Stop, Drop, and Open. Start Saving for College NOW.

I know. Ugh. The alphabet soup of savings plans…ROTH IRA’s, 401 A and B’s, 529’s. I don’t know if any of these examples of savings funds are even REAL, that’s how bad I am at anything beyond my personal checking account. (Oh, this just in: those funds ARE the real deal.) But I did some research. 529’s are a great way to stash money away for higher education. So stop, drop and open: start saving for college now.

What are 529 Plans?

529’s (AKA Qualified Tuition Programs, or Section 529 Plans) allow you to put away money for educational purposes: college, apprenticeships, K-12 tuition, and college loan repayments.

Yes, you heard that correctly.

College loan repayments, too.

The 529 is set up in the name of a beneficiary, which can be one of your children or grandchildren, yourself, a friend, or other family member.

529’s come in two varieties. The first, and more common, are the Educational Savings Plans. Money invested in this type of 529 can be used for college tuition and fees, room and board (including off-campus housing), books and other educational-related equipment (like computers and special-needs tools) for undergraduate and graduate learning. These plans can also be used to pay for up to $10,000.00 annually for K-12 tuition.

The second type of 529 is the Pre-paid Tuition Plan, which is used for specific colleges or universities, for undergraduate tuition and fees only (not for room and board, or for grad school or K-12 tuition). Plans like these may allow families to “lock in” a tuition rate at a given school years before a student plans to attend, and reduce the projected cost of attending college.

How do I get one of these 529’s?

All 50 states and the District of Columbia offer 529 plans. You are not limited to choosing a 529 from your home state. And any 529 savings plan (not pre-paid tuition plans, however) can be used at most institutions of higher learning in any state. For example, if you own a 529 offered by the state of Virginia but live in Missouri, you can use the money from that 529 in any state, not just your state of investment or residence. (But read the fine print for any exceptions.)

Where do I go to get a 529?

529 plans can be purchased directly through the state of your choice,*** or through a broker or financial adviser. There are fees for setting up a 529, and these fees vary from state to state. And working with a financial adviser can incur fees on top of set-up costs, as brokers are able to charge a 5% commission on your assets in a 529. Plus, there may be additional fees depending on where your contributions are invested. (Don’t freak out…more on this later.)

***To start a 529, a good place to begin is Google. Simply search “(state name) 529 plans”.

How does a 529 work?

A 529 is an investment account, and your 529 of choice will have options for where you wish to invest your after-tax contributions. Usually your choices include a mutual fund portfolio, much like a ROTH IRA. The value of your 529 will then depend on how much you add to it, and the market performance of your chosen fund portfolio.

Advantages to 529’s

• Anyone can invest in a 529, regardless of income level.
• Withdrawals, or if you want to be fancy, qualified distributions, from a 529 used to pay for college expenses, are not, repeat NOT, considered as income on the FAFSA. This is good news, as greater income equals decreased FAFSA loan eligibility. However, if someone other that a parent or the student owns a 529 for that same student, those qualified distributions do reduce a potential loan amount. Keep this in mind.
• There are tax benefits (see more on this below).
• There is no minimum to how much you must contribute annually.
• The owner of the 529 stays in control of the 529 account even after the beneficiary becomes “legal” (usually age 18).
• 529’s are easy. The treasurer of your 529’s home state hires an investment company to manage the account (it’s not on you!) and regular contributions can be made through an autopay system to make sure you don’t miss out on on saving up. What’s more, in many states you can chose a “target date fund,” which automatically starts investing more conservatively the closer your beneficiary gets to starting college.

Disadvantages to 529’s

• Investment options are limited to what a given state offers for its 529. So if your state’s choices don’t suit your family’s and beneficiary’s needs, check options in another state.
• As mentioned above, setup fees vary from state to state, as do the minimum contributions, which can range from $15 a pop up to a hefty $3,000.00
• 529’s must be used for education-related expenses; however, the owner of a 529 can withdraw earnings for other purposes…for a 10% tax penalty.
• While you can change 529 plans and your chosen investment profile, there are restrictions to doing so.

What are the tax benefits to opening a 529?

There are several. While opening a 529 isn’t tax-free, the government doesn’t get to double-dip. As our contributions (still feelin’ that fancy feel…) into a 529 have already been subjected to income tax and social security, the money we put in isn’t taxed a second time. And the earnings from those contributions grow tax-free as well (as far as the federal government is concerned…check your state for possible taxes owed on a 529). AND (feels like Christmas, don’t it?) any money taken out of a 529 to pay for school is not taxed, either.

PLUS…some states offer a tax break for any 529 contributions made in a tax year. The catch? The 529 must be one in your state of residence, so that limits your 529 options if this tax break is a priority to you.

How do I get started?

First, you’ll need an idea how much of the green stuff your beneficiary will need for higher education. A place to start crunching numbers is with a college savings estimator like the one found at: tools.inviteeducation.com.

Next, consider your personal situation…income, values, your own savings, how many years it will be until your beneficiary will need to tap into the 529. Obviously, the earlier you start investing in a 529, the better; the best time being as soon as that future scholar has a birth certificate and social security number (needed in order to set up a 529). But if that person is already in elementary or high school…don’t despair; it’s never too late to start saving. Remember, a 529 can be used for college loan repayment.

Consider the fees for setting up a 529 as they vary. Definitely consider buying into direct-sold funds instead of going through an investment broker, as the latter will likely charge additional fees.

Also to consider: what is the anticipated growth/return on a fund? Are lower or higher fees worth (to you) the lower or higher return, respectively? Also, how important to you is a state tax break? There will be tradeoffs to consider when selecting a 529.

Feeling Overwhelmed?

That’s normal. Most of us do when it comes to investments. The good news is, 529 accounts are easy to set up and maintain, once you’ve chosen one. But even the selection process doesn’t have to be stressful. You can look at the highest-rated 529’s for 2022 here and also compare the best plans for your family here both on savingforcollege.com. Check out savingforcollege.com in general for its comprehensive advice on saving for college.

And some more good news: you can switch 529 savings plans up to once a year if you decide a different plan may work better for your family. This is an option only if the beneficiary of the fund doesn’t change. On that note, you can change up beneficiaries with most 529 savings plans. This is an advantage because if the first beneficiary doesn’t use the entire 529, you can transfer the fund to someone else, no penalties incurred.

So save away.

But start now. It’s never too late.

More sources to help you start saving for higher education:

investopedia.com — another great resource to learn about 529’s

Forbes.com — tool to compare state 529 plans