When it comes to saving for college, a popular option for parents today is to open a 529 plan — and for good reason. Unlike other savings accounts, a 529 plan has many benefits and tax advantages that make saving for college tuition and other expenses easy and well-worth it. Here’s everything you need to know about opening a 529 plan.
What is a 529 plan?
A 529 plan is a state-sponsored, tax-advantaged savings plan that allows you to save money for a child or other beneficiary for tuition and other education-related expenses. Depending on the state, there are different types of 529 plans available, but the most popular option is an education savings plan.
A 529 education savings plan is an investment account that uses mutual and money market funds to help grow contributions. Maximum lifetime contributions vary (usually between $200,000-$500,000) and annual gift limits are subject to the IRS gift tax ($17k per person, $34k per couple in 2023). The tax advantages for these plans include no taxes due on earnings as long as the money stays in the account. When it’s time to use the funds, withdrawals may be federal income tax and state tax free when used towards qualified education expenses. This includes tuition at any accredited college, university, vocational or technical school, as well as toward any other expenses such as room and board, book, technology, etc. In addition, up to $10,000 annually may be used for qualified K-12 tuition.
All 50 states sponsor at least one type of 529 plan and, in general, you’ll want to invest in your respective home state’s plan to get a state tax deduction or credit (some states do offer plans as a nonresident without a tax break).
Who Can Open a 529?
While parents are the ones typically opening 529s for their children, all US residents over the age of 18 at any income level can open a 529 for anyone of any age with a Social Security or Tax ID number. That means grandparents, family members or friends can also help save for college for the children in their lives. You can even open a 529 in your own name. While requirements vary by state, they are typically minimal, making it easy to open a plan.
How to Open and Fund a 529
Opening a 529 plan is relatively easy — once you determine which account in your state works best for you, you can typically fill out an application and open an account online. From there you can start depositing funds right away electronically or by mailing in a paper check. You can also set up automatic contributions from your bank account as often as you like (monthly, quarterly, annually, etc). Minimum contribution amounts vary by state (typically at least $15) and some have no minimums at all.
You can always start small and increase contributions over time. Once some funds have been deposited, it’s also critical to choose investments for your 529 plan.
Need more advice about opening a 529 or saving for college? Our certified FutureTrack coaches are here to help you review your options, make informed decisions, and manage your plan for success. Book a meeting with your FutureTrack coach today to get started.