Paying for college may seem daunting for parents, especially as the annual tuition rates continue to rise. Fortunately, 529 plans offer a tax-deferred savings vehicle for funds earmarked for education, and getting started is relatively simple.
Your investment in a 529 plan is tax-free when used for education expenses, including outside-the-classroom costs like meal plans, off-campus housing, and even student loans. Here, we'll walk you through the steps for setting up a 529 plan for the child (or children) in your life.
Key Takeaways
- A 529 plan can help you save for educational expenses, including outside-the-classroom costs, using compound interest.
- All 50 states and the District of Columbia offer 529 plans.
- Many brokerage firms also offer 529s plans that you can invest funds into.
- In order to open a 529 plan, you'll first need to have prepared bank and personal information for both yourself and the beneficiary.
Choose Your 529 Plan
All 50 states, the District of Columbia, and many brokerage firms offer 529 plans. To find the best fit for your long-term savings goal, you'll need to investigate the potential advantages of each. Over 30 states provide a state tax deduction or tax credit for 529 contributions, but the rules for each plan differ. Some states only offer that deduction for state residents, while nine states (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania) offer an income tax benefit for contributions to any 529 plan, not just the in-state one.
The plans offered by brokerage firms may offer higher limits than state-run plans. If you have an existing relationship with the brokerage, you may appreciate the benefit of their customer service and support lines. Most major brokerages, such as Schwab, Vanguard, and Fidelity, offer 529 plans.
Gather Your Information
You can open a 529 plan for yourself or a beneficiary such as a child or other relative. If you're opening one for a beneficiary, you'll need information for both of you.
You'll need:
- Your Social Security number
- Your date of birth
- Your address
- If you're opening an account for someone else, you'll also need their Social Security number, date of birth, and address (if different)
- Your bank information, including your routing number and account number for funding and setting up automatic deposits
- Your existing brokerage account number if you are opening an account at a brokerage and plan to fund the 529 from your brokerage fund
Start the Process
When you've decided on the plan you want, go to the respective landing webpage for your state or brokerage firm's 529 plan. There should be a button labeled "Enroll Now" or "Open an Account." Click this button to get started.
Because each state's plan is self-administered, the order of information requested varies. In all plans, you'll have to enter your personal information, including name, address, phone number, Social Security number, and date of birth, plus the same information for your beneficiary (if applicable).
Choose Your Account
When you've entered the personal information, you'll then need to choose which account you want. This goes beyond choosing the plan, as there may be several options to choose from depending on which state or brokerage firm's plan you choose. Because you don't have to be a resident of a state to invest in its 529 plan, there may be additional options for state residents.
Fund Your Account
Now that you've set up your plan, you'll need to add funds. You can make an initial deposit via bank transfer from a checking, savings, or in some cases, a brokerage account.
Though there is no federally mandated minimum deposit required to open a state-administered 529 plan, each state has set its own requirements. State minimums range from $0 to as much as $3,000, depending on which plan you choose. Brokerage-administered accounts vary similarly. You should also be aware of the state maximum contribution for your plan, which varies from state to state.
At this stage in the process, you may want to set up recurring contributions. You can transfer from a checking or savings account on a set schedule or elect to have a portion of your pay direct deposited into some accounts.
Choose Your Investments
A 529's true power comes from the fact that the money you contribute will be invested, earning compound interest over time. That's why you also need to choose how to invest your contributions. Like an IRA, the 529 account is merely the tax vehicle for your money.
Most 529s offer a curated choice of plans, including age-based target-date funds and individual portfolios. For example, Missouri's MOST 529 provides a selection of conservative, moderate, or aggressive age-based funds and 16 individual portfolio options.
You may also choose to put a portion of your contribution into more than one account. For example, you may put 50% of your contribution into an aggressive target-date fund, 30% in an index fund, and 20% in a more conservative fund.
Not sure how to invest your money? You can change your current investments twice a year. You can choose new funds for future contributions at any time, so building a diverse portfolio is easy.
At this point, your 529 plan is fully set up. If you've set up recurring contributions, you can let your investments run on autopilot. If you prefer to be more active, you can contribute more funds when you have them. Grandparents and other loved ones can also contribute by check or an ACH transfer.
Do I Have to Choose My State's 529 Plan?
No you don't. Although some states only offer their residents a state income tax deduction for contributing to their in-state 529 plan, you may still choose an out-of-state plan and invest in it.
Is My Child Required to Go to School in the State Where I Invest?
No. Many people choose their 529 plans based on the plan's performance, not where they hope their children will go to school. There are no regulations for where or what kind of college, K-12 prep, or vocational school you choose. The one major rule for 529 plans is that the funds must go toward education costs.
Can Someone Have More Than One 529?
Absolutely. If grandparents want to open a 529 to benefit their grandchild separately from the child's parents' 529, they can do that, provided it's a different plan or a different state's plan. (Also be aware of your state's rules on contribution limits.) They will still need the same information to start the account, though, including the child's Social Security number, date of birth, and address.
The Bottom Line
A 529 plan is a great way to prepare for your or your child's future educational expenses. Opening one is quick and easy, with online portals for all 50 state plans, plus more options offered through traditional brokerage firms. But do your research—not all plans are created equal, with some offering state income tax incentives for residents only.
