Why you need a 529 plan if you are saving for your student's college education

Parents often wonder, “How can I financially prepare for a kid going to college?” A 529 college savings plan is one way to save for college tuition costs.

A 529 plan is a tax-advantaged savings account, meaning it is exempt from taxes on interest earned. Funds can be used for tuition and fees, books and supplies, and room and board for a full-time student at an accredited university.

529 accounts offer more flexibility than other types of education savings accounts. But don’t just take our word for it. Do your own research to find out which type of savings account is best for your family. 

If you decide to open a 529 plan, here are some easy-to-understand resources and next steps that will get you started.

How to open a 529 college savings plan

1. Chose a state 529 plan.

2. Determine the 529 plan account type.

3. Complete a 529 plan application.

4. Fund your 529 plan.

Choosing a state 529 plan

Each state offers a 529 plan. Take some time to compare plans in every state. It’s probably best to begin with your state of residence (for state income tax deductions), but the choice is ultimately yours.  

The goal of saving for college is to minimize costs and maximize returns. With this in mind, here’s a a list of the most popular 529 plans.

Determining your 529 plan account type

Next, pick your account type. You’ll choose from an individual or custodial account. 

An individual account is set up with the parent as the account owner and the student as the beneficiary. Anyone can contribute to this type of account.

A custodial account is used by a custodial bank or brokerage account such as a UTMA or UGMA account. These accounts are established in the child’s name, and the child is also the beneficiary. A custodian or parent manages the account until the child is no longer a minor. The beneficiary on a custodial account cannot be changed. Ever.

Completing the 529 plan application

Most accounts can be opened online. To complete your 529 plan account application, you’ll need to provide the following information:

• Name and personal information of the account owner.

• Name and personal information of the beneficiary.

• Name and personal information of a successor account owner if the original account owner passes away.

Personal information includes, mailing address, telephone number, email address, date of birth and Social Security number. 

You’ll have to pick investments for your 529 plan. Choose between aged-based and static portfolios. These types of investments are based on the age of your child and your tolerance for risk. Aged-based portfolios are for savers who want to remain fairly inactive when it comes to managing investments, while static portfolios that include target-risk (known as aggressive growth and income portfolios) and individual portfolios are for more experienced investors.

Familiarize yourself with the allocation choices, contribution limits and tax rules of the investment option you choose. You should be able to change your investment strategy twice a year.

Funding your 529 plan

Finally, you’ll have to deposit money into your 529 account. You can transfer the initial contribution electronically or write a check. You can also fund your account with:

• A rollover from another 529 plan.

• Money from a Coverdell education savings account.

• Money from the redemption of a qualified U.S. Savings Bond.

Consider setting up an automatic bank transfer or payroll deduction to continue to add money to your savings. Determine the amount and frequency you are most comfortable with.

That’s it — you’re done setting up your 529 savings plan. Here are some tools and tips to help you along the way: 

• How grandparents can help fund college

• College savings calculator

• 529 state tax deduction calculator