How to Model a 529 Plan and Saving for College

A 529 plan is a tax-advantaged account for education savings. In ProjectionLab, you can add a 529, contribute to it, and use it to pay for college or other eligible education expenses.

Let’s say you open a 529 with $10,000 the year your child is born and contribute $250 a month. Your child will attend a four-year college starting at 18, with tuition of $55,000 a year in today’s dollars.

Add Your 529 Account

1. Click the pie chart icon on the left side of your screen to open Current Finances.
2. Click + Add Investments, below your investment accounts.
3. In the Add Investments pop-up, click 529 Plan, the last option. You can also search for “529.”
4. Under Balance, enter your current balance, $10,000 in our example.
5. Under Owner, choose who owns the account.

Cost, in the top right corner, is your cost basis, or how much you’ve contributed. It defaults to half your balance, $5,000 in our example. To change it, click the three-dot menu next to Cost and select Edit Cost Basis.

This matters for non-qualified withdrawals, where earnings can be taxed and penalized.

Contribute to Your 529

Add a flow to contribute to your 529 each month.

1. On the Plan tab, scroll below the chart to Flows, to the right of Income.
2. Click + Add Flow.
3. On the Existing Accounts tab, click the + next to 529 Plan.
4. Under Goal, leave Contribution set to Specific Amount and Frequency set to Monthly.
5. In the second Contribution field, enter $250.
6. Under Mechanics, set Funding to Always Fund to contribute every month, even if it means drawing from other accounts. Choose Fund with Income to contribute only from leftover income.
7. Under Time Range, change End from End of Plan to the month and year your child starts college, such as September of the year they turn 18.
8. Under More Options, toggle on Tax-Deductible if your contributions are deductible, such as in a state with a 529 deduction.

Add College as an Education Expense

1. On the Plan tab, scroll below the chart to Expenses. Click the orange + in its top right corner, then choose Education.
2. Under Name, enter a name, such as “College for Child.”
3. Under Starting Amount, enter the yearly tuition, $55,000 in our example.
4. Under Frequency, choose Yearly.
5. Under Time Range, set Start to the month and year college begins, such as September of the year your child turns 18, and End to May four years later.
6. Under Change Over Time, choose Match Inflation so tuition keeps pace with inflation.
7. Under Tax Options, leave Tax-Deductible toggled off unless the expense reduces your taxable income.

Pay for College From Your 529

By default, Pay From is set to Automatic, which uses current-year income first, then other accounts. To pay from your 529 instead:

1. Under Pay From, choose Specific Account.
2. In the dropdown to the right, check 529 Plan. If the 529 runs out, any remaining amount is funded automatically.
3. Leave Tax Treatment set to Auto, which applies taxes based on the account type. The other options are Taxable, for full tax treatment, and Tax-Exempt, for no taxable event.
4. Under Flexibility, choose Essential. The other options are Discretionary, Hybrid, and Not Spending.

What If My 529 Doesn’t Cover It All?

In our example, $10,000 plus $250 a month grows to roughly $143,000 by age 18, assuming ProjectionLab’s default 7% average annual return. That covers about two and a half years of tuition. The rest is funded automatically, using current-year income first, then your other accounts.

To close the gap, you could test a higher monthly contribution or add a one-time contribution.