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6 Steps to Opening a 529 College Savings Plan

As tuition for college continues to rise—while financial aid fails to keep up—you may be wondering how you can save.

Setting up a 529 college fund can help families save big and reap tax benefits a simple savings account doesn’t offer, but according to a study by investment firm Edward Jones, only 29% of Americans know what this savings tool even is. The same study shows that most people use their personal savings, scholarships, financial aid, and loans to help pay for higher education costs rather than incorporating a more specific tuition-saving strategy such as a 529 plan.

So what is a 529 college savings plan, anyway, and how exactly does it work?

As its name suggests, a 529 college savings plan is a tax-advantaged account that helps save for college (and even K-12 education) expenses, such as tuition and fees, books, room and board, and so on. Contributions are after-tax and the money sitting in a 529 account will accumulate and can be withdrawn completely tax-free for any qualified education costs.

If you’re interested in setting up a 529 college fund but you’re worried about what could happen to the money if your child decides not to attend college, fear not! A 529 plan isn’t a use-it-or-lose-it investment—the money is always yours.

Step 1: Choose a College Savings Plan

Before setting up a 529 plan, the first step is to choose from the two types: a 529 college savings plan or a 529 prepaid plan.

Savings Plan or Prepaid Plan?

Starting a 529 plan begins with a choice: should you go with the savings plan or a prepaid plan, and what’s the difference?

Similar to a 401k, a 529 savings plan lets you invest your contributions in a predetermined batch of mutual funds. The funds in this account will fluctuate based on how much is contributed as well as the performance of said investments. Additionally, the money in a 529 savings plan can be withdrawn at any time as long as they’re being used for education expenses.

A prepaid plan, on the other hand, lets you essentially lock in college credits at a public, in-state school. While they aren’t quite as flexible as a traditional 529 savings plan, which is eligible for schools across the nation for any qualified education expenses, you don’t have to worry about college inflation.

School costs are ever-increasing, so what if your 529 savings plan falls short of what you need? A prepaid plan skirts these risks by allowing you to pay for tomorrow’s costs today.

The downside to a prepaid plan is that while you can get a refund if the student decides to attend an out-of-state school or a private school, many will only refund an amount that is predicated on average public school tuition levels. Other prepaid plans might refund the original amount minus interest, which means you may have been better off opting for the standard 529 savings plan.

State Plan (choosing in- or out-of-state plan)

Unlike other account types, 529 savings plans are state-run, making it easy to select the best option. Currently, there are 30 states which offer income tax benefits for contributions, and you’re free to select from any of them—not just the state you reside—since options vary.

After all, some states offer tax benefits for a 529 plan while some don’t. Some will limit this tax benefit to just in-state plans only and others won’t. As you can see, not all states offer the same 529 plan, so do some research to see which is best for you.

Additionally, you aren’t limited to sticking with your current 529 plan and can move over to a better plan at any time. Some states will reclaim the previously made tax benefits while others won’t.

Compare costs and investments options

Before starting a 529 plan, it’s important to understand the costs involved as well as your investment options.

First, if you decide to purchase a 529 plan using a financial advisor, you can expect to pay a sales charge on top of the 529 plan’s investment fees. The commission amount allotted to your advisor will often depend on the mutual fund share class chosen with your plan. The Financial Industry Regulatory Authority (FINRA) has recently put in motion a 529 Plan Share Class Initiative which is meant to oversee the practices of broker-dealers selling these 529 plans to ensure they aren’t making sneaky recommendations that will bring up their commission.

Due to this initiative, you’ll find that many advisory firms are using a breakpoint calculator along with a suitability questionnaire to determine which share class is best.

U-Nest allows families to easily set up a tax-free savings account while also bypassing the costly fees of a traditional financial advisor, which can cost hundreds or thousands of dollars. Opening a college savings account with U-Nest is just $3 a month.

Step 2: Determine the Type of 529 Savings Account

Individual or Custodial accounts

The next step is to determine which type of 529 savings account you need: individual or custodial. Both account types allow families to get started saving early for their child’s financial future.

The individual plan is your traditional 529 savings account held by Mom or Dad (or someone else)—which we’ve already reviewed—and grants the account owner with complete control of the funds.

A custodial account, on the other hand, gives full control to the beneficiary once they reach the legal age. This account type is established under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). It allows you to control how the money is invested and take advantage of the gift tax exclusion while the child is still a minor.

Step 3: Start Your 529 Plan (filling out long applications can be tiresome, but U-Nest makes it simple with their mobile applications)

Once you’ve established which plan type works best for you, the next step is how to start a 529 plan. Keep in mind that each state has different requirements when it comes to documentation when opening an account, but all will require at minimum the following:

  • Personal information which includes your name, address, date of birth, and social security number
  • Beneficiary information which includes the name, date of birth, and social security number of the beneficiary

Some plans will allow you to fill out an online form on their website while others will require you to complete a physical application that must be mailed in. The process often involves filling out long applications, which can be tiresome. You can save time and energy by setting up a 529 plan using the simple U-Nest mobile application, which is completely paperless and takes less than 5 minutes.

Step 4: Fund the 529 Savings Plan

Once the account is open, you can simply deposit funds directly into it. You can also mail a check or transfer the money electronically from your bank.

To continue funding the account, set up automatic contributions by specifying the amount and how often you’d like to contribute—weekly, monthly, annually, etc. You can do this by providing your bank account’s routing number and account number as well as a voided check.

Additionally, some state plans and employers allow the option to set up these automatic contributions through a payroll deduction.

So how much do you need to start a 529 plan? The answer varies depending on the state—some have a minimum contribution amount and some don’t. As far as annual contribution limitations go, the IRS doesn’t specify a limit for 529 plans and so limits will also depend on the state plan you choose.

Step 5: Choose Investments for the 529 Account

Now it’s time to choose from the various investment portfolios your plan offers to invest your contributions. Most plans allow you to change your investment option at any time for future contributions and twice per calendar year for existing contributions.

If you aren’t too familiar with the world of investments, the most common route when making a selection for your 529 account is to invest in age-based portfolios. These investments follow a strategy that starts off as riskier investments and gradually shifts to more conservative investments each year as you get closer to when you’re going to use the funds.

When researching 529 plans, you’ll notice that some offer just one age-based portfolio while others offer a wider variety of age-based portfolios ranging from conservative to aggressive.

Step 6: Begin Your Journey with the U-Nest Mobile App

If you’re wondering, “How do I set up a 529 plan?”, put your mind at ease by opening a college savings account with U-Nest. The process is both simple and efficient and takes less than 5 minutes to set up. U-Nest picks the best tax-advantaged savings plan for your child, and friends and family can gift contributions.

How much do you need in order to start investing? With U-Nest, all you need is an investment minimum of $25/month to begin helping your children reach their future education goals.

For many Americans, the idea of opening an investment account can be an intimidating prospect, but it doesn’t have to be. Saving now for your child’s future education will save your family money in the long-run and the process is more straightforward than you think. So, where to set up a 529 plan? Put an end to your search by opening a college savings account with U-Nest.

Download the app and get started today!

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This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.