Porcelain piggy bank next to stack of text books with "529" paper cutout on top.

Learn the ABCs of 529 College Savings Plans

By Lori Schock, Director of the SEC's Office of Investor Education and Advocacy

Quoting a line from The Jackson 5 song “ABC,” learning about how to save for college, can be as “easy as one, two, three” if you check out the SEC’s Investor Bulletins:  An Introduction to 529 Plans and 10 Questions to Consider before Opening a 529 Account. While investing in a child’s education can seem overwhelming, understanding your options is an A+ first step.

One: Understand the types of 529 plans.  There are two types of 529s–prepaid tuition plans and college savings plans. All 50 states and the District of Columbia sponsor at least one type of plan. Additionally, a group of private colleges and universities sponsor a prepaid tuition plan.

Prepaid plans allow you to lock in the future price of tuition at current prices. They don’t usually cover room and board but they often cover mandatory fees.  Most of these plans are sponsored by state governments and have residency requirements for the college saver and/or the beneficiary. Make sure you check whether the state you’re in guarantees the money you paid into the plan, as some don’t.  Also, you should know that prepaid plans aren’t guaranteed by the federal government. That means that you could lose some or all of your money if the plan’s sponsor loses money. And, if the student doesn’t wind up going to a participating college or university, the plan may pay less than if the beneficiary attends a participating college or university– possibly paying only a small return on the original investment.

The other type of 529 plans is college savings plans, which allow you to open an investment account to save for tuition, fees and room and board.  This type of plan allows you to choose from a variety of investment options, including mutual funds, exchange-traded funds (ETFs) and often principal-protected bank products. Generally, the money can be used at any U.S. and some non-U.S. colleges or universities.  All of these kinds of plans are sponsored by state governments and only a few have residency requirements but be aware that they are not guaranteed by the state government. Plans that invest in mutual funds and ETFs aren’t federally guaranteed, however, some of the bank products may be insured by the FDIC. And remember, college savings plan investments may not make any money and you could lose some or all of the money you invested.

Two: Be mindful of the fees and expenses.  Both the prepaid and savings plans may charge enrollment and administrative fees. You may also pay additional costs for savings plans, including program and asset management fees, sales loads and redemption and distribution fees. You can save money if states offer direct-sold college savings plans where you can invest without paying additional broker-charged fees.  Some savings plans will waive or reduce some of their administrative or maintenance fees if you keep a large account balance, sign-up for automatic contributions or electronic-only document delivery or are a resident of the state sponsoring the 529 plan. 

Three: Look at your “big picture.”  You should be aware of the tax implications of 529 plans. Investing in a 529 plan may offer you special tax benefits.  Some states may allow you to deduct plan contributions from state income tax or other benefits, such as matching grants.  But you may only be eligible for these benefits if you participate in a plan sponsored by your state of residence. In addition, if you use the money from the plan for qualified higher education expenses, money earned from the plan is not subject to federal income tax, and in most cases, state income tax.  However, if you don’t use the money for qualified higher education expenses, you will be subject to both, as well as an additional 10 percent federal tax penalty on earnings. Be sure to research the plan you’re considering thoroughly, including any restrictions.

And remember, “All you gotta do is repeat after me, ABC, easy as one, two, three or simple as do-re-mi” if you start right now about learning the ways 529 plans can help you save for college.

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

Learn the ABCs of #529 college savings plans from the @SEC: http://bit.ly/2zSWttW v/ @AmericaSaves #collegesavings
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