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How 529 Plans Work


Choosing the Right Plan

Choosing the right 529 plan is no harder than choosing anything else in the financial world. If you do your research, you can find the right plan for your family. Here are few guidelines to get you started:

  • Look at your own state's plan. Plenty of states offer a tax deduction on 529 contributions, and many also exempt state tax on the earnings upon withdrawal. Some states offer matching grants or loan programs.
  • Research the manager of the plan and get documentation of the fund's past performance. Look at the investment company's record of dealing with mutual funds and pension plans to see longer term performance.
  • Examine the fees the plan charges. Finding a low-cost plan means looking at several possible charges. For instance, some states charge an enrollment fee to open the account, and some also charge annual maintenance fees.
  • Consider the types of shares you'll be purchasing. Class A shares have upfront costs and tend to have lower annual costs. Class B shares can have lower costs if you hold them for a long time.
  • Check age limitations. A few state programs require your child to use the money prior to a certain age, or require that the child be under a certain age in order for you to be able to open an account. There may even be limits to how long the accounts can remain open without any withdrawals.
  • Investigate the availability and fees related to withdrawing your cash. Although the IRS set a 10-percent fine for withdrawal of funds that aren't used for qualified education expenses, plans can charge more than that. Also find out about how easy it is to get your money in the event of an emergency. Sometimes, there are time requirements about how long the money has to stay in the account before it can be withdrawn. If you do have to withdraw a portion of the money for a non-education expense, find out what happens to the rest of the account. Is it closed? Is a fine charged for the entire amount?
  • Look at the maximums and minimums for contributions. Determine how much you want to have in the account when your child enters college. Make sure the plan allows at least that amount. You also may need a low minimum if you want to start the plan out without a large sum of money.

Read on for some other educational investment vehicles that you can use in tandem with your 529 plan.


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