Saving for College (Without Overdoing It)
If you’re saving for your child’s education, chances are you’ve heard of the 529 plan. And for good reason: the 529 plan is one of the most tax-efficient ways to save for college.
For many states — including Michigan — you can deduct your 529 contributions on your state tax return. For Michigan, the deduction is $5,000 for single taxpayers and $10,000 for married taxpayers (note these are totals; the IRS doesn’t care how many kids you have!).
These investments grow tax-free and if used for qualified education expenses, the distributions from the 529 are also tax-free.
Remember, in order to get the state deduction for 529 contributions, you must use your residency state’s 529 plan. Fortunately, most 529 plans have good investment options.
Why I Recommend Funding About Half Through a 529
Now that I’ve raved a bit about the tax advantages of using a 529 college, I often tell parents: you don’t have to fund every dollar of college through a 529 plan.
In fact, you might not want to.
529 plans are excellent tools, but they’re best used as part of a broader strategy. I typically recommend aiming to cover roughly 50% of expected college costs with a 529 plan, and leaving the other half to be funded through a mix of savings, cash flow, scholarships, work-study, or even contributions from your student.
Here’s why:
529 plans are limited to qualified education expenses. If your child doesn’t use all the funds, or gets a scholarship, or chooses a nontraditional path, any leftover balance not rolled into a Roth IRA may be subject to income tax and a 10% penalty on earnings.
Kids having some “skin in the game” can be a good thing. When students contribute to their education — through part-time work, loans, or even just helping manage the budget — it builds buy-in. They tend to value the experience more, take it more seriously, and emerge with stronger financial awareness.
The Tax Benefits Are Real
Let’s be clear: the tax advantages of a 529 plan are powerful.
Tax-free growth: Money grows tax-free while it’s invested within the 529 account.
Tax-free withdrawals: As long as it’s used for qualified education expenses (like tuition, books, and housing), you won’t pay federal income tax on the earnings.
State tax breaks: Many states (including Michigan!) offer deductions or credits for contributions.
Over 18 years, that tax-free compounding can make a big difference.
What If You Overfund the 529? There’s a New Option
I’ve alluded to this in a prior post but starting in 2024, there’s a new way to use leftover 529 money: you can roll up to $35,000 into a Roth IRA for your child. It’s a great backup plan but it come comes with rules:
The 529 must have been open for at least 15 years
The Roth IRA rollover is subject to annual contribution limits
The beneficiary must have earned income
And the $35,000 limit is lifetime, not per rollover
It’s a helpful safety net, but not a reason to overfund.
College Isn’t Just About Paying the Bill
If you decide not to cover every last dollar for your kids and you communicate that decision clearly, it can actually empower your student.
Helping them think through costs, scholarships, and choices early on gives them ownership over their education. It's not about being punitive; it’s about preparing them for real life.
And remember: you can always help later, whether that’s grad school support, a car to get to a first job, or a boost toward a Roth IRA of their own.
I had one client who surprised their college student by paying off their student loans after graduation. What a gift!
