Is a 529 Plan the Right Savings Tool for You?

The cost of college is continuing to rise at a steady rate, though that should come as no surprise. Our nation’s anxieties and fears about affording college have become so common place that it’s become evident in our Google searches. As the Forbes article posted just this week reveals, data collected from Google shows that the frequency of searches for variations of the phrase “college cost” has doubled in the past decade. But there is good news.

According to Sallie Mae’s How America Pays for College 2015 report, an increasing number of families are saving money through 529 plans to pay for college (15% in 2013-14, and 17% in 2014-15). These plans can help students and their families proactively put money aside for college tuition and expenses. But is a 529 plan the right tool for your college savings goals? Here are five things to know about 529s:

  1. Not all 529 plans are created equal. While every state and the District of Columbia offers some kind of college savings plan, the benefits can vary. There may be incentives available, particularly in the form of tax benefits, if you stick with your home state’s plan. Some states might even allow you to apply those tax benefits to any plan in the country. Some plans can also have more complicated investment choices than you might need. When it comes to the plan set up and the tax benefits of a 529, it can definitely pay to do your research.
  2. Saving early can really pay off. Starting a 529 early allows more time for your money to grow into substantial savings. In fact, parents who start saving the year their child is born and make regular monthly contributions can save upwards of a third of their savings goal in interest earnings alone. The money invested in that first year could be worth two to three times as much by the time you are ready to pay for college. Saving regularly isn’t always feasible, but adding your college savings goal to your budget early can pay off big for your child later down the road.
  3. Automate your savings, but don’t set it and forget it. Setting up automatic direct deposit to your 529 is a great way to make those regular monthly contributions. Automation can also help you get into the savings habit in other areas of your financial life – saving for emergencies, for example. But it’s important to remember that 529s can come with some investment risk. While you might not need to keep tabs on the account at every deposit, being aware of your account status can help you stay ahead of any risks.
  4. 529s aren’t just limited to parents – grandparents can contribute, too. 529 plans can be set up to suit your family situation. While grandparents can own their own 529 plans for their grandchildren, contributions to a parent-owned 529 plan can improve a student’s eligibility for financial aid through the Free Application for Federal Student Aid (FAFSA).
  5. When it comes to withdrawing funds, know the fine print. Withdrawing doesn’t have to be complicated. Know what those qualified expenses will be and look ahead at how your 529 will impact yours and your student’s tax filings. A few quick tips? Avoid complicated taxes by matching distributions and expenses in the same calendar year, anticipating any education tax credits, and selecting the right distributee. You can also ask the prospective institution about how a 529 plan might impact your student’s financial aid package to avoid any nasty surprises.

As with any savings goal or investment, it’s important to do your research to make sure that the plan you choose is right for you – not just now, but in the future as well. College is still a worthwhile investment and 529 plans can be a great tool to help families and their students reach their education savings goals.  Set up your savings plan today by taking the America Saves Pledge and selecting college as your saving goal. You’ll get helpful motivation and support to help you save successfully.