Want a Gift for Opening a 529 College Savings Account?

New York Times

16-05-2025

If you're considering opening a 529 college savings account for your child, this may be the time to do it: Some state plans offer cash incentives in May.
Many students are about to move from one phase of their education to the next, whether it's completing kindergarten or finishing middle school and moving on to high school. 'It's a time when people are thinking about education,' said Mary Morris, the chief executive of Virginia's Commonwealth Savers program and chair of the College Savings Plans Network, a group for 529 plan administrators.
That's why 529 plans often promote perks now — to spur contributions. Offers range from modest matching gifts for opening or adding to an account to sweepstakes-style events dangling thousands of dollars in prizes.
Recent stock market gyrations may have given some parents pause about investing. But if saving starts when children are young, there's time to ride out market swings. Richard Polimeni, managing director of education savings programs at Merrill and Bank of America, said he opened 529 accounts for his children soon after they were born. 'There's nothing that's even close to a 529 if saving for college is your primary goal,' he said.
What is a 529 account?
Named for a section of the tax code, state-sponsored 529 accounts are for saving or investing money for college costs and other educational expenses. Money in the accounts grows tax free. In addition, some states offer tax breaks for 529 contributions, though there is no federal tax deduction.
Funds can be withdrawn tax free to pay for eligible spending on tuition, housing, food, books and supplies. (Withdrawals for nonqualifying costs are subject to income tax, plus a penalty.)
At the end of 2024, there were about 17 million accounts holding $525 billion, or an average of nearly $31,000 each.
What sort of cash incentives are we talking about?
Pennsylvania's 529 College and Career Savings Program is offering savers the chance to win $5,529 for their college accounts if they deposit at least $10 during May. Six prizes will be awarded.
West Virginia is holding a drawing to choose the winner of a $15,000 prize that will be deposited into a Smart529 account. Entries must be submitted before midnight on Friday.
Alabama's CollegeCounts program is offering the chance to win a $529 contribution to accounts for babies born between May 29, 2024, and May 29 this year. And Utah's my529 plan is offering up to $40 in matching contributions for participants who open an account this month for a beneficiary new to the program.
Contestants who submit a photo by May 29 of the person they're saving for will be entered into a drawing to win one of five contributions of $529 into an Indiana529 account.
Virginia's offer, Ms. Morris said, will deposit $25 into Invest529 accounts that are opened on May 29. (An expanded list of state offers is available on the savings network's website.)
The most effective way to save for college is generally to start early and make regular contributions while your child goes through school, said Liz Miller, a certified financial planner in Summit, N.J., and chair of the Certified Financial Planner Board of Standards, which sets standards for the financial planning profession. But if a state incentive or bonus can help savers get started, she said, that's a plus.
Some states tie promotions to regular contributions. California's ScholarShare 529 program, for instance, is offering a $50 bonus to savers who open a new account between next Tuesday and May 31 — if they commit to making a monthly contribution of at least $50 for six months.
How much does college cost these days?
The average cost of attending college — including tuition, fees, housing and meals — ranges from $14,440 a year at a two-year community college to about $25,000 at a four-year, in-state university to almost $59,000 at a private, four-year college. Books, supplies and personal expenses are extra. (Those totals reflect 'sticker' prices published by colleges for the 2024-25 school year, but many students pay far less, after financial aid.)
Why should I save in a 529 plan?
With college costs being steep, the accounts can help families save for higher education and reduce borrowing, Ms. Morris said.
The federal student loan system has recently been in turmoil, in part because the five-year pause on payments and collections, a legacy of the Covid-19 pandemic, ended. About a quarter of student borrowers who are currently required to make payments are considered delinquent, surpassing levels in early 2020 before the pandemic, the Federal Reserve Bank of New York reported on Tuesday. Borrowers who don't get back on track face forced collections and damaged credit scores, which can set them back financially.
To avoid over-borrowing, students should aim to borrow no more than their anticipated annual salary upon graduation, said Mark Kantrowitz, a financial-aid expert.
Ms. Morris suggested that families consider paying for college using this formula: Plan on paying for one-third out of current income earned by the family and the student; one-third through saving and investing, including a 529 plan; and a third through borrowing.
Ms. Miller said she recommended that families consider a 'direct sold' 529 plan, which allows savers to enroll and select from a menu of investment options on their own. Some states also offer 'adviser sold' plans, in which a financial professional manages your account, but they tend to have higher fees.
Can 529 accounts be used for more than paying for college?
In recent years, tax law updates have made the accounts more flexible. They can also be used to pay tuition for kindergarten through high school, as well as for apprenticeships. In addition, up to $10,000 from a 529 can be used to repay the beneficiary's student loans.
And under the federal law known as SECURE 2.0, up to $35,000 in a 529 account can be rolled over into a Roth individual retirement account for the beneficiary of the 529 account, if certain conditions are met. The Roth option helped some parents overcome concerns about saving in the account if their child decides not to attend college.
Do I have to be a resident to qualify for a state's 529 incentives?
You can open a 529 account in any state that offers one, even if you don't live there (although opening one in your own state may offer state-level tax breaks that can enhance your savings, Ms. Miller noted).
Rules on promotions vary, however, so check the offer's details. California's offer is available to residents of all 50 states, and Ms. Morris said Virginia's bonus for May 29 contributions is open to anyone. Pennsylvania's offer is restricted to account owners who are residents of the state. They may, however, use the account to save for a beneficiary who lives in another state, such as a grandchild.
Under a recently adopted change in financial aid rules, grandparents can save for a grandchild's college education without affecting the child's eligibility for financial aid.