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Where To Open A 529 Plan
What many people don’t realize is that you can invest in almost any state 529 plan. For some people, it can make sense to use your own state’s plan to take advantage of the tax deduction – but not all states offer tax deductions on contributions .
If the state doesn’t matter, the next things to look at are performance and ease of saving. For performance, you want good performance for low fees. For ease of savings, we look at whether the plan can be connected to savings programs like College Backer.
Check out this guide here, find your state, and see what plan we recommend: 529 Plan Guide.
SavingForCollege.com ranks the best plans every year. What plan you choose depends on the state you’re in. Check out the map below and find your state:
Send Yourself A Reminder
We will send you a link to this page so you can access and review it when you are able to.
For more information about 529 plans managed or administered by Ascensus call 1.877.529.2980 or .
Please Note: Before you invest, consider whether your or the beneficiarys home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that states qualified tuition program. You should consult your financial, tax, or other advisor to learn more about how state-based benefits would apply to your specific circumstances. You also may wish to contact directly your home states 529 college savings plan, or any other 529 plan, to learn more about those plans features, benefits, and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.Investment objectives, risks, charges, expenses, and other important information are included in a 529 plan’s offering statement read and consider it carefully before investing.
When you invest in a 529 plan you are purchasing municipal securities whose value will vary with market conditions. Investment returns are not guaranteed, and you could lose money by investing in a 529 plan. Account owners assume all investment risks as well as responsibility for any federal and state tax consequences.
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How To Choose A 529 Plan
Nearly every state has at least one 529 plan available, but youre not limited to using your home states plan. Each 529 plan offers investment portfolios tailored to the account owners risk tolerance and time horizon. Your account may go up or down in value based on the performance of the investment option you select. Its important to consider your investment objectives and compare your options before you invest.
How Much Can I Contribute
There are no annual 529 plan contribution limits, however, there are some important things to consider when making a large contribution. For example, contributions in excess of the annual gift tax exclusion will count against your lifetime estate and gift tax exemption .
Each state also has an aggregate contribution limit for 529 plans, which ranges from $235,000 to $529,000. This amount is based on the price of attending an expensive college and graduate school program, including textbooks and room and board.
As a general rule of thumb, you can aim to save about one-third of your projected future college costs. This assumes you can cover the remaining two-thirds with current income, including scholarship funds, and student loans.
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Education Savings Account Or Education Ira
An ESA works a lot like a Roth IRA, except that its for education expenses. It allows you to invest up to $2,000 per year, per child. Plus, it grows tax-free! If you put away $2,000 a year starting when your child is born, by the time they turn 18, you would have invested $36,000. Its hard to say exactly what the rate of growth is with an ESA because it varies based on the investments in the account. But at the average stock rate of 12%, that $36,000 would grow to around $126,000 by the time the child starts school. Congratulations, you more than tripled your investment, and now Junior doesnt have to worry about paying for tuition!
We like the ESA account because its likely a much higher rate of return than youd get in a regular savings accountand you wont have to pay taxes when you withdraw the money to pay for education expenses. An ESA isnt just for college tuition either. It can be used for K-12 private school tuition, vocational school or things like textbooks, school supplies or tutoring If your child doesnt end up needing it, you can transfer the money to a sibling for their school.
Why We Like It:
- Higher rate of return than a regular savings account
Why We Dont:
- Contributions are limited to $2,000 per year
- You must be within the income limit to qualify
- The amount must be used by the beneficiary by age 30
What Happens If My Child Doesnt Go To College
The future is always uncertain, and some parents worry about losing the money they saved in a 529 plan if their child doesnt go to college or gets a scholarship. Generally, you will pay income tax and a penalty on the earnings portion of a non-qualified withdrawal, but there are some exceptions. The penalty is waived if:
- The beneficiary receives a tax-free scholarship
- The beneficiary attends a U.S. Military Academy
- The beneficiary dies or becomes disabled
However, the earnings portion of the withdrawal will be subject to federal income tax, and sometimes state income tax.
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Fees Charges And Expenses
All 529 college savings plans have fees and expenses. Not only do these charges vary among 529 plans, but also they can vary within a single plan. Like mutual funds, a single college savings plan may offer more than one class of shares to investors. Often referred to as A, B or C classes, units or fee structures, each class has different fees and expenses. You can look at the offering document to see if a particular college savings plan offers more than one class.
Higher fees and expenses can make a big difference in the value of your investment over time. Let’s say you invest $10,000 in a college savings plan with a return of 8 percent before expenses. With a plan that had annual administration and operating expenses of 2 percent, after 18 years, you would end up with $27,880. If the college savings plan had expenses of only 0.65 percent, you would end up with $35,548an additional $7,668.
Here are some of the most common fees, charges and expenses found in college savings plans:
Funds Can Be Used For Educational Expenses
Funds in a 529 plan can pay for tuition, room and board, laptops and other peripheral equipment, school supplies, and any other expenses required for enrollment and attendance of an eligible educational institution.
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Eligible Postsecondary Schools: Almost every accredited postsecondary institution is eligible and should be able to clarify that participates in aid programs from the Department of Education
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Eligible Elementary or Secondary Schools: Any public, private, or religious school that provides K-12 education is eligible up to $10,000 per year . However some states havent caught up with federal law so be sure to check on your state if you are planning to use a 529 for elementary or secondary school. Check out our article that addresses all the possible pitfalls: Should I Use A 529 Plan For Primary School Tuition?
The IRS provides a comprehensive list of eligible expenses in Publication 970, published each year.
When you withdraw money from your 529 to pay for qualified expenses, you have to report that on a Form 1099-Q.
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What Are 529 Plan Contribution Limits For Married Couples
All 529 plans prohibit contributions once the account balance for the beneficiary reaches a certain point, which is generally more than $235,000, but can vary depending on the plan. In addition, the owner of the 529 plan may make an election that allows the owner to contribute up to five times the annual exclusion amount . The election allows the gift to be considered prorated over five years. For example, a married couple with two children can contribute $150,000 for each child in one year.
What Are 529 Education Savings Plans
Between normal, day-to-day expenses and long-term goals such as retirement, figuring out how and how much to save for your child’s education can be challenging.
One financial strategy you might consider? Setting up a 529 plan. A 529 plan is a state-sponsored education savings plan that can be used toward elementary, secondary or higher education expenses for the account beneficiary. 529 plans offer account owner tax advantages, flexibility and control.
Your Edward Jones financial advisor can help you determine how a 529 plan might work with your overall financial strategy, as well as think through specific questions you might have:
- Is a 529 plan a good fit for you?
- What is your family’s education savings goal?
- What investments might make sense for you and your education goals?
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How To Maximize Net Investment Returns
Minimizing fees is the key to maximizing net returns.
Choose a 529 plan that charges less than 1.0% in annual fees, often called the total expense ratio. Some 529 plans charge less than 0.5% in fees.
Choose a direct-sold 529 plan, since they have lower fees than advisor-sold 529 plans, and dont charge commissions.
Consider both your state’s own 529 plan, if your state offers a state income tax deduction or tax credit on contributions to your state’s 529 plan, and a few out-of-state 529 plans with lower fees.
Generally, lower fees matter more when the child is young and the state income tax break matters more after the child enters high school. The fees are charged on the full value of the 529 plan every year, while the state income tax break applies only to that years contributions.
Passively-managed investment options, such as index funds, charge lower fees than actively-managed investments.
How Much To Save
Like any major life-cycle expense, college costs should be spread out over time. The one-third rule suggests a rough cut, with one third of the cost coming from past income , one third from current income and one third from future income .
There is a balance between savings and loans. If you want to reduce student loan debt at graduation, save more.
Since college costs increase by about a factor of three over any 17-year period , that suggests that the college savings goal should be the full cost of a college education the year the child was born.
For a child born this year, this translates into monthly savings of $250 per month for an in-state 4-year public college, $450 per month for an out-of-state 4-year public college and $550 per month for a 4-year private college. Saving $250 a month from birth will yield more than $80,000 by the time the child enrolls in college.
If you can’t afford to save that much per month, save what you can. Every dollar you save is a dollar less you’ll have to borrow. It is cheaper to save than to borrow.
Families should aim to save enough that the child’s student loan debt at graduation will be less than their annual starting salary. If you keep student loan debt in sync with the student’s income, the student should be able to repay their student loans in 10 years or less.
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Its Time To Get Serious About Saving For College
Its never too early to start thinking about a college savings plan. Whether your child is a teenager or toddler, the best time to start a college fund is now .
Making the right plan for your childrens future starts with understanding all of your investment options. Connect with a qualified investment professional for free through SmartVestor. These are people we trust to take care of you and your childs college investment.
Want to learn more about how to go to school without loans? Debt-Free Degreeis the book all college-bound studentsand their parentsneed to prepare for this next chapter. Grab a copy today or start reading for free to get plenty of tips on going to college debt-free!
About the author
Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
How Grandparents Relatives And Friends Can Help
Open an account or gift money to an existing account
Anyone who wants to save for a child’s education can open a 529 plan account.There may be benefits to opening an account. The account owner keeps control of the money, can make investment decisions, and can even change the beneficiary if plans change. There may be estate tax benefits in some cases.But you can also gift money to an existing 529 plan account. In fact, account owners can enroll in our free college gifting program. It lets family and friends contribute gifts electronically and makes it easy for account owners to send invitations and track gifts from their private dashboard.
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Can I Use A 529 Plan To Pay For Rent
Yes, room and board is considered a qualified expense if the student is enrolled at least half-time, which most colleges and universities consider to be at least six credit hours per term.
For on-campus residents, qualified room-and-board expenses cannot exceed the amount charged by the college for room and board. For students living off-campus, qualified room and board expenses are limited to the cost of attendance figures provided by the college. Contact your financial aid office for more information.
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A Better Way To Save And Pay For College
Paying for college without spending your lifes savings is one of the biggest challenges faced by families today.
The traditional ways of paying for college, such as 529 college savings plans, UGMAs, UTMAs, and student loans all have serious drawbacks. So we put together a video that reveals:
- Seven important questions to ask yourself when choosing between college saving methods plus a chart that compares them side-by-side
- A better way to save and pay for a college education for your kids or grandkids or for yourself one you probably arent hearing about
- How the Bank On Yourself method can double as a safe college savings plan AND a way to provide you a guaranteed income in retirement that can last as long as you do
This video is a little longer than others weve done because this is a critical topic and making the wrong decisions can drag down your financial picture for decades. A full transcript of the video can be found below as well. Enjoy and let us know what you think in the comments box below!