessed at a maximum rate of 5.64%, meaning a $50,000 529 plan would reduce aid eligibility by about $2,800.
That’s not nothing, but it’s also not devastating.
By comparison, if the 529 is owned by a grandparent, it’s not counted as an asset at all on the FAFSA. But when the grandparent makes a distribution to pay for college, it’s counted as untaxed income to the student, which can reduce aid eligibility by up to 50% of the distribution amount.
So parent-owned 529 plans are generally better for financial aid purposes.
Your Back-to-School Education Savings Action Plan
Ready to get serious about funding college? Here’s what to do.
This Month:
- If you don’t have a 529 plan yet, open one (research which state’s plan is best for you)
- If you already have a 529, review your investment allocation and make sure it matches your timeline
- Calculate how much you need to save per month to hit your college funding goal
This Year:
- Set up automatic monthly contributions to your 529
- Talk to your kids about college expectations and financial responsibilities (age-appropriate conversation)
- Max out your retirement accounts first, then contribute to the 529
Ongoing:
- Review your 529 plan annually and rebalance if needed
- Encourage your kids to apply for scholarships when the time comes
- Be open to creative solutions (community college for two years, in-state schools, co-op programs)
And if you want help building a comprehensive plan that balances college savings with retirement and other goals, let’s talk.
Let’s Build a Plan That Works for Your Whole Family
Funding college is a big financial goal. But it shouldn’t come at the expense of your own financial security.
If you’re trying to figure out how much to save, which accounts to use, and how to balance education savings with retirement and other priorities, I can help.
Schedule a consultation at wovencapital.net/schedule and we’ll build a comprehensive financial plan that takes care of your kids’ future and yours.
Because the best gift you can give your kids isn’t a debt-free college degree. It’s the peace of mind that comes from growing up in a financially secure household.