Step-by-Step: Starting a 529 Plan

As college costs continue to rise, many parents and grandparents (and even aunts and uncles) hope to save up and help their family's next generation avoid taking on significant student loan debts. One way to help do that is by opening up a 529 plan. You can set your dollars to potentially grow with tax advantages while the kids are still young and then tap into those funds when the time arrives.

As you're considering options for saving for higher education costs, here's some of what to know about starting a 529 plan.

What Is a 529 Plan?

A 529 plan is a state-run investment account that helps you save for college. Most states offer a 529 plan, and you needn't be a resident to take advantage of a state's unique offerings. Whichever plan you choose, you usually can use the funds for institutions in any state. Anyone can open one, and anyone can contribute to one, too.

When you open an account, you deposit funds. That money has the potential to grow tax-free over time. Note that investments cannot guarantee growth or sustainment of principal value; they may lose value over time. Past performance is not an indication of future results. Once the student is ready to head to college, you can use the funds in the plan to pay for any qualified educational expenses. You may also be able to use the money to pay up to $10,000 in student loan debt.

What Are the Different Types of 529 Plans?

If you're considering starting a 529 plan, it's important to know that there are two types:

• A 529 college savings plan. You invest after-tax dollars in assets such as stocks and mutual funds. Most 529s offer a range of investment options, so you can pick one that aligns with your risk profile. The funds can be used to pay for qualified expenses like tuition or books as well as room and board.
• A 529 prepaid tuition plan. You purchase credits for tuition at a school — in today's dollars — which can be turned in later. You may only use the funds for tuition, and it may be limited to a specific in-state school.

Five Steps for Starting a 529 Plan

Opening up a 529 plan for your child or other future student is relatively straightforward. Here are five steps to help you begin the process:

1. Choose Your Plan

For many, this is often the most challenging part. With dozens of options, it may take some time to sort through which one seems best.

Working with a financial professional can help you determine some of the features and benefits that may be best for your needs. They can also help you identify your desired mix of performance and cost.

As you explore your options, consider some key factors:

• Tax benefits. Since you can choose a plan in any state, check if there are any tax benefits. Some states offer tax credits for residents or people who work in the state.
• Plan fees. Investment and administration fees range by plan and state.¹ You'll want to review those carefully because a high fee structure plan may negate any potential tax benefits.
• Investment options. You'll need to check out all the various investment features and choose one that aligns with your time frame and risk level.
• Contribution levels. Some 529s require very small or no contributions to start. But others may have a maximum limit on contributions. Be sure you're selecting one that meets your needs.

2. Pick a Beneficiary

Most people starting a 529 plan will be parents setting up the account for their children's needs. If this is the case for you, you'll open an individual account with you named as the owner and your child as the beneficiary. Review the options if you have multiple children; sometimes it's best to open a new account for each child.

3. Complete the Application & Open an Account

You can enroll in a 529 on your own by completing the process online or working with a financial professional who can help you along the way. You'll provide basic information for you and the student, such as birth certificates, addresses and Social Security numbers.

4. Fund the Account

Next, you'll need to make some decisions about funding the account. Some plans have no minimum; other plans may ask for a few thousand dollars to start. You'll also need to determine how you'll contribute money. You should be able to set up automatic withdrawals from your bank account. Participating employers may even allow contributions to come directly from your paycheck.

5. Pick Your Portfolio

Finally, when choosing a 529 college savings plan, you'll need to build your portfolio. Most plans offer options such as actively managed, passively managed and age-based, which adjusts the asset allocation to be more conservative as the student gets older. Consulting with a financial professional before you choose can help you work through your options.

The Bottom Line

Helping future students pay for college is a wonderful gift. As with many other things related to higher education, it never hurts to start the process early. Setting up a 529 for your child or loved one while they're still young can provide more time for the funds to potentially grow as they age. But remember that, as with any investment, growth is not guaranteed.

It might take some time and patience to sort through the available plans and choose the one that works for you, but rest assured the work you do today can make a difference in the future. If you think you could benefit from working with a financial professional who can take a personalized look at your situation and offer helpful suggestions, don't hesitate to reach out for their assistance.

Sources

1. Saving for College. https://www.savingforcollege.com/529_fee_study/.