How to Set Up a 529 Plan for Your Child
A 529 college savings plan is a plan you can use to help pay for your child's college education. These plans allow you to put money away on an after-tax basis into an investment account. The money grows tax-deferred. When you withdraw the money for college expenses, the money is tax-free.
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Instructions
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Determine your budget. The amount of money you need to contribute depends entirely on the college your child will go to and how much you want to help pay for.
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Contact your brokerage firm about your state's 529 savings plan. You do not have to use your state's 529 plan, however. Your broker will have information on the plans available through your state. If you want additional information, you may have to research this information on your own (see Resources).
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Fill out an application. Fill out an application for a 529 plan with your broker if you plan on using him as your investment adviser.
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Contribute money to the plan. You may elect to have automatic contributions deposited into the plan's account. These contributions will come from your checking account.
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Choose investments in the plan that are appropriate for building a savings for your child. A 529 plan normally contains mutual funds. You should coordinate these investments with your financial adviser to meet your child's future savings needs.
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Tips & Warnings
You can use the money in a 529 plan at any accredited college or university in the country - public or private, graduate or undergraduate.
The money can be used for tuition, fees, room and board, books, supplies, and equipment.
You can open accounts for any number of people, regardless of age and regardless of their relationship to you.
What you don't get is an up-front federal tax deduction - think of these accounts as the college saver's counterpart to Roth IRAs.
Many 529 plans still charge more than you'd pay if you bought the same fund directly from the fund company.
Investment options are limited by what is offered by your state.
If you don't use the money for school, you'll pay heavy penalties.
References
- IRS: 529 Plans: Questions and Answers
- SEC: An Introduction to 529 Plans
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu and Robert A. Crane; 2007
