Building Your Child's College Savings Portfolio

Here’s an unsurprising statement—raising kids is really expensive. According to U.S. government estimates, the cost to raise them through the age of 17 (not including college expenses) is an estimated $233,610 for a child born in 2015 or $267,233 when adjusted for inflation.¹

College education isn’t far behind, with costs steadily rising. The College Board—a nonprofit educational association—reports that for 2021–2022, the average cost of tuition, fees, and room and board for a four-year private college is $51,690 per year, or $22,690 for a public in-state institution.²

The good news is that there are steps you can take today to ensure that you’re prepared to pay those expenses when the time comes. Understanding how to use a 529 plan can be a great starting point. Named after Section 529 of the Internal Revenue Code, a 529 plan is a tax-advantaged way to save, or even pay in advance, for college expenses.

Earnings in a 529 plan can be tax-deferred, with withdrawals being exempt from federal and state income taxes if you use the funds for qualified expenses such as tuition, fees, room and board, and supplies. Many states also offer state tax deductions or tax credits on top of that.

Broad Flexibility

Another key benefit of 529 plans is their flexibility. Some investments that are used for education funding (such as a Coverdell Education Savings Account) require that the assets be distributed or transferred when the beneficiary reaches a certain age. With a 529 plan, the owner of the account continues to make all of the decisions. For example, if the beneficiary chooses not to go to college, you can name a different beneficiary or use the plan for your own education needs.

Savings in a 529 plan can also be used for any accredited in-state, out-of-state or international educational institution. A 529 has no age restrictions, meaning anyone can benefit from a 529 account.

Additionally, you can usually cover the full cost of college because the contribution limits per beneficiary generally exceed $200,000. Note that contribution limits vary by state.

Doing Even More with Your 529 Plan

The Tax Cuts and Jobs Act of 2017 permits federal tax-free withdrawals from 529 plans of up to $10,000 per year, per student for expenses related to elementary or secondary public, private or religious school. However, it’s worth noting that the state tax treatment of K-12 withdrawals is under review by most states. Speak with a tax advisor before withdrawing 529 funds to use on K-12 schooling.

A Strategy to Achieve Your Goals

When it comes to setting up a 529 plan, there are a range of investment strategies to choose from, depending on such factors as the age of the intended beneficiary, your financial objectives and your risk tolerance. Be sure to keep these in mind as you’re building a plan that works for you and your goals—and consider speaking to a professional to discuss your specific situation, as well as any questions you may have. 

¹ Source: How Much Does It Cost to Raise a Child? – U.S. News & World Report (analysis of USDA data), https://money.usnews.com/money/personal-finance/articles/how-much-does-it-cost-to-raise-a-child(opens in a new tab)

² Source: Trends in College Pricing and Student Aid 2021 – The College Board, https://trends.collegeboard.org/college-pricing(opens in a new tab)