A 529 plan is a tax-advantaged savings account designed to encourage saving for future education expenses. Named after Section 529 of the Internal Revenue Code, these plans are sponsored by states or educational institutions.
10 steps across 1 sections
1. Steps Process
- Choose a plan type.
- Savings plan (most common): Functions like an investment account. You contribute money, choose from investment options (age-based portfolios, index funds, etc.), and the balance grows over time.
- Prepaid tuition plan: Allows you to purchase tuition credits at today's prices for future use. Limited to participating state institutions and less flexible.
- Research and compare state plans. You can invest in any state's plan regardless of where you live or where the student will attend school. Consider:
- Investment options and performance history
- Fees and expense ratios
- State tax deduction/credit (your home state's plan may offer tax benefits)
- Minimum contribution requirements
- Plan ratings from Morningstar or Savingforcollege.com
- Open an account. Select a plan and open an account online:
Common Mistakes
- Not starting early
- Choosing a plan solely for the state tax deduction
- Using funds for non-qualified expenses
- Over-contributing
- Ignoring the impact on financial aid
Pro Tips
- Start with your home state plan first
- Use gift-giving occasions
- Superfunding is powerful
- Consider a 529 even if the child may not attend college
- Compare plans at savingforcollege.com