A 529 plan can be a great way to save for college, if you know the rules and how to optimize your investment.
What is a 529 plan?
A 529 plan is a type of savings and investment account in which money grows tax-free as long as the withdrawals are for qualified education expenses. They are named after a section of the IRS code.
There are two types of 529 plans:
-
529 college savings plans are the most common type. Investments grow tax-free and can be withdrawn tax-free for educational expenses such as tuition, room and board, and required textbooks.
-
529 prepaid plans let you prepay part or all of an in-state public tuition, locking in the tuition at time of payment.
Unlike retirement and other investment accounts, 529 plans are typically operated by states, which makes searching for the best option fairly easy; if your state offers a tax deduction for contributing, you’ll likely get the most bang for your buck by contributing to its plan.
You don’t have to contribute to your state’s plan, though. In reality, you’re free to choose any plan you’d like, so it’s worth comparing your options (and some states offer more than one 529 plan).
Consider looking for direct-sold plans: They are sold directly by the state, rather than through an advisor, which can translate into lower fees for investors. Below are two lists, one for each type of plan, showing direct-sold 529 plans by state.
College savings 529 plans by state
Prepaid 529 plans by state
The minimum contribution to a prepaid plan depends on the cost of a credit or the monthly payment plan. Check the specific plan for the correct minimum.
» Looking for other ways to pass money to your kids? Learn about trusts
This post was originally published on Nerd Wallet
