Setting up a 529 college savings plan for your children now is an excellent way to prepare for their future education. College tuition is more expensive than ever and it will no doubt only continue to increase.

College Data puts the current cost of attending a public university at $22,826 per year and a private university at $44,750 per year. Imagine how much higher those numbers could be when a child born today attends college in 18 years. While student loans and scholarships are certainly ways your children can fund their college educations, you can also do something fairly simple today to make it easier in the future: you can set up a 529 college savings plan.

What is a 529 College Savings Plan?

A 529 plan is an educational savings plan, operated by a state or educational institution, created to help families save money for their children’s future higher education costs. The “529” part comes from the Internal Revenue Code. It was created in 1996 and today, all states have at least one 529 plan.

The plan invests the contributions on behalf of the account holder. According to the SEC, “[i]nvestment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age.”

Benefits of a 529 Plan

529 plans offer many advantages when it comes to saving for college. Following are a few reasons you should consider opening one for your child.

1. Federal tax benefits: While the contributions you make to a 529 plan are not tax deductible, the investment grows tax-deferred. When it’s time to take distributions to pay for your child’s education, they come out tax-free.

2. State tax benefits: Thirty-four states, plus the District of Columbia, offer full or partial income tax deductions for contributions to 529 plans. You can check this FinAid page for a chart that shows the states that offer such a benefit, in addition to the maximum allowable amounts.

3. Easy management: 529 savings plans don’t require effort on your part. You open a plan and put money into it regularly (you can even do this through automatic deposits) and that’s it! The plan manages the account.

4. Flexibility: 529 plans are flexible in many ways.

  • Anyone can contribute to the plan, making them an excellent option for gifts from grandparents and other family members. (If your family is anything like ours, you dread holidays and birthdays a tiny bit because there’s no more room for toys! A contribution to a college savings plan, however, makes an excellent gift that keeps on giving.)
  • If your child decides against attending college, you can roll the 529 plan over to another family member.
  •  The majority of states don’t have income limitations for contributions.

Drawbacks of a 529 College Savings Plan

While 529 college savings plans are an excellent way to save for college, Sean A. Quigley, LUTCF, warns of a possible drawback. “The money you are saving is typically invested in a mutual fund, which makes it susceptible to market down turns,” Quigley says. “If the market is down when your child is entering college, you have no choice but to withdraw that money for their tuition.”

He explains that during the financial crisis in 2008, your investment could have experienced a loss of 30% to 40%. Because you have to use the plan when your child is in college, you couldn’t wait out the market if s/he was attending college during that time.

“In addition, a 529 is financial-aid visible, which may hinder your child’s ability to receive financial aid,” he adds. 

When to Start a 529 College Savings Plan

When it comes to a 529 plan, the sooner you open one for your child, the better. “Parents of newborn children should set up a college savings plan as soon as possible after birth,” Evisors suggests.

“It is never too late to start saving for college, but starting early allows more time for the earnings to grow.”

Josh Scheinker, Senior Vice President of Wealth Management at
 Scheinker Investment Partners of Janney Montgomery Scott, says, “We tell our clients to open accounts for their children/grandchildren as soon as they have social security numbers.”

Types of 529 College Savings Plans Available in Your State

If you feel like a 529 college savings plan is a good option for your family, visit College Savings Plan Networks to see which plans are available in your state. You can then select one and create an account.

Higher education is expensive. The cost of college tuition, fees, room and board, books and more continues to rise. By creating and adding to a 529 college savings plan, you’ll help prepare for your children’s future.

Categories: Education

Laura Willard

Laura Willard

Laura Willard is an adoptive mom, a law school grad who has successfully avoided using her education for eight years and counting, a writer, a curator and an editor. She cares deeply about social justice issues. Laura enjoys spending time with her family and friends, walking on the beach - something that's become quite difficult since she left San Diego and returned to Arizona a year ago - and a good glass of wine. She loves to spend hours on end writing, but avoids doing math at all costs. (She loves her accountant dearly.) Laura's certain sarcasm is a language, so she's totally bilingual.  Follow Laura on Twitter and Google+ and Facebook