A 529 plan is an easy and convenient way for parents to start saving for their child’s education. They are tax-advantaged accounts that can be used to cover educational expenses. While specifics vary from state to state, here’s how you can make 529 plans work for you.
#1. Do your research
The features and benefits of 529 plans vary from one state to another. That’s great news for you as you can invest in a 529 plan in any state. Take time to understand how each state’s 529 plans work. Choose a plan that offers the highest income tax deductions or tax credits for 529 contributions.
#2. Compare the fees of different 529 plans
One way to maximize net return on your investment is to minimize the costs. With that in mind, look at plans that offer the lowest fees.
#3. Consider your short and long term financial goals
Every family’s financial circumstances are unique and so are their long-term financial goals. Take all of this into consideration before deciding how much you want to put into a 529 plan. Some plans allow you to deposit an initial lump sum. You can then add as much as you can whenever you get a cash gift or bonus.
#4. Schedule regular monthly contributions
It’s not mandatory, but regular monthly contributions can help you stay on top of your savings goals. The good news is the minimum contribution requirements are very affordable. They vary from one plan to another but are can be as low as $10 to $15. Look for a plan that works for you in terms of minimum contributions. Signing up for an automatic investment plan can lower your monthly contribution requirements even more.
#5. Ask grandparents and relatives for cash for occasions
Most plans allow grandparents and other loved ones to contribute directly to a child’s 529 plans. They can make a direct deposit electronically or via cash or a gift check.
#6. Choose your investment options wisely
Every 529 plan offers several investment options that you can choose from. Each has a different potential for returns and risk. Generally, the higher the risk, the higher the returns. You can choose from aggressive to moderate or conservative options or a mixed portfolio that spreads the risks and returns. You’re allowed to change your portfolio twice a year.
#7. Understand the pros and cons of a 529 plan
Despite its many advantages, 529 plans come with a few downsides that you should be aware about. Understanding the pros and cons will help you make a more informed decision.
#8. Make sure funds are used for qualified purposes to get the tax benefits
The tax breaks are the biggest benefits of a 529 plan. But you only enjoy those benefits if the 529 funds are used for qualified purchases. This includes college tuition, fees, books, approved study equipment, room and board, and school supplies. The beneficiary must be a full-time student at an accredited college. If the funds are used for other purposes, you will pay federal income tax on investment gains. This can wipe out all the benefits of contributing to a 529 plan.
The key to making a 529 college savings plan work for you is by choosing the right plan for your family.
Even with proper planning, many families must turn to taking out student loans to help cover college costs. If that’s the case, you’ll need to find a student loan that fits your needs. Check out our free Student Loan Finder to compare lenders and rates side by side.