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10 mistakes to avoid with 529 savings plans

Amy Fontinelle

Posted on August 03, 2023

Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
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Point out that avoidance and procrastination are some of the leading limitations when it comes to taking advantage of 529 college savings plans.

Warn that misusing the money saved or not knowing the rules can also derail 529 plan benefits.

Note that efforts to try and game the college financial aid system often don’t pay off.

Helping your child pay for a college education can seem like a daunting task. Luckily, there are Section 529 plans, which are state-sponsored programs that provide tax benefits when saving and investing in a special account for elementary, secondary, and postsecondary education.

They are a popular way to save for college. At the end of 2022, 14.8 million 529 savings accounts held $411.3 billion, according to the Investment Company Institute.1 These figures include both regular savings programs and the less popular prepaid programs. (Related: A primer on 529 investment strategies)

Still, not enough families take advantage of 529 plan benefits. And those that do sometimes make mistakes.

To get the most from a 529 plan, you may want to consider these possible pitfalls:

  1. Avoiding the math
  2. Not opening one ... or procrastinating
  3. Not looking out of state
  4. Using the money for K–12 expenses
  5. Letting fear of tax penalties drive your decisions
  6. Failing to adjust for risk
  7. Not contributing throughout the college years
  8. Ignoring withdrawal rules
  9. Prioritizing college over retirement
  10. Skipping out on 529s to get more financial aid

Here’s more information about each of these potentially troublesome areas for your college savings plan.

1. Avoiding the math

Based on recent trends, college costs by 2039 — including tuition, supplies, and living costs — could be as much as $222,466 for a four-year public in-state university and $437,982 for a four-year private school, according to the College Board.

Unfortunately, many families don’t prepare for the costs. Results from the latest MassMutual College Savings Study reveal that just 28 percent of families who expect their kids to attend an institution for higher learning plan to use a tax-deferred savings program, like a 529 plan, to save. Instead, families are far more likely to use traditional savings accounts, which offer no tax benefit and miniscule interest rates.

The better move is to understand the costs by using this calculator — How much do I need to save for college? — and then developing a plan to address them.

2. Not opening one ... or procrastinating

If a tax break on college spending sounds good to you, then not opening a 529 plan may be a mistake. More than 30 states allow either a state tax credit or deduction for contributions to their plans (though the IRS offers no federal deduction). No federal or state tax is due on any earnings while they remain in the account, which helps the balance grow faster. And when you withdraw the money to pay for qualified educational expenses like tuition, fees, books, supplies, computers, and software, there’s no federal tax — and sometimes no state tax — on the money, either. (See IRS Publication 970 for details.)

You can even contribute before your child is born by naming a parent as the account’s beneficiary, then changing the beneficiary to the child later.

By opening an account as soon as your child is born, or earlier, you’ll have the opportunity to earn higher returns by taking calculated investment risks early on, when you have years to recover from a potential downturn.

You’ll also have more time for returns to compound, whether those returns are from stocks or from more conservative investments, such as bonds and CDs.

To make saving less daunting, many people contribute to accounts in small, monthly amounts instead of trying to come up with a lump sum annually. You may also consider setting up automatic contributions, so you don’t even have to think about it from month to month.

3. Not looking out of state

The benefit of contributing to a 529 savings plan offered by your state of residence is that your contributions may lower your state income tax.

However, you aren’t limited to 529 plans offered by your state. Some states even provide income tax benefits when you contribute to another state’s plan.

It could be worth contributing to another state’s plan if you’ll save on fees and expenses and have access to high-quality investment options. That’s especially true for residents of the 16 states that don’t provide tax incentives for such plans.

4. Using the money for K–12 expenses

The 2017 Tax Cuts and Jobs Act made it possible to use 529 plan savings for up to $10,000 per year in qualified elementary and secondary education expenses. But just because you can doesn’t mean you should.

“In my opinion, it’s only a good idea to use a 529 plan to pay for K–12 expenses once a child’s college education has been fully funded,” said Logan Allec, a CPA and owner of the personal finance site Money Done Right.

The earlier you withdraw the money, the less time it has to grow and compound.

An exception is when parents have considerable means to contribute to a 529. They can use it as a preferential tax arrangement for their private education spending before college. (Learn more: Paying for K–12 private school tuition)

5. Letting fear of tax penalties drive your decisions

Are you afraid of putting money into a 529 plan that you might need for something else or that your child won’t end up using for school?

There’s no federal penalty or tax on withdrawn contributions. You already paid federal income tax on that money before putting it into the 529. However, you may have to repay any state income tax breaks you got on your contributions.

The IRS will penalize you by 10 percent of the withdrawn earnings. You’ll also have to pay income tax on withdrawn earnings, as you would with any ordinary bank or brokerage account.

Despite these charges, the risk of not being able to afford college without serious student loan debt may be more troublesome. But that decision depends on your own situation and risk tolerance. (Learn what to do if your child doesn’t go to college: Alternatives for 529 college savings)

6. Not adjusting for risk

Unlike IRAs but similar to many 401(k)s, 529 plans offer a limited selection of investments. It’s your responsibility to choose the investments with the right level of risk and potential reward for your timeline and risk tolerance.

Eighteen years out, you may be able to afford to take more risk by allocating much of the portfolio to stocks.

As your child gets closer to college, the account balance will likely need to be invested more conservatively. Once they’re in college, cash and fixed-income investments are considered by most financial experts to be the safest bets for protecting principal.

Some plans offer age-based portfolios that automatically reduce risk as the child gets closer to college. Other plans require you to change the asset allocation yourself.

7. Not contributing throughout the college years

If your 529 plan isn’t large enough to fully fund your child’s college education at the outset, and if you’ve already maxed out other tax-advantaged vehicles, such as retirement accounts, it probably makes sense to keep contributing to a 529 plan while your child is in college so you can enjoy the tax-free growth in the plan, Allec said.

“Also, if you happen to live in a state that gives a tax deduction for contributions to a 529 plan, you will enjoy tax breaks for your contributions while your child is in college,” he added.

You don’t want to risk losing money on investments in the account during that short period while your student is in school. So contributions to the account should likely be steered to less risky investments.

8. Ignoring withdrawal rules

Withdrawing too much from a 529 plan when it’s time to pay for school can lead to preventable taxes and penalties.

A common error is withdrawing money in December and not spending it until tuition is due in January. The result can be mismatched withdrawals that are higher than the student’s qualified education expenses for the calendar year.

A similar problem can arise if both parents and grandparents have saved in a 529 and don’t coordinate their withdrawals for the student’s expenses.

Another common mistake is trying to use 529 funds to cover sports, clubs, activity fees, student loan payments, and transportation. The IRS doesn’t consider these qualified education expenses.

A few options are available to correct a mistake if you act quickly. These include rolling the excess distribution into another 529 plan within 60 days or prepaying next year’s expenses.

9. Prioritizing college over retirement

Parents learn right away that their kids come first. Whether your baby needs a dirty diaper changed or your kid needs a ride to soccer practice, you’ll drop everything to make it happen.

When it comes to saving for college, experts say to resist this urge.

“Your number one goal should be to max out your Roth IRAs and 401(k)s — then you can look at other tax-efficient savings vehicles, like 529s,” said Michael Foguth, president and founder of Foguth Financial Group in Brighton, Michigan. “Until your retirement accounts are maxed out, don’t contribute elsewhere.”

Why not? Your child can get college money from other sources, but your window to fund retirement is limited, and there are no retirement loans. Plus, a parent’s retirement account assets won’t reduce a child’s financial aid.

10. Skipping out on 529s to get more financial aid

Yes, 529 plan assets count against your child’s financial aid eligibility. But no more than 5.64 percent of plan assets count toward the expected family contribution — a percentage so small that only a lower-income household with a low marginal tax rate might not find that the tax benefits of a 529 plan outweigh the financial hit, according to Allec.

For a 529 plan with $30,000 in it, your child’s need-based financial aid could be reduced by a little under $1,700. The benefit of having $28,300 for school outweighs the small financial aid reduction.


529 plan benefits are one of the best ways to save for your child’s college education. They have a minimal impact on financial aid eligibility. They also offer tax-free growth and, in many states, income tax breaks. Avoiding major mistakes will help you get the maximum benefit of saving in a 529 plan.

Discover more from MassMutual...

529 college savings plans underutilized by many families

Getting the most out of your 529 plan

A primer on college financial aid

This article was originally published in July 2019. It has been updated.


Investment Company Institute, “Release: 529 Plan Program Statistics, December 2022,” May 5, 2023.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.