Open a 529 Plan With These 6 Simple Steps

A 529 savings plan can provide you with a simple and affordable way to save for college. But many people don’t know how to set up a 529 plan or contribute to one, preventing them from moving forward with maximizing this tax-advantaged investment tool.

529 plans have many benefits, including tax-free growth and withdrawals for qualified expenses. But they also have their drawbacks, like incurring a penalty for non-education withdrawals.

The good news is that they’re accessible to everyone, with low minimums and no income restrictions. And it’s fairly straightforward once you know how to start a college fund.

Here’s how to open a 529 plan and start saving smartly for college.

1. Explore 529 plans nationwide

Each state offers its own 529 plan, with the exception of Wyoming. But that doesn’t mean you’re limited to choosing your own state’s plan.

It’s best to shop around and consider each 529 plan’s costs, historical performance and available tax benefits.

You can visit each state’s website or use the College Savings Plans Network as a starting point when researching 529 plans. Or use an investment adviser platform like CollegeBacker, which can help you select and open a 529 plan.

2. Understand your state’s 529 plan tax benefits

Many states offer a tax deduction or tax credit as an incentive to make contributions toward its 529 plan. These tax incentives range from having no tax benefit at all to allowing for 100% of contributions to be tax deductible.

For example, California and Hawaii don’t provide a state tax incentive for contributing to their 529 plan. Whereas, Michigan and North Dakota provide a tax deduction of up to $5,000 for individuals and $10,000 for married couples filing a joint tax return. While Colorado and New Mexico allow residents to deduct the full amount from their state tax returns.

And some states, like Arizona and Montana, offer a tax break to their residents even if an out-of-state plan is chosen.

So, depending on where you live, you’ll need to determine if you’re required to use a 529 plan specific to your state in order to claim its tax benefit. If not, you can explore other states’ 529 plans to find the best match for you, while still reaping the tax benefits.

3. Choose the 529 plan that fits your needs

There are different types of plans to be aware of as you learn how to set up a 529 plan.

Most state plans allow you to invest directly in the plan on your own by selecting “direct sold” plans that have low fees and no sales commissions. But if you’d prefer investment advice, your state might offer “advisor sold” plans which offer professional services with a standard sales commission.

Additionally, you’ll need to choose between an individual account or a custodial account. Most families choose to open an individual account where the parent is the account owner and the child is the beneficiary.

But in some cases, you might need to set up the plan as a custodial account in which the child is both the account owner and the beneficiary. The parent is then named as the custodian and will manage the account until the child becomes of age.

It’s also important to note that third-party ownership (e.g. grandparents) of a 529 plan account can actually hurt the student when being evaluated for need-based financial aid.

So, it’s best to weigh all options to ensure you’re choosing and setting up a 529 plan that fits your family’s present and future needs.

4. Submit your 529 plan application to open the account

When you’re ready to open the 529 plan account, visit the plan’s website and select “Enroll”, “Open an Account” or an equivalent option.

You’ll need to provide the following information for both the owner of the account (e.g. you) and the beneficiary (e.g. your child):

• Social security number
• Date of birth
• Mailing address

You might also be asked to name a successor account owner who’ll assume control if the primary account owner dies.

5. Deposit money into your 529 plan

When you open a 529 plan, you’ll need to make an initial contribution by transferring money from your bank or mailing a physical check. There’s typically a $25 minimum, but each plan’s requirements will vary.

You can then choose to set up automatic recurring payments by linking your bank account. Or you can opt to make one-time payments electronically or by mail.

Your employer may also offer the ability to contribute through a payroll deduction, which can make saving for college even more convenient.

Keep in mind that you can crowdfund your child’s college fund by asking friends and family to contribute for special occasions, like birthdays or graduation.

6. Select your 529 plan investments

Once you’ve funded the 529 plan, you’ll need to select your investments. But be aware that your investment options are going to be limited, which in the end, makes it much easier to choose and get your investments rolling.

Age-based portfolios are the most common 529 plan investment option because they take the guesswork out of investing.

Simply select a target enrollment portfolio based on your child’s age. And your investments will be automatically adjusted based on when your child will attend college. The portfolio will start with an aggressive mix of investments when your child is young and gradually shift to investments with less risk as your child approaches college age.

Depending on the plan, you might also have access to static investment options that allow for more control of your portfolio’s diversification and investment strategy.

If you change your mind, you can switch investment strategies twice a year for funds that have already been invested. Or choose a different investment option for each new contribution.

Additional tax implications

One of the benefits of using a 529 plan to save for college is that there isn’t an annual federal or state contribution limit. But each state has an aggregate limit (currently ranging from $235,000 to $530,000) for each beneficiary, which includes all 529 plans assigned to that specific beneficiary.

Although there isn’t an annual federal contribution limit, your 529 plan contributions could be subject to the federal gift tax. But you can avoid this by claiming an annual gift tax exclusion for up to $15,000 per beneficiary (or $30,000 for married couples).

Or you can choose to spread larger contributions of up to $75,000 (or $150,000 if married) by claiming five years’ worth of exclusions all in one year.

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