How To Open The Right 529 Plan For You?

By opening a 529 plan you can invest money and then take it out for educational expenses without paying any tax. How to open 529 plan in 4 simple steps?

One thing that you might be trying to figure out right now is how to save for your children to go to college. But you likely don’t know how much you want to save, right?

And you don’t know what it’s even going to cost. But how are you going to determine what your next steps should be?

Or whether it’s even a good idea to save for a specific college account versus a more general savings account? What if you decide to use that money for something else in the future?

Well, one thing you should be looking into is a 529 plan.

What Is a 529 Plan?

The first thing to take a look at is just what a 529 actually is. This type of investment account gives you a way to invest your money and then take it out for educational expenses.

If you do use it for these types of expenses, which can include tuition, fees, supplies, room and board or books, you’ll get tax breaks, which can be a big benefit for parents looking to save for their children’s future.

This type of account uses after-tax contributions and allows your money to continue to grow without you having to pay taxes on it.

Then, when it’s time to withdraw the money for those educational purposes you don’t have to pay taxes on them.

If you use it for other purposes, however, you’re going to need to pay taxes and a penalty of 10%.

Now, what’s really great about this type of plan is that it’s going to give you the opportunity to invest in mutual funds.

Just like your 401(k), you’re going to be able to start building up your investment, and you’ll see it start to rise and fall over time.

Even better, you can take the money out at any time if you’re using it for educational purposes, with no limit based on age or retirement.

How To Open 529 Plan In 4 Steps?

When you decide to open a 529 plan you’re going to want to look at the different options. You can set up a prepaid tuition plan or a college savings plan.

If you use the prepaid tuition plan you’re locking in a set price for tuition so that your child can go to that school for that rate.

But you’re going to have some strong limitations on just what else your child can actually use that money for.

On the other hand, a college savings plan is the one that’s going to give you the ability to purchase a number of different things for your education.

But you’re not going to get a lock on tuition prices. That means if tuition goes up (and usually it does) you’re going to have to pay those higher rates for tuition.

1. Shop Around

The first thing you’re going to want to do is take a look at the different options. While starting a plan in your state may be the easiest way to go it’s not always going to be the best one.

So, take a look at the possible income tax deductions that happen with this type of account.

It’s not always going to happen with every state.

For states that don’t have income tax at all you’re going to want to look at any other fees or things you’re going to have to pay to determine if you want to open a plan in your state or in another state.

If you live in Kansas, Arizona, Minnesota, Montana, Missouri or Pennsylvania you can actually get tax breaks even if you choose to invest in a program outside of your own state.

You’ll also find that you can open one of these plans just about anywhere that you want, so you’ll be able to get the maximum benefits when you start it.

You’ll also like the fact that you can use this type of plan anywhere.

So, if you get a college plan you’re going to be able to use it anywhere.

Pay Attention To Restrictions & Bonuses

If you get a tuition plan you may be restricted to specific colleges or universities or even a single specific school in order to get that tuition lock.

If you’re going to start a plan look for what program is going to give you the best deal.

Some states have extra bonuses related to their 529 plans and you may want to consider a different plan because of these bonuses. You might get income tax deductions, matched contributions or even waived fees.

Make sure that you’re looking at each of these and weighing out how much of a benefit they would be to you.

Next, you’re going to have to take a look at the options for your plan, investment or prepaid.

The goal with a 529 plan is that you want to make sure you’re going to have plenty of money when your child (or you) decide to go to school.

That means you want to look at any tax benefits, costs and investments that you’re going to be making.

You want to lower the costs that you’re spending so that you can maximize the return that you’re going to get.

There are actually a number of different sites that you can go to in order to find out more about different investment options.

You want to know where you’re going to be able to save some money and where you’re going to get the biggest benefits in the long run.

2. Pick The Right Plan For You

Next, you’re going to want to look for the specific form of plan you want, an individual or a custodial.

These two plans are going to be slightly different, so you want to make sure you know what you’re getting into.

So, if you open an individual account you generally set a parent or guardian as the owner of the account and you can then set your child as a beneficiary.

The great thing about these accounts is that anyone can contribute to the plan.

This makes it a great idea for gifts when people don’t know what to get your child.

Now, you’ll need to choose a single parent that will be in charge of the account and you’ll want to pay attention to who is going to be filling out any financial aid forms to determine which parent this should be.

You want to make sure that the person in charge of the account is either a biological parent or a legal guardian to provide the best protection for the account and your child.

You’re going to need to fill out a great deal of paperwork, so make sure that you’re prepared for everything you’ll need and that you have everything together when you’re ready to apply.

There are actually physical applications that can be filled out or you can fill out an online application.

Either way, you’re going to have no problem getting everything ready and sent in. Some may choose to open an account such as a custodial account, trust account or a business account.

If you do you should talk with a financial advisor about what these mean.

If you’re not really sure what they are then you’re likely looking to open up an individual account for your child.

Account Protection is A Key Decision

You want your child to be protected and you want their college account to be protected too.

That means you should be keeping the account in the family as much as possible.

Put a biological parent rather than a stepparent on the account as the owner.

Keep in mind that you will rarely be allowed to put more than one person on so the most responsible parent should be the one listed as well.

Be sure that you know what you’re signing when you set up the account and be ready to start investing.

3. Where Do You Want To Invest?

You’re finally going to be investing the money that you put into the account, so you want to make sure that you’re getting the biggest return you can based on the amount of risk that you’re willing to take.

You’re generally going to be invested into mutual funds or exchange-traded funds.

And these are going to be managed for you, but you get to choose between a few different ideas to set up just what you want your account to do.

You can set an age-based account that will start you out with higher risk assets and then slowly drop some of the risk as your child gets closer to the age where they will need the money.

So, if your child is five now, the balance of stocks to bonds will be overwhelmingly on the side of stocks. As they get closer to 18 the balance will shift so that they are overwhelmingly on the side of cash and bonds instead.

Next, you can choose to go with a static option.

This one means that you get to invest in a set option and you stay there.

There are no changes made as the child gets older and depending on what you choose to invest in you could see a great deal of volatility or you could see very little growth in the investment overall.

Make Sure You Understand What You Choose

You’ll be able to choose, within these categories, how much risk you’re willing to take and what you’re actually looking to achieve overall.

You want to make sure that you’re going to get into something you can feel comfortable with.

In general, that means you should be investing more in stocks if you’re open to risk in exchange for the potential of larger rewards.

You should be investing more in bonds if you are averse to risk but willing to also sacrifice some of those larger rewards.

You may also find accounts that are insurance-backed or principal-protected.

These are going to keep you better protected and make sure that you’re not taking on much risk at all.

It means that you’re going to keep your original investment but you’re likely not going to see a lot of benefit otherwise.

Even better, you’re not going to be responsible for investing the accounts or doing anything with them. Someone else takes care of this for you.

4. Deposit Your Funds

The final step in the process is also the first, getting started.

You want to make sure that you’re putting money into the account as early as possible because that’s going to give you the best possible chance of getting more money back.

You’ll earn a lot more in interest when it comes to investing early.

For those who apply online you can make a bank transfer, which will get your account set up and earning interest within a short period of time.

On the other hand, if you apply via a paper application and send a check it could take a few weeks before you actually start your investment.

Make sure that you’re filling out the paperwork completely and not missing anything since you don’t want to delay the start of your account any further.

Bottom Line

In general, this is a great way to invest and to get some tax breaks toward your child’s education.

It’s a great way to help your child pay for the things they’re going to need when it comes to pursuing their education and you will barely even notice the money is gone.

Especially since you’re going to get a whole lot of extra money at the end in the form of all that interest.