5 Steps to Open a 529 Plan

Higher education expenses have become astronomical, but offsetting those costs with a 529 plan can help make college more affordable. Preparation is the only way to make sure you can cover such education expenses for your child, and a 529 college savings plan might just be your answer. 

This guide will tell you everything you need to know about the types of 529 plans available and how to use the funds.

Average Cost of Higher Education

Recent research shows a four-year institution will currently set you back more than $40,000 per year. A few things to keep in mind about these expenses: 

  • That figure includes both in-state and private four-year institutions. 
  • The costs will be cut about in half if your child attends a college in their state of residence.
  • Remember that these are current education expense numbers. 
  • By the time your child reaches college age, prepaid tuition plans may be the only way you can afford to send them to a four-year institution.

The cost of college is more than just tuition, too. Higher education expenses also include:

  • Books
  • Materials
  • Supplies
  • Student membership dues
  • Activity fees
  • Any other related expenses

These qualified higher education expenses must be paid directly by the student or a family member, including parents, to qualify as qualified education expenses. 529 plans can be a great option to help your child avoid lifelong student loan debt, which can even follow them into their marriage.

Defining 529 Plans

529 plans are college savings plans that allow an individual to save for their own higher education expenses or for the higher education expenses of a child. These plans are tax free at the federal level, and there may also be tax benefits as an in-state resident if you have state income tax.

The intent of a 529 plan is to help make college more affordable, as costs continue to rise across the United States. They offer a way to save for qualified education expenses without paying federal tax on the money, helping it grow faster. The money can then be used by the beneficiary to cover qualified higher education expenses.

How to Set Up a 529 Plan

College savings plans help cover the high costs of college, and 529 plans offer a tax free way to make your money grow faster. Here is a step-by-step guide to help make the process easier for you.

College student studying

1. Choose a 529 plan.

There are many plans from which to choose, including savings plans, prepaid tuition plans, or both. A savings plan works like a 401(k), where the account holds equities and securities. Prepaid tuition plans, conversely, work more like a pension which grows at a steady and guaranteed rate. These plans are usually limited to state residents or must be set up for students to attend specific colleges.

You can use different websites to help you compare plan options. Don’t worry too much about historical performance, as that is merely a lagging indicator rather than a leading indicator of a particular plan’s strength. Don’t allow analysis paralysis, either — instead, pick a plan and start your money working for you.

2. Visit the plan website

Once you have chosen a 529 plan that meets your needs, visit the plan’s website. This will help you determine which documentation you will need to open your college savings or prepaid tuition plan.

At a minimum, you will need to provide the following information for both you as the account owner and the beneficiary:

  • Address
  • Date of birth
  • Social Security number

Your specific plan may require additional information or documentation, so be ready to track down additional information as necessary.

3. Open the account.

Most 529 plans today will allow you to complete the enrollment process entirely online. You will need to select an account owner when setting it up, and most 529 plans do not allow joint ownership. Keep that in mind when setting up your 529 plan. You will also need to set up an online bank transfer to fund the account, and that step may take a few days to complete depending on the speed and protocols of your financial institution. 

4. Select your investments.

This can be the most challenging part. Most people have an automated investment plan or have a broker manage their investments for them. Selecting your own portfolio might seem daunting, but many 529 plan providers try to make this a simple process by letting you choose an age-based portfolio. This approach attempts to maximize returns at a certain point in the future.

Note that 529 savings plans do not guarantee returns. As with any investment, there is a risk of loss. Speaking with an investment professional can help you determine which 529 plan and investment breakdown is best for you.

5. Submit your application.

If you submit your application online, the platform usually will not let you complete the process if there is missing documentation. This is a good fail-safe to ensure you have provided all of the financial data required and necessary personal information for both you and the beneficiary.

You begin the funding process once you have submitted your application. Entering your bank information to complete an online transfer is the fastest way to get your 529 plan funded and earning money.

Pitfalls of a 529 Plan

A 529 plan is a great way to help make college more affordable, but there are some pitfalls to watch out for when selecting a plan. A few of the most common include:

  • Limited investment options 

529 plans are not the same as a savings account and must be invested, bringing the risk of negative gains.

  • Fees

529 plan managers may charge fees in addition to the fees charged by specific securities, further reducing the overall gains.

  • Withdrawal penalties 

Money that is used for expenses other than qualified higher education expenses is subject to a 10% penalty, so it’s important to know how your child is going to use the funds and crucial that they understand what it’s meant to cover.

  • Time 

If you need the money soon, a 529 plan may not be the best investment vehicle for you. The money cannot be touched for a certain number of years without incurring hefty penalties.

Understanding the nuances of 529 plans, which investment options to make, and how much time you must wait before you need the money for college expenses can seem overwhelming. Partnering with a wealth professional can help you make sense of your choices and ensure you make the best investment decisions for your personal situation.

Are you interested in how you can begin saving for your child’s college education? Contact Bogart Wealth today to speak with a wealth professional about your 529 plan questions and other higher education savings options.

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
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