A step-by-step guide to enrolling in California’s 529 college savings plan makes the process easier for parents and grandparents to understand and implement.
1. Choose a 529 plan
California has only one 529 plan, called ScholarShare. But, families can invest in almost any state’s 529 plan, not just California’s 529 plan, so they may wish to shop around.
However, there are no state income tax breaks on contributions to the California 529 plan. Also, California charges a 2.5% tax penalty in addition to the 10% federal tax penalty on the earnings portion of non-qualified distributions.
2. Determine the type of 529 plan account
There are two main types of 529 plan accounts: individual accounts and custodial accounts.
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. 529 plans that are owned by a dependent student or the student’s parent are treated more favorably by financial aid formulas.
Typically, only one parent can be the account owner. If the child’s parents are divorced and one of the parents 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.
3. Complete the 529 plan application
To open a 529 plan account, visit the 529 plan’s website to download a PDF account application or to apply online. Printed account applications can be submitted by mail.
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. The toll-free number for the California ScholarShare 529 plan is 1-800-544-5248. You can also ask questions by sending email to email@example.com, but 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. 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, including the California ScholarShare 529 plan, can set up automatic contributions through payroll deduction from participating employers.
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.
For California’s ScholarShare 529 plan, the minimum initial deposit is $25. Subsequent contributions, including automatic contributions, must be at least $25. The minimum payroll deduction amount is $15 per pay period.
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 five times as much money ($75,000 or $150,000 as a couple) in a single year and have it treated as though it were give over a 5-year period.
California 529 plans have a cumulative contribution limit of $475,000. 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 a 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.
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 choose 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.
ScholarShare has two age-based portfolios. One invests in actively managed funds and one invests in passive index funds.
ScholarShare also offers 17 static portfolios, including four single-fund portfolios, 12 multi-fund portfolios, and a principal plus interest portfolio. The single-fund portfolios include a social choice portfolio, a bond fund, a U.S. large-cap index fund and a U.S. total stock market index.
You can change your investment strategy twice a year.