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Learn more about 529 plans for college savings

Consider setting aside money for college today using one of these flexible accounts.

College graduates celebrate.

Plenty of working-age adults are saving for a student's college education while they also accumulate funds for their own retirement. And with higher education costs on the rise, getting a jump start on saving is often a practical idea.

The 529 plan.

This savings vehicle lets families set aside money for their student's future education costs. Among its many features:

  • You'll enjoy tax-deferral on your contributions and possible growth.
  • Withdrawals for qualified expenses such as tuition, fees and books are exempt from federal income taxes — and, many times, state income taxes.
  • The beneficiary can be changed to any relative. For example, if your eldest child chooses not to go to college, you may designate the funds to his sibling. Or, keep the account open and allow for potential growth for the education of your children's children.
  • As the account holder, you maintain control of the money.

The earnings on nonqualified distributions (those that don't meet the requirements of qualified expenses) are taxed as ordinary income and may be subject to a 10% federally mandated penalty.

» Learn more about the advantages of 529 plans.

529 plans come in two flavors.

  • Prepaid tuition plans let the account holder purchase credits (and sometimes room and board) at eligible colleges and universities, therefore locking in tuition prices ahead of time. Residency restrictions may apply.
  • College savings plans allow greater flexibility in how the funds can be used than prepaid plans. In addition to tuition, account assets also can help cover expenses such as mandatory fees, room and board and textbooks. And funds are not earmarked to a particular school.

Because there are differences between the two plans, it's worth doing your homework to see what works best for your student. Additionally, 529 plan structures vary by state. Because you're allowed to open a 529 savings plan offered by any state, shop around for the plan that best suits your needs. "Be sure you fully understand your plan before signing up," says Jason Heffner, senior financial services representative with the Principal Financial Group®.

Compare your savings options.

College savings plans may suit your situation better than a Roth IRA or other savings or investment vehicle, so it's worth reviewing your options. Consider that:

  • 529 plans don't have the annual income restrictions that Roth IRAs do, so you can make contributions even if your household income is high.
  • The plans' contribution limits are quite high, so you can typically contribute much more than to a Roth IRA.
  • 529 plans have low minimum contribution levels that help make them affordable for households with smaller incomes.
  • Funds in a 529 plan are considered an asset of the account owner, not the student, and typically won't impact the student's request for financial aid.

Make the most of your 529 plan.

  • Start early, add often. Consistency is key to a successful plan, says Heffner. He suggests contributing to the account on a monthly basis to help stay on track.
  • Review your plan regularly. Heffner suggests reviewing your 529 plan and making adjustments as needed. To see if you're on track with your savings goals, use our "What Will It Take to Save for a College Education?" calculator.
  • Continue saving for retirement. Don't let your retirement saving take a backseat to college costs. "Save for retirement first and for college second," says Heffner. "It's possible to take out loans for education but not for retirement." Remember: You can always help your student with loans after graduation if your retirement savings are in a good place.
  • Sit down with a financial professional and discuss all the choices available to you for college savings.

Talk with a financial professional Find out how you can save for college education with a 529 plan. Talk with a financial professional to get started.


Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, Member SIPC and/or independent broker dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392. Certain investment options may not be available in all states or U.S. commonwealths.

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t13070303u4 – 7/2013

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