Borrow / The Other Talk

What is a 529 Plan?

Hattie Burgher  |  November 29, 2018

Raise your hand if the thought of paying for your kid’s dream school makes your head hurt.

Note: This is a sponsored article, and it’s a part of a paid campaign, The Other Talk with Citizens Bank.

Like preparing to buy a car or a house, starting to save now can help alleviate some of that achiness when the tuition bill shows up. And if your hand is raised (like ours is), you may want to look into a 529 plan.

What is a 529 Plan?

We’re glad you asked. A 529 plan is a tax-advantaged investment that is used to save for — then pay for — college, grad school, other forms of continuing education and recently K-12 education, as well. The funds can be used for anything from tuition to biology textbooks to a new MacBook Pro, as long as it’s needed for your education. Anyone can contribute (like a grandparent, parent or your rich aunt Cindy, who is twice removed, but still comes to Thanksgiving) and you may get a state tax deduction for doing so (more on that in a moment). The money goes in after you’ve already paid taxes on it, grows tax-free and then as long as you use the money for those qualified educational expenses described, it comes out without you having to pay any additional taxes, too.

How Do You Choose One?

A 529 is typically sponsored by a state, state agency or educational institution. In fact, many states have more than one. That can make figuring out which 529 makes sense for you a little complicated. Start by looking at your state’s plan and noting three things: any benefits (like a state tax deduction), the costs of participating in the plan (lower is better, broker-sold plans are more expensive than those you invest in directly) and performance. The website savingforcollege.com maintains rankings on plans that can help you make the right choice. If your state’s plan is a poor performer, you can choose to put your money into another state’s plan that ranks higher. You just won’t qualify for a tax deduction or other state perks.

How Should the Money Be Invested?

As with a 401(k), once you put the money into the 529 you have to put it to work. Many plans have age-based portfolios that work on a logic similar to target-date retirement funds. The further away your child is from college, the more risk the portfolio will take.  The logic here is that when you’re still a decade or more away, you’ve got time to make up losses in the market. However, as your child gets closer, the amount of risk will be tapered off, lessening the chances you’ll take a big hit right before that first tuition bill is due. As they get closer to college, you can also choose to move the money into an even safer investment mix.

Contribute Automatically (And Rally The Troops)

The best way to assure that the money in your 529 will continue to grow (aside from picking a plan that performs solidly) is to keep contributing over time — and get your family to do the same.  Figure out how much you want to put toward college every month and set your contributions on autopilot. Then get some help. Research has shown grandparents want to help with the high cost of college, so let them. Give them the information about the 529 you set up for your child and let them know how they can add to it at birthdays, holidays and whenever else they’d like.   


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