7 in 10 U.S. Parents Are Missing Out on This Useful College Savings Tool

If your goal is to save enough money to be able to cover your kids' college expenses, then you'd better start socking funds away at an early age. Given that the average cost of tuition has risen to $10,423 for in-state residents at public colleges, according to U.S. News & World Report, you may find that paying for college requires more money than you'd expect. (And let's not even get started on tuition for private colleges and universities, which is way more than what state schools charge.)

In fact, given what some colleges cost today, saving for that milestone just isn't enough. It's important you invest your college savings to grow your money into a larger sum. 

But data from Vanguard reveals that most parents are missing out on a very helpful college savings tool. And if you're missing out, too, then you could be making a big mistake.

What can a 529 plan do for you?

You could invest your college savings in a traditional brokerage account. That way, your money won't be restricted in any way. You can contribute as much as you want year after year, and if your kids opt out of attending college, you won't have to worry about what to do with your money. But a better bet may be to save for college in a 529 plan for one big reason.

With a 529 plan, you don't get a federal tax break on the money you put in (though some states offer their own incentives). However, money in a 529 gets to grow tax-free, and withdrawals are tax-free as long as that money is used to pay for qualified education expenses. (And to be clear, you don't have to use that money just for college. You can pay for private school when your kids are younger as well.)

So, let's say you contribute $5,000 a year to a 529 plan over 18 years for a total of $90,000. If your investments do well, your account might have a value of $200,000 by the time your kids are set to attend college. Only you won't have to pay taxes on that $110,000 gain if you use all of that money to cover tuition. 

Of course, that's a big "if." When you fund a 529 plan, you run the risk of ending up with excess money in your account. And taking withdrawals from a 529 for non-education purposes could result in you getting penalized on the gains portion of your account. 

But the good news is that 529 plans allow you to switch beneficiaries without penalty. So if you have one child who opts out of college, you can always use the money you've saved for them for a different child. You can also roll a limited amount of money from a 529 plan into a Roth IRA without penalty starting in 2024. 

Consider a 529 plan

A 529 plan certainly isn't your only option when it comes to investing for college. But it's an option worth considering due to the tax benefits involved.