Saving for a child’s education is a deeply meaningful financial goal for many parents, and a 529 plan can be a powerful tool to help achieve it. However, even with all its benefits, certain missteps could limit the plan’s effectiveness — or create unnecessary hurdles. Here are five common mistakes to avoid.
- Not starting early enough. Time is one of the most valuable assets when it comes to investing. Delaying contributions to a 529 plan can limit the opportunity for your investments to grow through the power of compound interest. Starting early — even with small amounts — can make a significant difference over time. For example, contributing just $50 a month when your child is a toddler can grow into a substantial sum by the time they’re ready to head to college.
- Losing track of your timeline. A 529 plan often provides a range of investment options, including age-based portfolios that will automatically adjust risk levels as your child gets closer to college age. However, selecting investments that don’t align with your child’s expected college timeline — or your risk tolerance — could expose you to excessive market volatility or limit potential growth when it’s needed most.
- Overlooking state tax benefits. Many states offer tax deductions or credits for 529 plan contributions, but these benefits often go unnoticed. Failing to take advantage of them can mean leaving money on the table. Research your state’s specific tax incentives and consider how they can enhance your savings efforts. Even small tax savings can add up to a significant boost over time.
- Contributing more than you need. While saving for education is important, you don’t want to contribute more than necessary, especially when you have other savings goals. If they’re not used for qualified expenses, 529 earnings may be subject to income tax and a 10% penalty upon withdrawal. However, there are options to help avoid penalties, such as rolling over funds to a Roth IRA (subject to limits) or using up to $10,000 for student loan repayment.
- Not updating the beneficiary (or knowing you can). Life happens, and circumstances can change. If the original beneficiary no longer needs the funds — due to a full scholarship, a decision not to attend college, etc. — you may forget to update the beneficiary. But 529 plans allow for certain beneficiary changes within the family, so you can transfer the funds to another child or even use them for your own education without losing the tax benefits.
Don’t Set It and Forget It
A 529 plan is a flexible and valuable savings tool, but like any financial strategy, it works best when managed thoughtfully. While these are some of the most common mistakes, they aren’t the only ones — factors like financial aid considerations and evolving education costs can also impact your approach. That’s why consulting with a Financial Professional can be a smart move, helping you navigate potential pitfalls, maximize benefits and ensure your plan aligns with your family’s long-term goals.
Sources
https://www.irs.gov/newsroom/529-plans-questions-and-answers
https://www.nerdwallet.com/article/investing/529-plan-rules
https://www.fidelity.com/learning-center/personal-finance/college-planning/college-529-spending
https://www.forbes.com/advisor/student-loans/can-i-use-529-to-pay-student-loans/