529 plans offer unique tax breaks, unlike any other account type. Similar to a Roth IRA, funds deposited into the account are taxed as normal income, however, you won’t have to pay any tax on investment gains or withdrawals as long as funds are used for educational expenses.
Unlike an IRA, 529 plans are not universal and there is a different 529 plan in almost every state. An investor may benefit from certain additional tax breaks by investing in a plan within their own state though this is not always the case in all states.
Once an investor chooses his state and 529 plan, they can begin the process of opening the account.
Here are a few steps investors should take when going through the process of how to start a 529 college savings plan:
The PDS, or program disclosure statement, can be a rather lengthy document however you will find all of the necessary information on contributions and withdrawals, program rules, investment options, and fees. Just like you wouldn’t sign a contract of employment without first reading the terms, a 529 plan should be the same. By taking the extra few minutes to go over the PDS you will have a better understanding of the plan and it may prevent a future misunderstanding or error from being made.
Once plan selection is out of the way, the difficult part is done and you are able to begin naming an account owner and beneficiary. Unlike most accounts, a 529 plan can only have one owner and beneficiary, however, the owner has the option to change the beneficiary in the future. The account owner will normally be the parent or guardian of the child for whom the funds are intended for and in turn, their child will be the beneficiary. To name a beneficiary you will need the child’s social security number, however, you may actually set up a 529 plan for an unborn child by naming yourself as beneficiary and changing it at a later date, which can be a useful tool for starting early. Although there is only one account owner, a plan will usually ask to name a successor owner, and in the event of an owner’s death, the successor owner would take control of the account and be responsible for distributing the funds for the beneficiary’s education expenses.
There really is no correct dollar figure when it comes to contributing to a 529 plan, and everyone’s individual situation will differ. Some plans have a minimum contribution to start but most can be started with an initial investment as low as $20. An excellent strategy for 529 plan contributions is to link the plan to a bank account and have automatic monthly contributions made. The funds will then be automatically invested in the plan and even a small amount will add up over time.
The real key to starting a 529 plan is to start early. If you start when the beneficiary is a young age, the tax breaks received will add up to tremendous savings.