How to open a direct-sold 529 plan
Families saving for college can enroll in a direct-sold 529 plan by completing a form on the 529 plan’s website. Direct-sold 529 plans are convenient and generally offer low fees, but the account owner is responsible for selecting and monitoring the 529 plan’s investments.
Benefits of using a direct-sold 529 plan
The biggest advantage of using a direct-sold 529 plan over an advisor-sold 529 plan is that direct-sold 529 plans tend to have lower fees. With any 529 plan, you will incur fees related to the underlying investments. But, many advisor-sold plans invest in actively-managed funds, which have higher expenses than passively-managed funds typically found in direct-sold plans. In addition to fund expenses, advisor-sold 529 plans feature a sales charge, or load, to compensate the advisor for their guidance and expertise.
Direct-sold plans are also convenient. Busy parents can enroll in a direct-sold 529 plan online at any time and manage their 529 plan account from the comfort of their home.
How to choose a direct-sold 529 plan
There are nearly 60 direct-sold 529 plans available, with over 750 investment options. The first step in choosing a direct-sold 529 plan is to see what your state has to offer. 529 plan contributions are deductible on state income tax returns in over 30 states. Tax breaks are usually only offered to residents who contribute to their home state’s 529 plan, but Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania offer a tax incentive for residents who contribute to any 529 plan.
It’s also important to review the plan’s fees and investment options. High expense ratios and poor fund performance can outweigh the benefits of a state income tax deduction or credit. Compare 529 plans by reviewing historical performance rankings, and once you decide on a 529 plan make sure it offers low-cost investment options.
How to open a direct-sold 529 plan
Enrollment forms for direct-sold 529 plans can be found on the 529 plan’s website. You will need the following information to complete the form:
- The account owner’s Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- The account owner’s date of birth
- The account owner’s mailing address, telephone number and email address
- The beneficiary’s Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- The beneficiary’s date of birth
The form may also ask for information about a successor owner, who will become the new account owner if the first account owner dies.
Expecting parents who want to save for a child’s college education before the child is born can name a parent as the beneficiary to set up the 529 plan account and change the beneficiary after the child is born and has a Social Security Number.
How to select investments in a direct-sold 529 plan
With a direct-sold 529 plan, the account owner is responsible for the 529 plan’s asset allocation and investment selection.
Many 529 plans simplify the process for the investor by offering age-based investment portfolios. Age-based investment portfolios automatically change the asset allocations based on the beneficiary’s age. The portfolio typically starts out heavily-weighted toward equities (stocks), and then shifts toward more conservative investments over time. This DIY method works well for new investors who prefer a “set it and forget it” approach to college savings.
Parents who prefer to manage their own investment portfolio can select from the direct-sold 529 plan’s static portfolios offered. Static portfolios include target portfolios, which focus on a defined level of risk such as aggressive, moderate or conservative, and individual portfolios, which mirror an underlying mutual fund, exchange traded fund (ETF) or other investment.
The investments in a static 529 plan portfolio do not change unless the account owner makes a manual change. You may make changes to your 529 plan investment portfolio twice per year, so be sure to review your portfolio regularly and make adjustments when necessary.
How to contribute money to a direct-sold 529 plan
529 plan account owners can set up automatic deposits from a linked bank account or contribute by payroll deduction if their employer allows it. You don’t have to make regular contributions, but many plans lower their minimum contribution amount when an automated investment plan is selected.
Direct-sold 529 plans generally accept contributions from the account owner via check or electronic bank transfer. The 529 plan may also offer crowdfunding tools to solicit contributions from grandparents, aunts, uncles or anyone else who wishes to give the gift of college savings for a birthday, holiday or other occasion. Contributions can also be made using Gift of College gift cards, which are available to purchase online or at over 3,000 retail stores.
A good place to start