Saving for college: 529 plans and the alternatives
A 529 plan is a tax-advantaged account for education costs. Earnings grow free of federal tax and come out tax-free when used for qualified education expenses (IRS); many states add a deduction for contributions to their own plan.
529 versus other ways to save
- 529 plan – tax-free growth for qualified expenses; non-qualified withdrawals are taxed and usually face a 10% additional tax on earnings.
- Taxable brokerage account – full flexibility, no special tax benefit.
- Savings, CDs, Treasuries – for money needed within a few years.
As the tuition date gets close
Money needed in the next one to three years is usually moved out of stocks into lower-risk holdings. Outside a 529, Treasury bills and notes timed to tuition dates are free of state tax. IncomeGrid ranks every item by yield after tax for where you live: federal, state and each investment type (Treasuries, municipal bonds, corporate bonds, funds, REITs and filed offerings are each taxed differently).
Find low-risk options for the timeline
IncomeGrid has 40,000+ investment options screened, with risk levels 1–5 and term filters, for the part of college money held outside a 529.
Find options for your tuition dates →
Sources
- Investor.gov – An introduction to 529 plans
- IRS – 529 plans: questions and answers
- TreasuryDirect – Treasury bills
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