Your 529 Guide for "529 Day"

In honor of “529 Day" (May 29th), today’s blog post will cover the basics of what you need to know about saving for college with a 529 plan.

529 Plan Overview

For most families with college-bounds kids, 529 savings plans offer an easy, efficient and tax-savvy way to save for college. Today I’m going to do a deep dive into the world of 529 plans, and since many of my clients live in Virginia, I’ll focus on the best options for Virginia residents.

First, let’s establish what a 529 plan is. A 529 plan is a savings account specifically designed for college savings. With the new tax bill, 529 plans became even more flexible and useful as they can now be used to pay for private education before college as well. 529 plans are sponsored at the state level, but don’t let that confuse you. For regular 529 plans, you can invest in any state 529 plan and use those funds for any eligible school in the country. We’ll dive more into the details of that later.

The basic advantages of 529 plans:

  • Your investment grows tax-deferred
  • The investment becomes tax-free if you use the funds to pay for eligible expenses (tuition, fees, room & board, books, etc.)
  • In the case of Virginia, you can deduct up to $4,000 per year per account on your Virginia state income taxes
  • There are no income restrictions on who can invest in a 529
  • The limits of how much you can invest each year are very high
  • 529 accounts are generally owned by a parent, with the child named as a beneficiary. For college financial aid purposes, 529 plans are considered an asset of the parent and receive more favorable treatment.

What Counts as a Qualified Higher Education Expense?

Expenses for which a 529 account may be used, as allowed under IRC Section 529, are as follows:

  • Tuition (may be for college, graduate-level degrees or private or religious K-12 tuition)
  • Fees
  • Room & board expenses during an academic period in which the Beneficiary is enrolled at least half-time in a degree, certificate or other program that leads to a recognized educational credential awarded by an Eligible Educational Institution
  • Textbooks, supplies and equipment required for enrollment or attendance
  • Computers, peripheral equipment, software and internet service primarily used by the beneficiary
  • Special needs services incurred in connection with enrollment or attendance

What Colleges Qualify? Eligible Educational Institutions (EEI)

An accredited post-secondary educational institution offering credit toward a bachelor’s degree, an associate degree, a graduate level or professional degree or another recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions are also considered to be Eligible Educational Institutions. The institution must be eligible to participate in a student financial aid program under Title IV of the Higher Education Act of 1965 (20 U.S.C. Section 1088).

To check the eligibility of a school, visit and select “School Code Search” or contact the school directly.

Types of 529 Plans

There are a few broad types of 529 plans to understand:

  1. Regular vs. Prepaid 529 plans
  2. Direct-sold vs. broker-sold

Regular vs Prepaid

Regular 529 plans are by far the most common. We’ll expand on the details below, but the basic idea of a regular 529 plan is this: you contribute funds to a 529 plan and choose funds within that plan to invest in. Your account grows tax-deferred and can be withdrawn tax-free if used to pay for expenses at any eligible college in the US (any school that participates in the Federal financial aid program, which is almost any school. See above description of Eligible Institutional Institutions). You can choose any state plan and you can use the funds to pay for college in any state.

While regular 529 plans offer quite a bit of flexibility, prepaid 529 plans are less common and more restrictive. Not all states offer prepaid plans. For a prepaid plan, you are not directly investing in mutual funds. Instead, you are locking in current tuition prices now, to be used when your child attends a public university in that same state. You can still use the funds to pay for private and out-of-state schools, but much of the benefit of the prepaid 529 plan will be negated at that point. More on that later.

Direct-sold vs Broker-sold

Most states offer a direct-sold plan. In Virginia, it’s just called Virginia 529 ( Anyone can open a 529 account there. There are no commissions or fees, and no broker (or third party) is required to open the account. Direct-sold plans are almost always the cheaper option since there are no commissions or fees paid to a broker. 

Broker-sold plans (sometimes called Advisor-sold) are sold through brokers and advisors who get paid a commission on any contributions you make (either an upfront fee with each purchase or an ongoing fee). The advantage is that you work with a broker to help you decide the funds you invest in. In most cases, it doesn’t make sense to pay a broker a 5% fee on your contribution to help you decide which funds to invest in.


Virginia 529 Choices

We are very lucky in Virginia to have excellent 529 plan options. See the Saving for College website to see how they rate the Virginia plans.

You don’t have to choose the state 529 plan that matches the state where you reside, but some states offer income tax deductions for using their own plan. Virginia allows a $4,000 deduction per year per account, so that’s a great incentive to use the Virginia plans. If you contribute more than $4,000 per account per year, you can roll over the deduction indefinitely. It’s a good deal.

Virginia offers direct-sold, broker-sold and prepaid plans. Let’s explore each one.


Virginia 529 Plan (Invest529)

The direct-sold Virginia plan is a highly rated plan. You can do your own research at I like the Virginia 529 plan for several reasons:

  • Relatively low fee
  • Easy to set up online
  • Easy to get help (they are very responsive to questions by phone)
  • Plenty of great investment choices

The fees for Virginia 529 plans are as follows:

  • No fee to open an account, but there is a $25 account minimum
  • No account maintenance fees
  • Program manager fee of 0.10%
  • Underlying fund fees vary from 0.04% to 0.66% depending on the fund you choose. These are pretty low compared to other plans (such as broker-sold plans and even many other state plans)

Investment Choices at Virginia 529 (Invest529)

Virginia 529 offers three different broad investment choices:

  1. Target date funds (best choice if you just want to set it and forget it)
  2. Static passive funds (basic, low-fee funds). You’ll probably want to change the fund and allocation (the kinds of funds its invested in) over time to be more conservative as your child’s college start date gets closer
  3. Static active funds (slightly higher fee funds with the hope of returns that could beat index funds). Just like option 2, you’ll have to change your allocation over time

The target date funds are offered in 3-year increments, and automatically change their allocation over time based on the year your child will start college.

For example, the 2024 fund has an allocation of 40% Equity (stocks)/60% Fixed Income (bonds). That’s a fairly conservative allocation, and appropriate for most families who are a few years out from their child starting school. In contrast, the 2036 fund has a much more aggressive, growth-oriented allocation of 80% Equity (stocks)/20% Fixed Income (bonds). This is a riskier portfolio, but it is often appropriate to take more risk for funds that won’t be touched for 15 years.

Virginia Prepaid 529 (Prepaid529)

I am a big fan of the Virginia Prepaid 529 plan under certain circumstances. College prices have been increasing much faster than inflation for the last 20+ years. By locking in prices now, you are hedging against higher prices in the future. If tuition prices go up by 5% each year between now and when your child enters college, you have effectively gotten a 5% “return” on your investment. Prepaid plans offer a more conservative approach to paying for college - no need to take on investment risk, just lock in today’s prices.

Prepaid plans do NOT cover room & board and other supplies and fees, so in most cases it makes sense to have a regular 529 in addition to a prepaid 529. The prepaid 529 can be used to pay for tuition and mandatory fees, then the regular 529 can be used for room & board, etc.

The reality is many people prefer a combination. For my own family, we have locked in several years of tuition through the Prepaid529 plan. I figure at least one of my three kids will go to a Virginia public school. For the rest of our college savings, we use regular, direct-sold 529 accounts.

Three Ways to Pay for Prepaid529

The Prepaid 529 plan is very flexible in how you choose to participate and pay:

  1. One-time payment in full
  2. Monthly payments (spread your payments up the spring of your beneficiary's high school graduation year)
  3. Down payment (lower your monthly payment by making optional down payment when you open the account)

Current Prices for Virginia Prepaid529 Tuition:

Child Age/Grade


VA Public 4 Year College

VA Public 2 Year/

Community College

Newborn - Age 4/5


1 Semester

2.6084 Semesters

K - 4th Grade


1 Semester

2.6084 Semesters

5th - 9th Grade


1 Semester

2.6084 Semesters







What Happens to Your Prepaid529 If Your Child Goes to Non-Public or Non-VA School?

If your child does NOT go to a Virginia public school, you have a few options. One, if you have multiple children, you can change the beneficiary to one of your other children (as long as they are in 9th grade or younger at the time). You can also just roll the balance into a regular 529Invest plan. In that case, you'll get a "reasonable return" on the funds you contributed. Virginia's definition of reasonable return is quite low -- basically what you would get in a money market fund. So, the good news is you will not lose the money you contributed. The bad news is that if you don't use it for VA public tuition, you probably would have been better off investing the funds in a regular 529 account so they could have grown at market rates of return.

Which plan is best? That depends!

Regular, Direct-sold 529 Plan

A regular, direct-sold 529 plan is great for almost everyone savings for their kids’ college expenses. If you don’t mind taking some investment risk, over time, your investments are likely to grow faster than college inflation. These funds are the most flexible —and can be easily be used to pay for college expenses at almost any college in any state (see exceptions above).

Prepaid 529 Plans

Prepaid plans are a great fit in some circumstances. If you are sure you child will go to a Virginia public school, it’s a good deal. If you have multiple children and are sure at least one of them will go to a Virginia public school, it may make sense to put at least some of your savings into a prepaid 529. If you are risk-averse and prefer not to see your investments balance go down, this is also a good choice. You should never lose money in a prepaid plan. The worst that will happen is that if your child does not use the funds for a Virginia public school, you roll your contributions plus a small rate of return into a Virginia Invest529 plan.

Broker-sold Plans

Broker-sold plans usually only make sense if you are already working with a broker whom you really like, and you feel comfortable paying the additional fees to invest in broker-sold plans. The broker-sold plan in Virginia is the CollegeAmerica plan and it offers American Funds for its fund choices. American Funds tend to be higher fee, but they do offer a solid lineup of fund choices. If you want to invest your 529 funds in specific American Funds mutual funds, the CollegeAmerica plan is a good choice.

I’ve summarized some of the pros and cons of each type of plan below: 

Regular 529 Plans

(such as Virginia 529Invest)

Prepaid 529 Plans

(such as Virginia Prepaid529)

Broker-Sold Plans

(such as CollegeAmerica)



Low fees

Opportunity to grow investments

Tax-deferred growth

Tax-free withdrawals for qualified expenses

Virginia state income tax deduction

Lock in today's tuition prices now

Hedge against future tuition increases

Tax-deferred growth

Tax-free withdrawals for qualified expenses

Virginia state income tax deduction

Help from broker in choosing investments

Access to American Funds investment choices

Tax-deferred growth

Tax-free withdrawals for qualified expenses

Virginia state income tax deduction


Subject to stock market risk

Not overly flexible

Not getting the benefit of stock market investment returns

Higher fees

Subject to stock market risk

In summary, 529 savings plans are a great way for many families to start saving to send their kids to college. Whether you save a lot or a little is up to you and your family. Every family’s financial circumstances are different, and every family has their own philosophy on how much they would like to contribute toward their children's college education. It's a personal decision driven by many factors.

I hope you feel more informed about your choices now that you’ve read all the way to the end! If you want to understand more about your options and how college savings fits into your family’s overall financial picture, click here to contact me about setting up a free, 30-minute phone consultation. Happy May 29th and happy savings!


Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Alyssa Lum, and all rights are reserved. Read the full Disclaimer.