How To Open a 529 Plan

June 24, 2024

Planning for your child’s education savings can be daunting. A 529 plan is a great option to cover college and other eligible education costs. It helps reduce taxes and offers flexible and versatile investment options. But figuring out how to open a 529 plan can feel overwhelming if you’re new to it. We can help you get started with step-by-step expert guidance.

1. Choose the Right 529 Plan for Your Needs

When choosing the best approach for you, consider various savings plans. Start by looking into your state’s 529 plan to see if it offers a state income tax deduction or tax credit on contributions. When choosing a 529 plan, focus on the return on investment, costs and fees, and tax benefits. Minimizing costs is crucial for maximizing net returns.

Next, compare the various 529 plan types. See below for detailed information about each:

Direct-sold 529 plans allow account owners to purchase directly from the plan manager. You will have to rely on your own research to choose investments, or you can hire a fee-based financial planner. Direct-sold 529 plans are approved and monitored by each state and are managed by professional investment firms. There are no sales charges with these plans.
Advisor-sold 529 plans are sold only through financial advisors. Using an advisor means you benefit from the advice and expertise of an investment professional. Still, you may pay sales charges or incur other fees to compensate the advisor.
Contract-type prepaid tuition plans are purchased to cover between 1 to 5 years of future tuition either on a lump sum or installment basis.
Unit-type prepaid plans allow you to buy ‘units’ of tuition, which equate to credits or hours.
529 ABLE accounts allow Americans living with disabilities to save money for college and other expenses in a tax-deferred account without affecting their eligibility to receive Medicaid, supplemental security income, or other public benefits.

In-State vs. Out-of-State Plans

Not every state offers all of the above options. If you feel the best choice for your family is one that is not offered in your state’s 529 plan, you can enroll in another state’s plan. Whether the plan you choose in-state or out, doesn’t dictate where your child can attend college.

State income tax deductions and tax credits are available in most states. In most cases, taxpayers must contribute to their home state’s plan to qualify for a state income tax benefit. However, if you live in a tax parity state, you are allowed to contribute to any state’s plan and still claim the in-state tax deduction.

Be sure to consider the trade-off between tax incentives and professional fees when making your plan choices, especially for young beneficiaries.

Some out-of-state 529 plans may offer lower fees, which may be the best option if the beneficiary is several years away from college. But, as the child nears college age, the in-state plan with the state income tax deduction becomes more financially beneficial.

Families should consider the best performance, lowest fees, and state-specific ratings. We also provide 5-cap ratings for the best 529 plans for both state residents and non-residents.

Fees and Expenses

As stated, low fees matter more than tax breaks when the child is young. The fees are charged annually, whereas the tax breaks only apply to the year’s contributions. Our 529 fee study will help you find the lowest fees. The study compares the 10-year expense totals for all direct-sold 529 savings plans and fees by state to compare the lowest and highest fees.

2. Choose the Type of 529 Plan

There are two types of 529 plan account ownership structures: individual accounts and custodial accounts.

Individual accounts allow the account owner, usually a parent, to have primary ownership and control over the account, change the beneficiary as needed, and provide the main funding source and investment account decisions.

A custodial account is different in that the plan is not owned by the parent but by the prospective student, regardless of age. A custodian will help the child manage the account until they reach the legal age. This type of account is common if a custodial bank or brokerage account, such as a UTMA or UGMA account, funds the plan.

Most families choose to open an individual account with a parent as the owner and a child as the beneficiary. Everyone, including parents, grandparents, aunts, uncles, and other relatives, can contribute to a parent-owned 529 plan account.

3. Complete the 529 Plan Application

After choosing a suitable 529 plan and owner, the next step is to apply for the account. Our Enroll Now tool helps you open an account online. Enrollment in 529 plan accounts requires the account owner’s and beneficiary’s names and specific personal information, including social security numbers (SSNs), date of birth, addresses, and phone numbers.

4. Choose 529 Plan Investments

There are a variety of investments for the 529 plan to choose from, depending on your investment objectives. Some include:

Age-Based Portfolios: These portfolios adjust the investment mix based on the beneficiary’s age, becoming more conservative as the beneficiary approaches college age. They start with a higher allocation to riskier investments and gradually shift towards more conservative investments. They are suitable for investors with moderate risk tolerance who prefer a hands-off approach.
Static Portfolios: These portfolios consistently allocate assets among various investment types, such as stocks, bonds, and cash equivalents. Investors select from conservative, moderate, or aggressive portfolios based on risk tolerance and investment goals.
Individual Fund Options: These plans allow a customizable and flexible approach with a broad range of individual fund selections, such as mutual funds or exchange-traded funds (ETFs), based on specific investment preferences.

This guide will help you choose the right investments for your 529 plan.

5. Fund the 529 Plan

Once you’ve opened it, there are several ways of depositing money into a 529 plan.

Initial Contributions

You can start with small initial contributions and increase them later. All 529 plans allow automatic contributions from your bank account in specific amounts and frequencies, making them easier to manage in the early stages.

Ongoing Contributions

You can add more money to your 529 plan after your first contribution. You can contribute from your bank account or other funding sources. Some 529 plans allow contributions to be deducted directly from your paycheck through payroll deduction programs.

Gift Contributions

529 plans often have gifting platforms for friends and family to contribute funds directly to the account for the beneficiary’s benefit. However, it is important to consider gift contribution limits to avoid triggering a taxable event.

Taxpayers don’t have to file a gift tax return if their total gifts exceed the annual gift tax exclusion amount per recipient. The annual gift tax exclusion is $18,000 per recipient in 2024 ($36,000 for a married couple giving jointly).

Rollovers from Other Accounts

In addition to direct or gifted contributions, you can rollover funds from another 529 plan, a Coverdell Education Savings Account (a tax-advantaged trust account created by the U.S. government to help families pay for education expenses), or redeem a qualified U.S. Savings Bond.

6. Manage Your 529 Plan

Monitoring Investment Performance

It’s good to be involved in planning your investment strategy to ensure your funds are invested according to your goals. We evaluate the historical performance of 529 investment portfolios and rank the savings plans from best to worst based on their performance over different periods. Review and consider these metrics when evaluating your investment plan.

Making Changes to Investments

As time goes on, you’ll likely want to adjust your investment strategy in your 529 plan. If you’re working with an advisor, they can help walk you through investment options changes to meet your new objectives.

Talk to your plan provider about the process for changing investments. It is federally mandated that you can only move money already contributed to a different portfolio within your account twice per calendar year or if you change the beneficiary. You can often change the investments on future contributions at any time.

Updating Beneficiary Information

The process for changing the beneficiary varies by plan provider. You must complete a beneficiary change form that requires information about the current and new beneficiary and the reason for the change.

Changing the beneficiary of a 529 plan usually does not trigger tax consequences as long as the new beneficiary is an eligible family member. Parents who are the account owners can change the beneficiary between children for individual accounts. However, the beneficiary of a custodial 529 plan account cannot change.

When it comes to planning for your or your children’s future education, a 529 plan offers investment options and flexibility to ease the financial burden. Once you decide that a 529 plan suits your situation, a plan administrator will guide you through the necessary steps.

After the account is set up, it’s important to periodically review the investment strategy to ensure that the plan maximizes potential returns and aligns with your preferences. It’s never too late to open a 529 account, but the sooner the better to let your money grow over time!

Frequently Asked Questions (FAQs)

Do I have to choose my state’s 529 plan?

No, you do not have to choose your state’s 529 plan. You can generally elect to enroll in any 529 plan in the country. However, some states do offer certain benefits for enrolling in their plans if you live in the state, such as certain state tax credits.

Is my child required to attend school in the state where I invest?

No, your child does not have to attend school in any specific state, regardless of where you open your 529 plan. In fact, the funds in any 529 plan can fund a college education in any state.

Can you open a 529 on your own?

Yes, anyone can open a 529 plan. You don’t have to be a parent or grandparent. You can open one for yourself if you plan to go to school in the future. You can also change the beneficiary of your plan in the future if you change your mind.

Who can I open a 529 plan for?

The beneficiary on the plan is the one who can withdraw funds to pay for college. You can name any beneficiary you want, even if they aren’t related to you, so you can open a 529 plan to benefit anyone. You can even name yourself the beneficiary of a 529 plan.

What age is too late to start a 529 plan?

It’s never too late to start a 529 plan and save for college. Even if your child is already a teenager and in high school, there’s still time. You can think about it this way: Would you rather have $0 saved for college or three years’ worth of savings? You always want as much as you possibly can save ready to be used for college, so now is as good a time as any to open a 529 plan.