What’s a 529 Plan, and how can it help my family?

Today is National 529 day, a day meant to bring awareness to this special type of investment account. If you have a child or grandchild, a 529 plan can be a great way to invest smartly and plan for their future education.

529 plans are tax-advantaged accounts designed to cover educational expenses. 529 plans are run by states, and their specific rules vary. Note that you are not required to purchase a 529 in the state where you reside. This is good news for military families who have frequent moves.

Generally, there are two main types of 529 plans.

529 Savings Plan

With a 529 savings plan, the account holder contributes money to the plan, and those funds are usually invested in a selection of mutual funds. Money can be added to the account at the account holder’s discretion, and there is typically no minimum amount that must be deposited. The money in the account grows tax-deferred until it is withdrawn. As long as the funds are used for education, the withdrawals are generally not subject to state (depending on the state it was purchased in) or federal taxes. The money can be used for most undergraduate and graduate college education expenses, including room and board at most eligible institutions. The money can also be used for K-12 educational expenses. However, there are typically more restrictions in that instance. 529 savings plans typically offer target date funds that adjust holdings over the years, becoming more conservative as the target date nears. The target date is generally the year you expect the beneficiary to need education funds, i.e., when your child will start college. Friends and family are usually also able to contribute funds to this plan.

529 Prepaid Tuition Plan

A 529 Prepaid Tuition Plan locks in tuition at current rates for a student who will not attend college until many years from now. Once you purchase this type of plan, you will make monthly payments for a pre-determined period of time. Like the 529 savings plan, the money grows in value over time, and the earnings from the account to pay tuition expenses is not taxable. However, prepaid tuition plans will not cover room and board expenses. There may be other restrictions depending on the state the plan is purchased in, such as which colleges the money can be used for.

When should I start?

The best time to start saving for your child’s college expenses is now. 529 plans are a simple and easy way for anyone to begin investing and grow their funds for ever-increasing higher education expenses. Not sure where to start? To find out which plan may be best for your family, the National Association of State Treasurers offers a state and feature plan comparison here. Or visit CollegeSavings.org to complete their 529 questionnaire.