Saving for College: The Basics of a 529 Plan

Help your child get a hard start in paying for college with a 529 plan.

Every month, money is automatically debited from my checking account and deposited into a 529 plan that I opened on behalf of my son. While it’s not a huge amount of money, and the end result will probably not pay for his entire four-year degree, it’s still something, and it will help him in the future.

A 529 plan can be a great way to put the power of compound interest to work for your child. While I believe that a child should take an active role in paying for college (getting scholarships, saving, working, etc.), I do think there is a room for parents and others to help out. And one way to do that is to contribute to a 529 plan.

What is a 529 Plan?

Basically, a 529 plan is an investment account meant to help you save for college. (Jeff Rose, at Good Financial Cents, has a great post answering questions about college savings plans.) You put the money in the account, and if the investment does well, you end up with more money. It’s a way to boost college savings, since you are investing.

One of the great things about the 529 plan is that the money grows tax free. So, as long as your child withdraws the money for qualified education expenses, he or she doesn’t have to pay taxes on the earnings. It is possible to change the beneficiary of the account if something happens to prevent your child from attending college, and you own the assets in the account.

Realize, though, that there is no federal tax benefit for contributing to a 529 plan. Some states will offer you a tax deduction for contributions, though. So, if you contribute to your state’s 529 plan, you might be able to receive a deduction on your state┬áincome taxes. Check with your state, and your state’s plan, to see if this is the case.

Choosing a 529 Plan

Many states offer 529 plans, and you probably ought to start your 529 search in your own state. However, realize that your state’s plan might not be the best for your needs. Choosing a 529 plan should involve thought and research. Some things to consider as you look at 529 plans include:

  • Eligible schools: While many state 529 plans don’t confine you to a single state, some do. Make sure that you have a variety of schools, in various states, to choose from. Unless you are certain that your child will attend college in your state, don’t choose a 529 plan that limits choices. Consider plans that have more school choices.
  • Investment options: Look at the investment options offered. Some plans offer a wide variety of low cost funds that you can invest in. Other plans, unfortunately, offer limited choices and you could be stuck with high-fee plans. These plans erode your earnings. Try to find a plan that will let you choose low-cost investing options.
  • Convenience: Many 529 plans are easy to open, and will allow automatic investments. This can be a great way to ensure that you are making regular contributions. Have a direct debit arranged if possible so that you can conveniently contribute each month.

Do a little research, and you should be able to find a 529 plan that works for you and your child. And, even better, as your child gets older, he or she can help the fund grow by contributing money from an after school job, or by contributing a portion of his or her allowance.

There is no reason not to get a head start on saving up for college. One way to boost your college savings is to make use of investing. Realize that there is a risk of loss, though. Anytime you invest, you could lose money, and there are risks associated with 529 plans. However, with the right research and some planning, you can choose a 529 plan that helps ensure your child’s future.

Image source: Electron via Wikimedia Commons

Written by Miranda Marquit

Miranda Marquit is a freelance writer and professional blogger, specializing in personal finance, small business, and investing topics. She writes for a number of financial web sites and blogs, and has been featured in numerous media. Read about life as a freelancer at MirandaMarquit.com and in her book Confessions of a Professional Blogger.

6 Responses to Saving for College: The Basics of a 529 Plan

  1. Geoff says:

    Very timely piece as I’ve been considering different 529 options myself lately.

    I like to maximize my Roth first as contributions there can be used for school as well (you just have to decide yourself what goes to retirement and what goes to school). The upside of the Roth is that it doesn’t count towards financial aid. When the time comes, if you do try to get a financial aid package, schools will want to take all the money you’ve saved via 529′s but they won’t consider touching your Roth. That said, after maximizing your Roth, 529 is the next best thing. Now I just have to figure out which 529 plan is best for me. The whole process if very daunting!

    • Miranda Marquit says:

      Great idea on the Roth! I think that’s a great strategy. We can also open a Roth in our son’s name — once he begins pulling in an earned income anyway.

  2. Sounds like we have similar philosophies on the 529. I opened one for my spouse. I don’t get any state specific tax advantages in my state, but money set aside in a 529 still can’t be used elsewhere. So I feel like that’s one benefit, that I won’t be tempted to use the savings on something else. Like you I probably won’t save enough to cover the whole degree. But any bit helps I think!

    • Miranda Marquit says:

      Great point about having the money earmarked! Once it’s designated to go elsewhere, it really can help you keep your hands off.

  3. MIssi says:

    Earmarked money is a good idea.

    I also already maximize my Upromise acct but this is good advise as well.

    My advise is if you havent started a plan — Dont forget to visit the longest standing website with 529 information, they have been around since 2001 with compare tools and calculators to help you find the right plan for you. Tax Advantages is always something to look at and they talk about that as well. Savingforcollege.com is the best source for objective information about Section 529 college savings plans and other ways to save and pay for college. They compile and analyze the information that will help parents and financial professionals ease the pain of constantly rising tuition.

  4. MIssi says:

    Savingforcollege dot com was removed from my post above.

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