529 College Savings Plan: The 5 Minute Guide To Starting a 529 Plan

Saving for your child’s college education can be scarier than retirement planning, because high-school graduation is probably approaching more quickly than your golden years.

These 529 plan tips will help you to get ahead of the class and start planning for your child’s education sooner.

If you’re a student, learning how to avoid student debt and and pay off your student loan fast are money lessons well learned.

1. Start Your 529 College Savings Plan Early

The earlier you start to save in a 529 plan, the more time your investments have to grow, so open a 529 plan or Coverdell Education Savings Account (ESA) as soon as possible after your child is born.

Saving for your child’s education through a 529 plan gives you the advantage of growing your money tax-free while in the plan and distributions are generally not taxed if used for qualified expenses such as tuition or text books. Check out Sec.gov and search for “529 Plans” to learn about the types of plans available, including the Prepaid Tuition Plan and the College Savings Plan.

2. Watch Out for 529 Plan Fees

Choose a 529 plan with the lowest possible fees and without any loads. Any fees, loads, or commissions you pay to an investment adviser or mutual fund manager will eat up your returns. The best low-cost investment strategy is to find a plan offering portfolios of index funds or exchange-traded funds (ETFs). Many investors though prefer rolling savings bonds into a 529 plan — just watch out for any associated fees.

3. Compare 529 Plans

Compare the features of several home-state and out-of-state 529 plans to get the best bang for your education buck. Every state now has at least one 529 plan available, and each one can differ greatly from state to state. You should research the features and benefits of your 529 plan before you invest – compare 529 college plans at Morningstar 529 Plans.

4. Get a 529 Plan Grant or Scholarship

Some states (but not all) offer tax incentives and contribution matches to 529 plan investors. For example, if you invest in a 529 plan from your home state, your state may match part of your contribution through an educational grant or scholarship. This varies from state to state, so check your state’s 529 plans and research tax treatment before investing.

See Saving For College to see if your home state offers incentives to opening a 529 plan. For example, if you live in Iowa, searching for “iowa 529″ will help you find the right 529 plan close to home.

5. Consider 529 Plan Alternatives

If you’re not comfortable handing over your child’s education savings to a state-based 529 plan with all their rules, fees and regulations then consider an alternative with more financial freedom.

Instead of investing in a 529 plan, put your money into a taxable account at your favorite online brokerage and invest in a portfolio of low-cost and tax efficient index funds, exchange traded funds, and CDs. Depending on your approach, the savings in fees by managing the investments yourself can more than offset the tax savings of a 529 plan. Be sure to do the calculations beforehand to determine if forgoing tax savings to preserve your financial freedom can save you money over the longer term.

A 529 college savings plan is a great way to stash some cash for school. Just be sure to compare 529 plans before signing on the dotted line.

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