A 529 plan is a tax-advantaged college savings account sponsored by a state government or education institution. The plans are kind of like 401(k)s for college funds. (The name comes from the section of the tax code that authorizes the accounts.)
There are two types of 529 plans:
Not surprisingly, the more flexible savings plans tend to be more popular.
529s can offer several significant advantages, including:
The only significant drawback is that the plans place restrictions on withdrawals. If you withdraw money for noneducational expenses, you’ll typically pay a 10% penalty plus income taxes on any withdrawn earnings.
Anyone—a parent, grandparent, sibling, distant relative, kind neighbor—can open a 529 account. You can even open one for yourself. Here’s how:
Learn about your state’s 529 plan
Compare your state’s plan to other states’ plans available to nonresidents
Choose a plan and open an account (online or by mail)
Pick your investments
Make your first deposit
The last two steps might flip-flop depending on the plan you pick. Some want to first know where to put your money once they get it, and other plans want to get your initial deposit before letting you choose investments.
Once you have an account, you can set up automatic recurring deposits or make additional contributions manually whenever you happen to have funds available. You can also change how the money you hold in the plan is invested but only twice per year.
With all the 529 plan options out there, it might seem tough to pick the right one. Experts recommend that you start by looking at your state’s plan because there could be more tax benefits for you.
If you want to compare different plans within your state (if there are multiple plans) or between states, here are some questions to help you pick the best one:
If you’re really struggling to decide, there’s nothing stopping you from opening multiple 529 accounts in different states. Just don’t contribute more than someone could reasonably use for education expenses (unless you want a friendly visit from the IRS).
529 plans can be a great way to save for college. There are many out there to consider, and most come with tax benefits and other advantages.