Funding A College Education? Don't Forget The 529

When 529 plans first hit the scene, circa 1996, they were big news. Nowadays, they’re a common part of the college-funding landscape. But don’t forget about them — 529 plans remain a valid means of saving for the rising cost of tuition and more.

Flexibility is king

529 plans are generally sponsored by states, though private institutions can sponsor 529 prepaid tuition plans. Just about anyone can open a 529 plan. And you can name anyone, including a child, grandchild, friend, or even yourself, as the beneficiary.

Investment options for 529 savings plans typically include stock and bond mutual funds, as well as money market funds. Some plans offer age-based portfolios that automatically shift to more conservative investments as the beneficiaries near college age.

Earnings in 529 savings plans typically aren’t subject to federal tax, so long as the funds are used for the beneficiary’s qualified educational expenses. This can include tuition, room and board, books, fees, and computer technology at most accredited two- and four-year colleges and universities, vocational schools, and eligible foreign institutions.

Many states offer full or partial state income tax deductions or other tax incentives to residents making 529 plan contributions, at least if the contributions are made to a plan sponsored by that state.

You’re not limited to participating in your own state’s plan. You may find you’re better off with another state’s plan that offers a wider range of investments or lower fees.

The downsides

While 529 plans can help save taxes, they have some downsides. Amounts not used for qualified educational expenses may be subject to taxes and penalties. A 529 plan also might reduce a student’s ability to get need-based financial aid, because money in the plan isn’t an “exempt” asset. That said, 529 plan money is generally treated more favorably than, for instance, assets in a custodial account in the student’s name.

Just like other investments, those within 529s can fluctuate with the stock market. And some plans charge enrollment and asset management fees.

Finally, in the case of prepaid tuition plans, there may be some uncertainty as to how the benefits will be applied if the student goes to a different school.

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