529 Plans: Saving For College

College presents a world of opportunities for students. However, a college education is not always financially within reach. Attending an in-state public college is the least expensive option. Even that option costs an average of over $10,000 per year, according to 2021-2022 school year data provided by U.S. News and World Report. Attending a private institution costs an average of over $30,000 annually. If your family struggles financially, you may need creative solutions to help you cover such costs. 

The first options you may think of when trying to raise funds for college might include applying for federal student aid or scholarships. Those are valid choices, but they are not always successful. If you are prepared to start saving for college sooner, rather than hoping for scholarships later, a 529 plan is a possible alternative. It is a special type of flexible college savings plan. 

What a 529 Plan Is

The U.S. Securities and Exchange Commission (SEC) defines a 529 plan as a savings plan that is “tax-advantaged” and is state or college institution-sponsored. A 529 plan is designed to help you save for educational expenses with the least amount of risk possible and without paying high tax rates. Until recently, 529 plans were specifically for college. However, you can now also use one to save for a child's education from kindergarten onward. 

There are two types of 529 plans available. One allows you to prepay educational expenses for a specific institution long before attending. The advantage of doing so is you can pay the current rate for your future college education at that institution. You do not have to worry about how high rates increase by the time you arrive. The other type of 529 allows you to save money towards an education and use it at your institution of choice when the time comes.

Reasons to Apply for a 529 Plan

The federal income tax break you can receive when you have a 529 plan is one of the biggest attractions. There are no tax fees during the savings process. You also do not pay tax fees when making qualified education-related withdrawals. However, if you choose not to use the funds for educational purposes, you must pay fees. In some states, you may also qualify for state tax breaks on a 529 plan. Other reasons to apply for a 529 plan include:

• If opening a 529 plan for another person, such as your child, you keep control of the account. Therefore, you can rest assured the money cannot be misused by the person for whom it is intended.

• You have the flexibility to make changes to your 529 plan as needed, including changing the beneficiary.

• There are very few restrictions regarding who can open a 529 plan. Issues like age and income do not impact your eligibility.

• A 529 plan is not typically counted against the beneficiary when he or she is applying for financial aid.

• There are high limits on deposits to 529 accounts, allowing you to save as much as you desire.

Setup and Management of a 529 Plan

To create a 529 plan for yourself or your beneficiary of choice, your chosen banking institution requires you to provide identifying information. That information includes your name and social security number. If the institution offers access to more than one type of 529, you must also select the type you want. Then you are ready to start saving.

Most banking institutions make management of your 529 plan simple by giving you options such as setting up automatic deposits from another of your accounts into the 529 each month. However, you can also opt to contribute only when you want to. You also have the option of managing your account by changing the beneficiary, if needed. That need may occur if the beneficiary you initially selected unexpectedly passes away, chooses not to attend college, or receives a full college scholarship and does not need the 529 funds.

Top State 529 Savings Plans

There are 529 plans offered in all U.S. states and the District of Columbia. However, not all state 529 plans are equal. For instance, some offer tax benefits to in-state applicants, such as the AZ529 plan offered by the state of Arizona. There are also some states that require minimum contributions, while others do not. Some of the top state 529 savings plans offered in 2021 include:

• Ohio's 529 College Advantage

• Wisconsin's Edvest

• California's ScholarShare

• West Virginia's SMART529

• New York's 529 Direct Plan

Top State Prepaid 529 Plans

State savings plans are ideal when you want to set aside money for a beneficiary's education on an ongoing basis. However, you may have more interest in a prepaid college tuition plan that allows you to lock in the best rates. If so, these programs are at the top of the list, as of 2021:

• Maryland's Prepaid College Trust

• Michigan's Education Trust

• Massachusetts' U.Plan Prepaid Tuition Program

• Washington's Guaranteed Education Tuition Plan

• Florida's Prepaid Plan

Top Banking Institutions Offering 529 Plans

When you are ready to apply for a 529 plan, you do not have to apply for one offered by the state in which you reside. You may apply for any other state or non-state 529 plan you wish. However, you do need to find a banking institution you can trust to help you review your options and set up a plan. Some of the top institutions in the country offering 529 plan options include:

• Fidelity offers age-based investment plans and the ability to make account changes at any time.

• Vanguard provides several levels of assistance for 529 plan holders, including personalized investment advice.

• J.P. Morgan allows you to use 529 plan funds for educational opportunities overseas, as well as in the United States.

• Schwab has no account maintenance or opening fees and offers multiple ways to invest for full control of your 529 plan.

Securing the Educational Future

As you can see, you can use a 529 plan to secure your own educational future or that of a loved one. In either case, a 529 plan is straightforward and simple. It is low-cost, low-maintenance, and completely flexible. Before you know it, your educational savings goal is met or your prepaid tuition cost is locked in. Then there is nothing to do but reap the benefits of your college tuition planning.