What is a 529 plan and how do they work for college savings

What Is A 529 Plan And How Do They Work For College Savings?

What Is A 529 Plan And How Do They Work For College Savings?

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I have been investing in 529 plans for both of my children for over a decade now. In this article, I’m going to share with you all the tips, strategies, pitfalls and ways for you to be successful in savings for your children’s higher education. 

In this article, I’m going to only discuss 529 plan savings accounts that are opened by either a parent or guardian with their child as the beneficiary. I will get into the reasons later in the article. 

Grandparents, friends and other relatives don’t worry, it will make a lot more sense once you read on. You can still contribute to the child’s 529 plan but you should not be the owner of the account.

What is a 529 plan?

The 529 Plan is a qualified tuition program (QTP) established and maintained by a state, or an agency of a state, that allows the contributor to either to prepay a beneficiary’s qualified higher education expenses at an eligible educational institution or to contribute to an investment account for paying those expenses.

For more information on 529 plans click on the link to the guide from the Federal Reserve, FINRA website.

Things to do prior to considering opening a 529 plan.

Remember you need to always invest in yourself first before you take on college finance for your children. If you’re a parent or guardian of a child you need to be on good financial ground so that you can properly support them. Investing in their education should come after you have established your monthly budget, maximized your cash flow, reduced your expenses, eliminated your high-interest debt, are in good credit standing and have retirement investments of your own. After all of that is in place, then you can start considering investing in your child’s educational future. Remember only you can pay for your retirement. Your child, if needed can find a way down the line to pay for their education.

What is the best age to start a 529 plan?

baby to teenThe sooner you can invest the better. My recommendation is to start investing as soon as your child is born if you can afford to do it.

The time horizon for 529 plans is much shorter than retirement accounts for example. In retirement accounts, if you start saving let’s say at 20 years old and you plan on retiring at age 65, that gives you a 45-year investment timeframe.

If you start when they are born and you anticipate they will need the funds from their 529 plan for higher education at the age of 18, that gives you a very narrow window of time to maximize the investment potential for them to have money for school.

Another challenge you need to take into consideration is the rapid rate of college tuition increase every year. For example, according to the national center for education statistics, a 4-year college cost was $13k in 2000 and has soared to $27k in 2018. 

That is more than a 2x increase. So, anticipate that within an 18-year timeframe that the cost for higher education will double from a planning standpoint. So, the sooner you can invest and the more you can invest sooner the better. 

What are the different types of 529 plans?

There are two types of 529 plans. Prepaid tuition 529 plans and education savings 529 plans. At least one of these plans can be found in each and every state including the District of Columbia.
Prepaid tuition 529 plans allow you to purchase units or credit at participating colleges or universities for future tuition for the account beneficiary.

Education Savings 529 plans allow you to open an investment account to save for higher-education expenses, tuition for elementary, secondary public, private or religious schools. This is by far the more popular of the two plans due to the flexibility it provides.

What can funds from a 529 education saving plan be used for?

To elaborate a bit further you can use 529 educations savings plans funds for qualified higher education expenses including tuition, elementary or secondary public, private, or religious school, i.e. kindergarten through grade 12, up to a total amount of $10,000 per year. This also includes expenses for fees, books and supplies. 

How does a 529 plan affect financial aid?

This is where the non-parent savings for someone comes into play. When it comes time to qualifying for student aide, 529 plans from parents or guardians with their children as beneficiaries do not negatively affect their aide as much as a 529 plan from someone other than their parents. So, it is absolutely critical that only a parent or guardian create the account for this very reason. Anyone can contribute to the account. A relative, a friend, anyone can contribute but the account must be owned by the parent.

Be careful of non-custodial divorce situations as this could hurt the child’s chances as well during the financial aid process.

What are the tax advantages of a 529 plan?

All of your contributions are previously taxed, but any earnings you accrue that are used for qualified expenses are all tax-free. That is pretty amazing. In addition to this, some states even offer incentives for 529 plan contributions with benefits at the state tax level. Check with your state’s tax division to see what benefits they provide as it varies year by year. As of right now they’re about 30 states offering some type of incentive if you invest in a 529 plan.

529 college savings plans come with specific tax rules and benefits. Please click the link to the IRS website for additional information.

How to open, choose and invest in a 529 plan?

529 plans are still a bit challenging to navigate, open an account and invest in. Some offer these plans directly through the state or through investment firms. You are then very limited on what you can invest in, the options offered and the ways you can go about investing in them. Their interfaces are antiquated at best.

Luckily there are new players on the block that have made the 529 process simpler and easier than ever before.

My #1 recommended platform for 529 plan investing is CollegeBacker. No other platform provides the simplicity, choices, technology and investment options all on one platform. Within as little as 5 mins you can have a tax-free growth investment plan in place for your child. Collect gifts from family and friends. You can even earn cashback. Click the link below to check out CollegeBacker.

#1 Rated College Savings & Investment Platform

#1 Rated College Savings & Investment Platform

If you’re thinking about college savings CollegeBacker is in my opinion the best platform for you. No other platform provides the simplicity, choices and options. Within as little as 5 mins you can have a tax-free growth investment plan in place. You can also have friends and family to directly contribute as well. Apply today if you’re planning on saving for college.

collegebacker mobile tp


529 plan when set up correctly can provide an amazing vehicle for college savings. The choices now are better and simpler than ever before. If you’re thinking about saving money for your child the sooner you start saving the better.

What are your thoughts on 529 savings plans? Are you currently investing in one? Are you thinking about investing in one? Please share your thoughts in the comments section below.

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Frank Makrides

Frank Makrides

Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.

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