Colleges are expensive. If you have or are planning on having a child, have you accounted for the rise in tuition? How will you help your children pay for their higher education? A 529 college saving plan can be an effective way to help your child get to the college or university of their choice.
Many people don’t know what a 529 plan is or how to open one. According to a 2015 study by the FDIC, 9 million Americans don’t even use checking accounts. If routine banking is daunting, the idea of opening an investment account may seem insurmountable. Thankfully, opening this essential account is easier than you think. Here’s how to do it.
How to Choose a 529 Plan
It might surprise you to find out there are several different types of 529 plans available. In fact, there are over 100 savings and prepaid types of 529s alone. This can make it difficult to choose the right one for you. Narrow it down with these steps:
- Pick prepaid or savings. A savings plan operates like a 401(k) in that they leverage stocks, bonds, and other securities. A prepaid plan works like a pension, meaning it grows at a rate promised by the sponsor. Prepaid plans are usually limited to state residents. If you don’t know which kind to choose, open both and add a little money each month to both.
- Choose an in-state or out-of-state plan. If you have a state tax benefit, it might be better choosing an in-state plan, but this doesn’t always apply. Talk to a financial advisor if you’re confused.
- Research online or contact a specilaist. Compare the investment options and inherent costs of each plan. Don’t get too bogged down on the performance statistics – keep in mind these are lagging indicators and don’t necessarily tell you about a plan’s strengths. Shoot for a plan with low overhead costs.
Get Your Documentation in Order
Each state has different requirements for the type of documentation you need to open an account. At minimum, you’ll need personal information like social security numbers, addresses, and birth dates. You’ll also need information about your beneficiary (social security number and birth date).
Once you have all your documentation in order, you’re free to open your 529. This allows you to grow money tax free in order to pay for your child’s college expenses. It’s a safe, effective, and a long-term method for saving money that will pay for the applicable costs of higher education.
Saving money for college can seem like a daunting task, but it doesn’t have to be. With the right approach, you can invest money over time and give your child a chance to graduate debt-free, or at least with less to pay off.