How to Set Up a 529 Plan

Tom Gilmour is a senior director of Planning, Thought Leadership, and Research for Northwestern Mutual.

Your little one may be grasping a rattle now, but they’ll be tossing a mortarboard in the air before you know it. Translation: It’s never too early to start thinking about how your family will pay for private K–12 school or college.

It’s always smart (and often, daunting) to factor in education along with childcare, diapers, dance lessons, and sports, but the average cost of college continues to escalate at eye-watering rates. The Education Data Initiative finds that college tuition at four-year public schools went up more than 36 percent between 2010 and 2023; for the 2026-27 academic year alone, statistics indicate that the average tuition at all postsecondary institutions will increase 3.25 percent.

According to the College Board, the average cost of college in 2025 was nearly $25,000 for an in-state public school. Private school tuition, fees, and room and dining plans will set you back more than $58,600 per year.

The good news is that there are many ways you can get a head start on saving for college or private K–12 education. For example, you may want to set up a 529 plan, which is often a good option. Here’s what you need to know.

What is a 529 plan?

A 529 plan is a type of tax-advantaged investment account designed specifically for education saving. Your contributions grow tax-deferred, and your withdrawals down the line are exempt from federal and most state taxes—as long as you’re using the money to pay for qualified education costs (more on what this means below).

Who can open a 529 plan?

Anyone 18 or older can open a 529 plan if they are a U.S. citizen or resident with a Social Security number or individual taxpayer identification number. This means parents, grandparents, aunts, uncles, or even friends can open a 529 plan with your child as beneficiary.

Who can I open a 529 plan for?

You can open a 529 plan for anyone, regardless of their age, and they don't have to be a family member. They just have to be a U.S. citizen or resident with a Social Security number or tax ID. Since the beneficiary’s Social Security number or tax ID is required, most people wait until a child is born to open an account.

You can even open a 529 to save for yourself if you're over 18, are a U.S. citizen or resident, and have a Social Security number or tax ID.

How to open a 529 plan

Opening a 529 plan involves a few simple steps.

1. Compare your 529 plan options.

Most states and the District of Columbia sponsor a 529 plan, but you’re not limited to using the one local to you. You can invest in any state’s plan, no matter where you live or where your child eventually attends college. But one benefit of using your own state’s plan is that you could get a full or partial state tax deduction on your contributions if your state offers that benefit. (Otherwise, you don’t get a federal tax deduction on your 529 contributions.)

The two types of 529 plans are college-savings plans and prepaid tuition plans.

• A college savings plan is for general higher education costs. You don’t need to have a particular school identified as you save, but you will pay the tuition and fees charged at the time of attendance—there’s no pre-payment discount as there is with the other type of plan.
• A prepaid tuition plan puts funds toward tuition credits at participating colleges or universities at today’s costs. So, if you and your child are certain that a particular school is in their future and accepts the prepaid plan, you’ll be able to lock in those lower prices. Note that a prepaid tuition plan doesn’t guarantee acceptance.

CollegeSavings.org helps explain the options and makes it easy to compare. Some things to watch for as you’re researching:

• Fees can eat into your returns.
• Different plans offer different investment options. Think about which is right for you.
• Some states offer a tax break on contributions, and some don’t. It’s good to be clear before you commit to a plan.

2. Choose the 529 plan owner and beneficiary.

A 529 is controlled by the account owner (typically a parent, grandparent, or other relative). The account owner controls the money in the 529 plan, including how the funds are invested. The beneficiary of the money in the account is usually a child who will attend college.

If you have two or more children you’d like to help with a 529, consider opening separate accounts for each child. You can switch the beneficiary on your 529 down the line to another member of your family if needed.

3. Decide how much to put into the 529 plan and what to invest in.

Think about the amount of money you need to open your account (some 529 plans require a minimum), as well as how much you think you can contribute regularly. While your instinct is probably to contribute as much as possible now, don’t do so at the expense of other important goals, such as retirement. Your child has more time to earn and pay off any loans, but often in retirement years, a parent’s earning power is limited. A golden rule is to pay yourself first, and then put away what you can for college.

As with other types of investment accounts, you can invest the money in a 529 plan in assets such as stocks, bonds, and money market accounts. Some plans may offer age-based funds (sometimes known as target-date funds), which will rebalance your assets for you automatically depending on when your child will be attending college—the closer the first day of college gets, the more conservative the asset mix becomes.

And while you love to give with unfettered generosity, there are conditions around gifting toward 529 plans, which require an understanding of federal and state rules. For example, different state plans carry different maximum amounts. Federally, there are no annual contribution caps for these plans, unlike retirement accounts, but there are gift tax exemption limits. Each year, $19,000 per person or $38,000 per married couple can be gifted into a single 529 without using any lifetime gift and estate tax exemption.

While 529 plans allow a special five-year election that can help front-load contributions, larger contributions may require filing a gift tax return with the IRS. Make sure to check with your tax professional before you make large financial gifts.

The sooner you start funding a 529, the better, thanks to the power of compound interest. Once you open the account, it’s typically a good idea to set up regular contributions.

4. Use your 529 plan for qualified education expenses.

Most people understand that 529 funds can be used to pay for undergraduate and graduate tuition, but they can also be used for vocational and trade schools—think cosmetology, plumbing, electrical, mechanical, and culinary education and apprenticeships.

For K–12 education, 529 funds can be used for up to $20,000 per beneficiary per year in qualified expenses—including tuition, curriculum materials, books, online educational materials, certain tutoring, testing fees, and certain educational therapies. Once your student gets to college, qualified expenses can include:

• Housing and meals,
• Tuition and fees,
• Books, and
• Technology expenses, such as purchasing a computer and monthly internet costs.

What happens to unused 529 funds?

If your student receives a full scholarship or admission to a U.S. military academy—or they decide not to pursue higher education—you may need to pivot. Fortunately, all that money in the account isn’t lost, and it is still under your control indefinitely.

• You can designate another beneficiary or put the money toward student loans (up to a $10,000 lifetime limit).
• You could give those funds to your beneficiary in the form of a Roth IRA if the 529 has been open for 15 or more years and the funds were invested at least five years before. Annual Roth IRA contribution limits apply, and lifetime rollovers are capped at $35,000.
• In a pinch, you could withdraw the funds for other personal use—but earnings may be taxed as income plus a 10 percent penalty.

Talk it over with your financial advisor

Your Northwestern Mutual financial advisor can answer any questions you may have about 529 plans or other college savings options. Together, you can choose the best way to work college saving into your budget. With a plan in place, you can feel confident that your family is on the right track.

All investments carry some level of risk, including the potential loss of all money invested. No investment strategy can guarantee a profit or protect against loss. This publication is not intended as legal or tax advice. Financial representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.