What should I know before investing in a 529 savings plan?
Before choosing a plan for your child, review the plan's fee schedule and investor handbook, ask plan managers questions if you have any, and make sure you understand the cost and terms associated with the plan.
- Some plans charge more fees than others so compare costs. Different 529 plans may have different costs and fees. The costs associated with your 529 plan will vary based on the provider and type of 529 plan you select.
- Consider how you want to invest in each plan. Most 529 savings plans allow you to make additional contributions to your account whenever you like. Some plans may also require minimum contribution or monthly deposit requirements, for example, $15 a month. Before choosing a plan, review your plan's payment requirements and choices. Some plans may charge you fees if you don't meet certain requirements.
- Understand your investment options and how to maximize your money. 529 savings plans allow you to invest your education savings in various types of mutual funds and exchange-traded fund portfolios. Your plan's value may go up or down based on the performance of your investments, meaning you can potentially lose money if your investments do not perform. Typically, every month, a fee will be deducted from your account. This pays to cover the costs associated with managing your account. You can visit your plan's website or online portal to monitor and change your investment options and monthly contribution amounts. If you are not happy with the performance of your plan you can change your investment options up to twice per year.
- Explore whether your state offers additional benefits. Some states offer matching grants and scholarships to help eligible families maximize their monthly contributions to a 529 savings plan. For example, some states offer qualified families up to $500 a month in matching 529 savings plan contributions. Some states also offer tax advantages for residents.
- Know when and how you can withdraw money. You can withdraw from your 529 account federal income tax-free as long as the funds are used for a qualified education expense. Qualified expenses include:
- Apprenticeships or on-the-job training
- Required student fees
- Campus Room and Board (as set by the eligible educational institution)
- Computers, software, internet access fees and other computer equipment
- Expenses for special needs services by a special needs beneficiary when connected with enrollment or attendance at an institution and
- Books and supplies (if required to be purchased from the institution for enrollment or attendance)
- K-12 tuition and fees (up to $10,000 per year)
- Student loan repayment (up to $10,000)
Money withdrawn from a 529 account can be paid to the account owner, student, or school. Some plans may require that the funds to be in the 529 savings account for a certain number of years before you can withdraw the earnings without any penalties. Be sure to check if the plan has withdrawal restrictions.
- Check if your state offers tax incentives. Many states offer tax credits or deductions for 529 savings plan contributions. Although you cannot deduct 529 contributions on your federal income tax returns, your 529 plan's earnings may receive special state tax treatment. If you enroll in an out-of-state 529 savings plan, you may not be eligible for your state's income tax advantages.
- 529 plans may affect Federal Financial Aid eligibility: Money saved in a 529 savings or prepaid tuition plan may affect eligibility for federal financial aid. These funds may count as funds of the child. Families should consult with a financial counselor or tax preparer for more information on how 529 plans may affect federal financial aid eligibility.
- Find out how to change your plan's beneficiary: If your 529 plan's beneficiary no longer needs the funds in your 529 account, you can designate a "family member" as the new beneficiary, including:
- Children and their descendants;
- Parents and stepparents;
- Nieces and nephews;
- Aunts and uncles;
- In-laws; and
- First cousins.
Some states may also impose additional restrictions, such as age and residency requirements for the plan's new beneficiary. You can change your beneficiary by filling out a "change of beneficiary" form and submitting it to your 529 plan administrator. Some plans may require you to pay an administrative fee to change the beneficiary.
If your plan's current beneficiary only needs a portion of the funds in your 529 account, you can do a partial change of beneficiary to establish another 529 account for a new "family member" beneficiary. A partial change in beneficiary will allow you to roll over some of the funds from the old account into a new one. Check with your 529 plan administrator to learn more about the taxes and fees associated with changing your plan's beneficiary to someone who doesn't meet the "family member" criteria.
Tip: Do your research. Look for online tools and comparison websites that can help you compare plans including fees and other costs across savings plans.