State-sponsored 529 accounts are a tax-free way to pay for a child’s college education. Opening an investment account when they’re young and contributing to it regularly and basically forgetting about it until they’re ready to go to college is one way to deal with it.
The money is usually invested in mutual funds, so parents don’t have to keep a close eye on how they’re performing.
Because 529 plans have a much shorter time to grow than retirement accounts do, a severe market drop can affect how much money they have for college. For this and other reasons, it’s a good idea to set up a 529 wisely and keep an eye on it.
Conservative investments are one way to go, especially if all of your college money is in a 529. Most 529s offer age- and risk-based investments as the child grows, moving from stocks to more bonds as they get older, much as a retirement fund can. In addition, some 529 plans offer savings accounts insured by the Federal Deposit Insurance Corporation.
Whatever returns a 529 plan gets, the best way to get the most out of it is to contribute to it regularly, such as through automatic deductions from a family checking account. Contributions aren’t deductible on federal taxes but many states offer a deduction on a state tax return.
Investment allocations can be changed twice a year, so be sure that the change you’re considering is one you want to make.
Another way to save with a 529 plan is to use one of 13 prepaid tuition plans offered by 12 states and one not-for-profit organization. They allow participants to pre-purchase future tuition at a predetermined rate today.
The most widely offered 529 plans are college savings plans that typically use mutual funds to grow contributions that parents make to the plan.
If your child doesn’t want to go to college, a 529 plan’s beneficiary can be changed to another family member to use for college.
If the money isn’t used for educational purposes then the earnings, not the contributions, will be subject to income tax plus a 10 percent federal penalty. Some plans may also charge extra fees.