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What is a 529 Plan and Should I Open One?

What is a 529 Plan and Should I Open One?
31 Jul

Going to college is more expensive than ever before. According to The College Board, a four-year degree at a public, in-state university can cost nearly $40,000. Opt for a private school and that number jumps to over $120,000.

With the high cost of college, saving for your child’s education is a terrific way to prevent them from taking on too much student loan debt. One of the best ways to save is by using a 529 plan — a tax-advantaged account for education savings.

Below, find out how 529 plans work and what makes them so advantageous.

Why a 529 helps you save for college

A 529 plan is a tax-advantaged savings account designed to encourage parents and relatives to save for a child’s education. 529 plans are sponsored by states, state agencies, and schools, but there are now Private College 529 Plans, too.

According to Philip Weiss, a certified financial planner and certified financial advisor with Apprise Wealth Management, contributing to a 529 plan makes a lot of sense.

“The primary advantage is that money deposited in a 529 account can grow free of taxes and be withdrawn free of taxes as long as the funds are used to pay for qualified educational expenses,” he said.

Money saved in your 529 plan can be used for a range of expenses, such as tuition and fees, room and board, textbooks, and even a computer for school use.

Types of 529 plans

There are two main types of 529 plans, although another 529 plan for private schools is available.

Just like the name implies, a prepaid tuition plan lets contributors use pre-tax dollars to pre-pay for future education expenses by locking in today’s tuition prices. Prepaid plans may have state, residency or even institutional limitations. For example, K-12 tuition is not covered by prepaid plans and you aren’t required to be a state resident in the state in which you hold a 529 plan.

Although prepaid 529 plans cover the cost of in-state tuition, they may only cover the weighted average tuition or the minimum benefit for private colleges and out-of-state colleges. This could
leave you on the hook for thousands of dollars to make up the difference.

A college savings 529 plan, also known as an education savings plan, is a type of investment portfolio that provides more flexibility than a prepaid tuition plan. Withdrawals from the account can be used at most colleges and universities within the United States. College savings plans can cover private elementary and secondary school tuition. Besides tuition, the money in a 529 account can be used for other expenses such as miscellaneous administrative fees, books, and room and board.

Although you don’t need to be a resident of the state in which you plan to attend college, some states offer incentives in the form of income tax deductions for attending college in-state. There may also be loyalty programs — like the one offered by Upromise — which allows you to earn additional money to put into your 529 plan from your purchases. If used for education expenses, 529 plan earnings are not subject to federal tax and are typically not subject to state tax.

Similar to a prepaid tuition plan, a Private College 529 Plan allows you to secure today’s tuition rates with tuition certificates. Certificates can be redeemed at any participating school. The amount you purchase in tuition credits locks in the tuition at the time you purchased the certificate.

Finally, if you have a child with a disability or special needs, a 529A Account can help cover the cost of disability-related expenses, such as health care, financial management services, transportation, housing, education, and other expenses that may improve the beneficiary’s independence or quality of life.

How to open a 529 plan

To open a 529 account, follow these simple steps:

1. Decide which type of 529 plan is right for you

First, you’ll need to choose the type of plan that best fits your needs: prepaid tuition plan, education savings plan or a Private College 529 Fund. High costs can eat up some of your returns, so it makes sense to choose a plan with lower costs and fees. You’ll also want to look at the past performance of the 529 plan. While a return is not guaranteed, past performance can be an indicator of the plan’s potential success. You can compare 529 plans and view their past performance at

2. Visit the plan website and open account

Some 529 plans allow for joint ownership of the account, but most plans only allow for one account owner. Even though one person may be the account owner, other individuals — such as relatives and friends — can still contribute to the 529 plan. When opening a plan, it’s important to decide who is the owner of the account and who is the beneficiary.

Once you’ve selected a plan, visit the 529 plan website for your state of choice to begin your application. You’ll need to provide some personal information, such as your name, address, and Social Security number, as well as information about the selected beneficiary. It’s also wise to name a successor account owner—someone to whom ownership is transferred to in the event of the death of the original owner—such as a grandparent or other caregiver.

3. Choose your investments

Next, you’ll choose specific investments for your plan. If you’re not sure what to select, consider investing in a target-date or age-based portfolio based on the beneficiary’s age. These investments start out aggressive, but become more conservative as the recipient approaches college-age.

If you’re a more seasoned investor, you can also opt to invest in mutual funds and individual stocks rather than relying on target-date funds.

When evaluating your investments, it’s important to note that you are permitted to change your investments twice per calendar year, which may alleviate any anxiety you have from choosing an investment and feeling “stuck” with them.

4. Submit the application and make your initial deposit

You can submit your application online once you’ve selected your investments. Most sites allow you to transfer money from your checking or savings account automatically, but some states require you to mail in a paper check.

How to contribute to a 529

There are several different ways to contribute to a 529 plan:

  • One-time deposits: If you have a windfall or some extra cash, you can make one-time deposits to the 529 plan.
  • Automated contributions: Make a habit of saving by setting up automatic contributions toward your child’s education.
  • Relative contributions: Relatives and friends can also contribute to a child’s 529 plan — known as a gift fund — and won’t be subject to a gift tax unless the contribution exceeds $14,000. Ask for their support and, over the years, the account will grow even faster.

How a 529 affects financial aid

While a 529 plan is a great way to save for future education expenses, it can affect financial aid eligibility.

“529 plans are considered parental assets if the account is opened by the parent,” said Weiss. “If another family member (like a grandparent) or non-relative owns the 529 plan, the account’s assets are disregarded for federal financial aid purposes.”

That means that a parent-owned 529 plan must be reported on the child’s Free Application for Federal Student Aid (FAFSA). When your 529 plan is counted as an asset, it may affect the child’s chances of qualifying for grants, scholarships and even federal student loans.

Downsides of 529s

There are some significant drawbacks to contributing to a 529 plan that you should keep in mind before investing. For example, funds invested in a 529 plan must be used solely for qualified education expenses.

“If money in a 529 account is not used to pay for qualified education expenses, there will be a tax charge when the money is withdrawn,” said Weiss.

That means if your child decides not to go to college or drops out of school, you’ll owe taxes on the money withdrawn and face a 10 percent penalty. Some people opt to save for college using a Roth IRA rather than a 529 plan because it gives them greater flexibility in how they can use the funds.

Bottom line

With college costs reaching record highs, it’s more important than ever to begin saving early.

“Open the account as soon as you can,” advised Weiss. “You can even open it before you have children if you’re planning to have them. The longer the account is open, the more opportunity there is for the amounts in the account to grow.”

While there are some drawbacks to 529 plans, they are a tax-advantaged way to invest, specifically for college. By saving religiously, you can ensure you have enough money in the bank to help your child pay for their education.

For more tips on how to pay for school, check out our guide to paying for college.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.


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