Opening a 529 college savings plan isn’t difficult but if you don’t know the right steps to take it can feel pretty daunting. It’s important to understand where these plans can be accessed and what you need to do so that your college savings plan is set up to succeed from day one.
If you’re ready to open your 529 plan, we have the right option for you. We have been reviewing and rating 529 plans nearly since they’ve existed. You can see our best 529 plans or you can see which 529 plan we’ve rated as the top in your state.
1. Choose a 529 Plan
529 plans are offered by administrators that are financial institutions through a state program. Each state generally offers its own 529 plan that anyone can open, regardless of where they live. Many will say that you should start by considering your own state’s 529 plan first because 34 states and the District of Columbia provide a state income tax deduction or tax credit on contributions to the state’s 529 plan.
However, residents of Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, Ohio, and Pennsylvania can get a state income tax break for contributions, regardless of which state’s 529 plan they open.
Ultimately, the goal is to maximize the total amount of money in the 529 plan account when the beneficiary is ready to enroll in college. Thus, families should consider the 529 plan’s return on investment and costs, in addition to tax benefits, when choosing a 529 plan. Minimizing costs is the key to maximizing net returns.
Low fees matter more than tax breaks when the child is young, since the fees are charged every year, while the tax breaks apply only to that year’s contributions.
2. Determine the Type of 529 Plan Account
There are two main types of 529 plan accounts: individual accounts and custodial accounts. Individual accounts provide a beneficiary, typically the child who is going to school, but a parent will likely be the owner of that account. It lets parents change the beneficiary between children and lets them own the plan since they are the primary source of funding.
A custodial account is different in that the plan is actually owned by a child, regardless of age. Someone else will help manage the account for them until they reach the legal age but the parent doesn’t own the 529 plan in that scenario.
Most families will open an individual account with a parent as the account owner and a child as the beneficiary. Everybody can contribute to a parent-owned 529 plan account, including parents, grandparents, aunts, uncles and other relatives.
Typically, only one parent can be the account owner. If the child’s parents are divorced, the account owner should be the parent who will be responsible for filing the Free Application for Federal Student Aid (FAFSA). If this parent has remarried, it is best for the account owner to be the child’s biological parent, not the stepparent.
If money from a custodial bank or brokerage account, such as an UTMA or UGMA account, is used to fund a 529 plan, then the 529 plan should be set up as a custodial 529 plan. With a custodial 529 plan account, the child is both the account owner and the beneficiary. Since the child is a minor, a custodian will manage the account on behalf of the child until the child reaches the age of majority. Note that the beneficiary of a custodial 529 plan account cannot be changed.
529 plans that are owned by a dependent student or the student’s parent are treated more favorably by financial aid formulas. If the grandparents open a 529 plan account with themselves as the account owner, it can hurt the grandchild’s eligibility for need-based financial aid.
Although a grandparent-owned 529 plan is not reported as an asset on the Free Application for Federal Student Aid (FAFSA), distributions from a grandparent-owned 529 plan count as untaxed income to the beneficiary on a subsequent year’s FAFSA, reducing aid eligibility by as much as half of the distribution amount. There are, however, a few workarounds for a grandparent-owned 529 plan that can fix the impact on financial aid eligibility.
3. Complete the 529 Plan Application
When you are ready to choose a 529 plan, Saving For College’s enroll now tool helps you open an account online. Just click on the “Enroll Now” button adjacent to the 529 plan’s listing. It will take you directly to the online application form for opening a 529 plan account.
Other options for setting up a 529 plan account include visiting the 529 plan’s website to download an enrollment kit. Most 529 plan account applications will require the following information:
- Name of the account owner
- Name of the beneficiary
- Personal information about the account owner and beneficiary, including their mailing address, telephone number, email address, date of birth and Social Security Numbers (SSN) or Individual Taxpayer Identification Numbers (ITIN).
The 529 plan account application may also ask for the name and personal information of a successor account owner, in case the original account owner dies. The 529 plan account application may also ask you to pick an initial set of investment portfolios.
If the application form is confusing, call the 529 plan’s toll-free number to ask questions. If you ask questions by sending email to the 529 plan, do not include account numbers, passwords or other personal information in the email message.
4. Fund the 529 Plan
There are several ways of depositing money into a 529 plan once you’ve opened it. These include mailing a paper check to the 529 plan and transferring the money electronically from your bank account.
All 529 plans allow you to set up automatic contributions from your bank account. You will need to specify the contribution amount and the contribution frequency (e.g., biweekly, monthly, quarterly, annually). The 529 plan will also need the bank routing number and account number for your account and a voided copy of a preprinted check or preprinted deposit slip.
Some 529 plans can set up automatic contributions through payroll deductions from participating employers. The automatic investment makes it easier to save, since you don’t have to remember to make a contribution to the 529 plan.
Other options include a rollover from another 529 plan, money from a Coverdell education savings account or money from the redemption of a qualified U.S. Savings Bond.
Minimum contribution amounts vary by state. Some states have no minimum contribution amount. Automatic contributions, including payroll deductions, typically must be at least $15 or $25.
There are no annual contribution limits for a 529 plan, but you can give up to $15,000 ($30,000 as a couple) each year without incurring gift taxes or using up part of your lifetime gift tax exclusion. 529 plans provide 5-year gift tax averaging, so you can give up to 5 times as much money ($75,000 or $150,000 as a couple) in a single year and have it treated as though it were given over a 5-year period.
Cumulative contribution limits vary by state, ranging from $235,000 to $550,000, and are periodically adjusted for inflation. After a 529 plan account reaches this balance, it can still earn interest and appreciate in value, but no additional contributions will be accepted. Most people do not reach this limit.
Many people start off with a small, automatic monthly contribution and increase the amount after a few months. If your goal is to save about a third of the future cost of public college education, start saving $250 per month from birth. If you can’t handle that big a contribution, start off with what you can afford and tackle the amount you need to save as you can.
5. Choose Investments for the 529 Plan
After the 529 plan has been opened and some funds have been deposited into the 529 plan, it’s time to set up the investments for the 529 plan. The number of investment options is limited, making it easier to choose.
Most people invest in an age-based portfolio, which starts off with an aggressive mix of investments (e.g., mostly stocks) and gradually shifts to a less risky mix of investments as the child approaches college age. If you start saving for college soon after the child is born, an age-based portfolio is a good starting choice. You can change the investment approach later.
Some 529 plans have just one age-based portfolio, while others have aggressive, moderate and conservative age-based portfolios. These portfolios usually differ according to the initial percentage stocks (e.g., 100% equities, 90% equities or 80% equities) and the final percentage stocks (e.g., 30% equities, 20% equities or 0% equities).
Most 529 plans also offer static portfolios which may involve single-fund portfolios or multi-fund portfolios, as well as a money market portfolio. Options may include bond funds, U.S. large-cap, mid-cap and small-cap index funds and foreign stock funds.
Note: You can only change your investment strategy twice a year.
Where to Open a 529 Plan
529 plans are offered through state-sponsored websites and the accounts are administered by financial institutions that have partnered with that state. For example, BlackRock oversees the Ohio 529 plan and T. Rowe Price administers the Alaska 529 plan.
The right place to open your 529 plan is going to depend on a number of factors. Ultimately it doesn’t matter where you open the plan as the base benefits are all the same. However, there are a few factors you’ll want to consider as you decide what plan to use. These factors include:
- Performance: While it’s recommended that you set your own investment strategy, when you don’t then the plan will likely invest your funds based on the overall fund strategy. If you don’t want to pick the investment strategy then you’ll want to choose a plan that is administered by a financial institution that you trust. You can also see the overall performance of each plan before moving forward.
- State of the Plan: You may want to enroll in a plan that is administered by a specific state. There isn’t a huge need to do this but you may qualify for certain benefits if you live in that state or if your child goes to college in that state.
- Costs: Not every plan has the same costs. This should always be an important factor that is understood before deciding where to open your plan.
To make it easier for you, we regularly rank every 529 plan on these factors so you can see where the plans you’re interested in rank.
Extra Tips on Ways to Save for College
Opening a 529 plan is just the first step in the process of saving enough money for your child to go to college. It’s important to make sure that you’re able to take the necessary steps to maximize those savings. There are several ways you can help your 529 college savings plan grow faster, which include:
- Consider opening a college savings reward credit card. These credit cards give you cash back that can be swept into your 529 college savings plan.
- Give the gift of college instead of traditional holiday and birthday presents.
- Whenever you get a raise, increase the amount you save for college.
- Whenever your child no longer needs diapers or daycare, redirect the amount you were previously spending to their 529 college savings plan account.
- If you get a windfall, such as a big bonus, an inheritance or a big income tax refund, direct at least half of the money toward your 529 college savings plans.
- If your state provides a state income tax break based on contributions to the state’s 529 plan, reinvest the tax savings in the 529 plan.
The Bottom Line
Ultimately, opening a 529 plan should be pretty straightforward once you understand the necessary steps. The most important thing is to make sure you know where you want to open your 529 plan and then, if you need, the administrators of the plan can help you with the rest. Remember that once you open the plan your responsibility doesn’t stop. You may want to keep deciding on the investment strategy to make sure that the plan maximizes potential returns and savings.
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 go to school in the state where I invest?
No, your child does not have to go to 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. It doesn’t have to be a parent or grandparent. You can open one for yourself if you would like to and 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.
What age is too late to start a 529 plan?
It’s never too late to start a 529 plan and start saving for college. Even if your child is a teenager and in high school already, there’s still time. You can think about it this way: Would you rather have $0 saved for college or 3 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 of a time as any to open a 529 plan.
Consider these additional resources that we’ve put together in order to help you get a better understanding of 529 plans and college savings.
- Avoid These 529 Plan Withdrawal Traps
- How Do I Select the Right Investments for My 529 Plan?
- How to Transfer 529 Plan Funds to a Sibling?
- How to Help Pay for College Without Impacting Financial Aid
- How Much to Save For College
At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.