How you could be saving yourself short if you're not taking advantage of a 529 account
The cost of not saving for education in a 529
Most families believe higher education is an important investment in a child's future.* And with education costs rising, parents and grandparents who save early and often can help give their loved one the best chance of success. However, 55% of parents use savings, investment, and retirement accounts not designed specifically for education savings.*
Here's the bottom line: You could be saving yourself short if you're not taking advantage of a 529—an account that's built for education savings.
What it could cost you to miss out on 529 plan benefits
Families who want to be as prepared as possible for education costs should consider saving in a 529 account. If you're using an account that doesn't offer the same benefits as a 529, you could miss out on tax advantages** and potential growth.*** For example, here's how the difference in accumulated savings might look:
Note: This hypothetical example of a long-term average return does not represent the return on any particular investment and the 6% rate is not guaranteed. It is an illustrative example of a long-term average return on a balanced investment of stocks and bonds. The account comparison assumes 4% annual capital and 2% annual income returns. After-tax return assumes a complete liquidation of the account, including applicable taxes. Calculations assume a 22% federal income tax and 5% state income tax, along with a combined 20% capital gains tax rate. Source: Vanguard. Note that 529 accounts will be limited to the investments offered by the plan sponsor, but generally offer well-diversified index investments. Market returns are not constant and will fluctuate annually. Lower tax rates on dividends and capital gains may make the taxable investment more favorable and the difference between taxable and tax-deferred ending balances less. Any future changes in the tax treatment of investment earnings or a rate of return that is lower than the assumed rate of return may further impact the comparison. Investors should consider their time horizon and current and expected future tax rates before making an investment decision. The 529 ending balance calculation assumes proceeds are used for qualified expenses as defined by the Internal Revenue Code and discussed in the plan’s Official Statement. If this were not the case, the ending balance, and the difference between account balances, could be lower due to applicable penalties and taxes.
Pursue higher education with less of a debt burden
Parents who understand firsthand the burden of student loans may be even more inclined to find a better way to save for a loved one's higher education. Imagine helping make it possible for your child to graduate from the university or trade school of their choice and start their career without the stress of student loans.
Opening a 529 is a way to give yourself and your family some assurance that you're doing everything you can to prepare them for higher education and beyond. Once you've opened a 529 account, every investment you make gets you closer to minimizing or even avoiding student loan stress in the future.
529 plans are more flexible than you might think
Your loved one may not know yet what they want to do in the future. Thankfully, a 529 account provides them with options. In fact, a 529 is flexible enough to accommodate a variety of educational paths, including trade schools, 4-year universities, and graduate programs. Some 529 plans can even be used to pay for K–12 tuition and fees of up to $10,000 per student per year at a public, private, or religious school.†
Account owners will also be allowed to roll over 529 plan assets to a Roth IRA for the beneficiary beginning in 2024, with certain restrictions including a holding period of 15 years.††
Here are a few more things to know about 529s. Some might surprise you!
Ready to open a 529?
For more than 45 years, Vanguard has helped investors stay the course, no matter what the markets are doing. And for nearly 25 years, Vanguard has been helping families use 529 plans to prepare for higher education. The Vanguard 529 comes with high-quality investment options, and our costs are among the lowest in the industry.†††
If you decide The Vanguard 529 is a good fit for you, here are some time-saving tips for getting started:
- Basic information. Have the beneficiary’s Social Security number, birth date, and address (or start with your information and change it to the beneficiary's later).
- Investment choices. Choose an expertly assembled Vanguard Target Enrollment Portfolio, or build your asset allocation from our individual portfolios.
- Bank information. Enter your bank account and routing numbers if you plan to make your first contribution through an electronic bank transfer.
330,000+ families use The Vanguard 529 to save for more than half a million futures.
*Source: Sallie Mae and Ipsos, How America Pays for College 2022.
**Certain conditions may apply.
***Bank deposits and CDs (certificates of deposit) are guaranteed (within limits) as to principal and interest by an agency of the federal government. Bank accounts can offer more liquidity, ATM access, and overdraft protection. You should consider all material differences before choosing to invest.
†State tax treatment of withdrawals for K–12 tuition expenses, apprenticeship program expenses, and student loan repayments is determined by the state(s) where the taxpayer files state income tax. Please consult with a tax advisor for further guidance.
††This is a provision of SECURE 2.0, passed in December 2022 as a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
†††Vanguard average 529 portfolio fees: 0.14%. Industry average 529 portfolio fees: 0.50%. Source: ISS Market Intelligence, as of December 2022.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about The Vanguard 529 College Savings Plan, obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor.
For more information about any 529 savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors. Vanguard Marketing Corporation serves as distributor for some 529 plans.
The Vanguard 529 College Savings Plan is a Nevada Trust administered by the office of the Nevada State Treasurer.
The Vanguard Group, Inc., serves as the Investment Manager for The Vanguard 529 College Savings Plan and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Ascensus Broker Dealer Services, LLC, serves as Program Manager and has overall responsibility for the day-to-day operations. The Plan's portfolios, although they invest in Vanguard mutual funds, are not mutual funds. Investment returns are not guaranteed, and you could lose money by investing in the Plan.
If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors.