What are the steps involved in setting up a 529 account? (Script)


What are the steps involved in setting up a 529 account? Watch video


Hi, I'm Kathryn Flynn. If you're thinking about starting a college fund for your child or grandchild, you’ve come to the right place. During the month of September we're celebrating College Savings Month with a new podcast series on "Getting Started with 529 Plans". Our first episode focused on finding the best plan to suit your needs. Be sure to check it out on the Savingforcollege.com blog if you haven't already. If you're still deciding on a 529 plan – check your home state's plan first, some states are offering incentives for residents who open an account this month. We have a great list of all current promotions - also on the SFC blog.

Once again I'm here with Joe Hurley, CPA, Bestselling Author, Founder of Savingforcollege.com and our very own 529 Guru, and today we'll be discussing how to set up a 529 account.

So now that we've informed our listeners on how to find the best 529 college savings plan to suit their needs, what is the first thing they should do as far as setting up their account?

Before you enroll in a plan, you really should read the official program disclosure statement. It can be a fairly intimidating document but the PDS is the only place you will find all of the program rules, contribution and withdrawal procedures, investment options and information on the fees and expenses you'll pay for that particular plan. Remember, no two plans are alike so If you decide to skip reading the PDS entirely you'll have no grounds for complaining later on about missing important details concerning your plan.

I can see why that would be so important. Where would someone find the program disclosure statement?

They are always part of the program application packet and can usually be downloaded from the plan's website.

Okay, so what next?

Well, the next thing you'll need to do is name the account owner. You'll most likely name yourself as the owner, but know that very few plans permit joint ownership, so your spouse may want to open an account as well.

Unlike UGMA/UTMA custodial accounts, it's the owner of a 529 account that retains control of the assets – not the beneficiary. But if the funds are going to be sourced from an existing UGMA or UTMA account, you'll need to preserve the minor's ownership rights by designating it as a "custodial 529" account. It is also possible for corporations, trusts and other legal entities to be account owners.

You wouldn't name the child as the account owner?

The person who will eventually be using the funds would be named as the beneficiary, whether that's your child, yourself or someone else. Many parents and grandparents appreciate the fact that the child is not the account owner. This way, they can rest assured that the money will be used toward its intended purpose – paying for college.

Another nice thing about 529 plans is that you can easily change the beneficiary without any tax consequences. So let's say your child gets a scholarship and doesn't need all of the money you saved. You can simply change the beneficiary to a younger sibling or someone else who is planning to attend college so that you can still take full advantage of the tax benefits. This could also come in handy if for some reason your child decides not to go to college.

Remember that to take full advantage of the tax benefits of a 529 plan the beneficiary must incur qualified higher education expenses, which can include tuition, room and board, books, fees, supplies and equipment and even computers if the school requires them. Non-qualified withdrawals will incur income tax and 10% penalty tax on account earnings, so if the original beneficiary doesn't use the funds remember that you can change the beneficiary and pass the money along to someone else who will.

To designate a beneficiary, you'll need their social security number, birth date and current address. If you're setting up a college fund for a child who isn't born yet, you can name yourself as the beneficiary and make the change once the child is born. This is a great way to jump-start your savings.

So what happens to the account if something were to happen to the account owner? Would the beneficiary get control?

The account application will ask you to name a successor owner. This is the person who will take over the account in the event of your death or incapacity. If this were to happen, the successor owner will take control over the account, giving them the right to request distributions for college, replace the beneficiary or even revoke the account assets.

If you don't feel comfortable leaving this responsibility with anyone else, you can always set up a legal trust to be the successor owner. You can leave explicit instructions for the trustee on how to handle the 529 funds in your absence.

I’m guessing the next thing to do is make a deposit. How do I know how much to contribute?

The dollar amount of your initial contribution will depend on your own situation and the plan you selected. Some plans have minimum dollar amounts for initial contributions, ranging from $15 to $1,000. Many plans will allow for a smaller initial contribution if you sign up for automatic monthly investments or if you open the plan through your employer.

Another great thing about 529 plans is that many will allow you to link a checking or savings account so that automatic contributions can be set up easily – allowing you to "set it and forget it". Most people who set up automatic contributions get so used to saving that they don't even miss the money they put away.

Don't forget to include other family members. Contributions to a 529 savings plan make great holiday and birthday gifts. In fact, with the holiday season only a few months away you might want to get that discussion started sooner rather than later.

Once again that was extremely helpful – thanks again Joe. What a great idea to ask for help from family members. Even a small contribution can grow over time and would be a much more meaningful gift than another toy or outfit.

Well, so far you’ve helped us with picking the right plan and getting it set up. Next time we’ll talk about how to maximize our savings in a 529 plan to ensure we are ready when its time for college. From what I hear, it can really sneak up on parents!

Ready to open a 529 plan? Start comparing plans.