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The 529 Plan Provides Several Options to Save for College

By Peterson's Staff updated on Monday, April 07, 2014

As college costs continue to be a significant issue when choosing which school to attend, you may reach for the panic button when you ponder how on earth you'll pay for it. The best time to start a college savings plan is when the kids are very young since even the smallest contributions can make a big dent in tuition by the time they enroll. However, even if your children are getting older, it's not too late to get started! Smart investing, even late in the game, is still an investment in the future.

However, for many people, trying to figure out the best way to save can be downright confusing. How should you invest, given your personal situation? We won't presume to tell you how to invest your money since we're not certified financial planners, but we can offer insight into one college-savings option: the 529 plan.

What's a 529 plan?

Sponsored by states or educational institutions, 529 plans are investment accounts designed specifically to help you save money for college and grad school tuition. Additionally, federal law currently allows you to enjoy special tax benefits if you invest in one! Most of the 50 states now offer at least one 529 college plan, and no plan is the same as another. Generally speaking, these plans come in two flavors: pre-paid tuition plans and college savings plans.

The 529 pre-paid tuition plan
Pre-paid tuition plans are the only type of 529 college plan that an educational institution can sponsor, and they give you the opportunity to invest money for future tuition at today's tuition rates! Your money goes into an interest-bearing account that is similar to a mutual fund. Since college tuition rises each year, your investment could mean significant savings; when the time comes to take out the money, you won't be taxed on it.

Pre-paid tuition plans are designated for use (usually) at an in-state school. If your child decides to enroll elsewhere, you may still be able to use the money to pay the tuition, but you won't be able to withdraw the full value since your withdrawals will likely be penalized. If this happens in your family, you can choose to use those college funds later for another child's tuition and forgo using it for the first child's college bills.

The 529 college savings plan

A 529 savings plan works differently. With this type of plan, you invest your money into a fund just like those used for pre-paid tuition plans; however, the money you invest can be used toward any college your child chooses to attend. Unlike the pre-paid tuition plan, you won't be able to lock in the tuition rate, but you will be able to withdraw your money tax-free when it comes time to pay the tuition bill. Most college savings plans are transferable from state to state and from sibling to sibling. Best of all, the full value of your investment can be used at any accredited college or university in the country.

Who should invest in a 529 plan?

As with all investments, 529 plans are supposed to increase in value over time. The longer you invest, the more money your account will potentially earn. If time is on your side, open an account while your children are very young. Remember that you're not limited to your state's plan. Do a little research and find the one that best suits your needs.

If your children are rapidly approaching college age, then a 529 savings plan might not be the best investment for your situation. A Certified College Planning Specialist (CCPS) may be able to offer alternative solutions for maximizing your investments.

How to get started
529 plans are fairly easy to open. All you do is fill out a simple form and make an initial contribution, and you're on your way to building college funds. Many plans offer the ease and convenience of online enrollment and automatic withdrawals from your bank account.

Your contributions don't have to be huge. You can open an account with as little as $25, and subsequent contributions can be as low as $15, depending on the plan. If you have a little more cash to put aside, some plans allow substantial contributions (over $230,000) but in general, contribution limitations are quite liberal.

Before you know it, you might have all four years of tuition covered!

About the Author

Peterson's has more than 40 years of experience in higher education, and the expert staff members here are all ready to leverage their considerable knowledge and experience to help you succeed on your educational journey. We have the information, the know-how, and the tools -- now all we need is you!

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