Think you’re too late for a 529 plan? Think again

Like any parent with pre-college-aged children, you’ve likely been exposed to repeated messages about the importance of setting money aside to help your kids afford higher education. This is not surprising when you consider the 2024-2025 average annual cost for tuition, fees, room and board at a four-year private college was $58,600, according to the College Board. For a four-year in-state public school, the corresponding cost was $24,920 annually.

Paying for higher education is a prominent financial issue for many families, which is why starting early and saving regularly can help give you additional leverage to grow assets and offset some of the financial burden. And utilizing a tax-advantaged 529 savings plan—even if that means starting one just a few years before your kids graduate from high school—may be an effective tool to build a college nest egg.

529 plan basics

A 529 plan allows you to set funds aside for the express purpose of helping to cover education costs. Contributors can choose from a variety of plans and invest the money in different ways, giving 529s a broad appeal. Some key benefits of 529 plans include:

• High lifetime contribution limits—from $235,000 to $575,000, depending on your state
• Tax-deferred earnings and tax-free access to all distributions used for qualifying education expenses
• Oversight of the account that remains with the donor, not the beneficiary
• Flexibility to change the beneficiary (for example, in case the intended beneficiary decides not to go to college)
• The ability to utilize a five-year gift election, where plan contributors can make the equivalent of five years’ worth of gifts in one lump sum while potentially mitigating gift tax consequences
• Up to $10,000 from a 529 account can be used to repay the beneficiary’s student loans
• As of Jan. 1, 2024, beneficiaries may be able to roll over up to $35,000 into a Roth IRA without tax penalties

Can you overcome a late start?

If your child (or children) is already approaching college age, you may wonder if it is too late to start contributing to a 529 plan.

“Just because you haven’t started saving in a 529 to this point doesn’t mean you should forego the valuable benefits,” says Angie O’Leary, head of Wealth Strategies and Solutions at RBC Wealth Management–U.S. But, the earlier you set funds aside to help cover education costs of a future collegian, the greater the opportunity to build a significant pool of assets, she notes.

For example, consider what happens when parents invest a lump sum of $2,000 into a 529 plan and continue with monthly $300 contributions until their child turns 18:

• If they start saving right after their child is born, by the time that child enters college, the account will have grown to $130,077 (assuming an average annual return of 6.21 percent)
• By delaying that same savings regimen until the child’s sixth birthday, the account would only grow to $73,026
• If parents didn’t begin saving until the child turned 12, the total value would reach just $33,284

Tax savings still count

You may have to follow a more conservative investment path with a 529 plan if your child is entering college soon. Still, it’s likely to be worthwhile, according to O’Leary. “If your kid has just started college and you haven’t opened a 529, even getting two or three years of potentially tax-free growth in the account can be helpful,” she says.

“Engage your village,” she adds. “Forgoing material gifts and inviting others to contribute to the fund is a great way for extended family and friends to show the value of a higher education.” This can include family members—such as grandparents, aunts and uncles of the beneficiary—who by gifting can turn those dollars into tax-advantaged contributions. Depending on what state they live in, it’s possible these contributors may be able to claim a deduction on their own state tax return.

If you have a pool of money sitting in a taxable savings or investment account, it may also be used to fund a 529 plan. One option, if you hold assets that are subject to capital gains taxes when sold, is to gift those assets to a child who’s likely to be in a lower tax bracket. The child can then sell the assets at a lower capital gains tax rate (possibly even qualifying for a zero percent rate) and put the proceeds into a 529 plan (as long as the child is 18 or older).

Leveraging the flexibility of a 529 plan

Even if you start saving late, a 529 may have longer-term benefits you didn’t initially anticipate. For example, O’Leary says, if a child decides to pursue a graduate degree, that can extend the potential time horizon for the funds in the 529 plan to grow.

O’Leary points out the flexibility of 529 plans may also allow you to think beyond just the immediate potential needs for college. The scope of these plans expanded with the 2017 Tax Cut and Jobs Act as well as the 2022 SECURE 2.0 Act. Today, funds accumulated in 529 plans may also be used for elementary and high school education expenses, and in certain situations leftover funds can be rolled over to a Roth IRA as long as the account is owned by the beneficiary of the 529 plan.

Additionally, rather than using accumulated assets to help defray college expenses for your own children, the money may instead be allowed to accumulate and be applied toward education expenses far into the future.

“Set aside as much as you can afford now and let that money grow over a much longer timeframe,” O’Leary says. “Ultimately, assets accumulated in the account could even be used to help fund education costs for your grandchildren.”

Quite simply, according to O’Leary, don’t discount the possibility that, while you may be late in saving for the current generation, you can still get a head start on the next generation’s education expenses.

This article was updated in May 2025.