With the average cost of a four-year college education running anywhere from about $100,000 for in-state public institutions to well over $200,000 for a private college, according to the Education Data Initiative, it’s no wonder millions of parents are wondering how they’ll pay for their children’s academic future.

There are a number of alternative ways to pay for college beyond student loans — but they require a bit of planning. One of the most viable savings vehicles that give account holders the best value are 529 college savings plans.

A 529 college savings plan can be a great way to help your future student cut down on student loan costs. Plus, these special savings plans provide some valuable tax benefits, making them beneficial for the person paying into them as well.

A 529 plan comes in two major types: (1) a college savings plan, which allows you to invest money in potentially high-return assets such as stocks, and (2) a prepaid tuition plan, which allows you to purchase part or all of the tuition at an in-state school.

If you’re looking to get up to speed, you can read about 529 plans and their many advantages.

Otherwise, here’s a step-by-step guide to opening a 529 savings plan.

Step-by-step guide to opening a 529

Parents shouldn’t be intimidated by opening a 529 plan. In fact, the process is relatively simple.

“The biggest hurdle for parents is there’s the fear of getting in there and you need someone to push you to do it,” says Megan Gorman, a personal finance expert and founding partner of Chequers Financial Management. “But the system is set up so well and there are so many cost-effective plans that do all the work — parents just need to open the account and put some money to work.”

Opening a 529 can be completed in (as little as) these four steps:

1. Select a plan

You’ll have to choose between a savings plan or a prepaid plan. According to Gorman, parents can open a plan with any provider, regardless of state — but she recommends prioritizing the quality and cost of the plan you choose to invest in first, and then consider any state tax benefits the plan may provide.

“This is important as you don’t want to invest in an expensive plan that underperforms just because of the tax benefit,” Gorman says.

Every state and the District of Columbia offers a 529 plan. It is even possible to open multiple 529 plans in multiple states.

However, each state’s 529 plan has its own set of advantages, and they are limited to residents in some cases. For example, there may be a state income tax credit only available to residents of the state offering the plan.

There are other considerations, too, such as enrollment fees and minimum contribution amounts. The College Savings Plan Network (CSPN) has a comparison of 529 plans across different states, including a map that lets you easily find your state’s plan.

If you aren’t sure which provider or plan works best for you, consider contacting a financial advisor for advice. A 529 plan broker may also be able to give you assistance.

2. Choose a beneficiary

This will likely be your child — but remember, you can change the beneficiary at any time without penalty. You will need the beneficiary’s date of birth and Social Security number. Since most plans have age-based options, meaning they have a target-date fund that reallocates investments based on a child’s age, it’s best to open an individual account for each child.

In general, anyone can be the beneficiary of a 529 plan; it is not limited to children or any other type of relationship. The beneficiary must be a U.S. citizen or resident alien and have a Social Security number or tax identification number. As long as those requirements are met, there are no restrictions on whose name can be on the plan. In fact, even the person opening the 529 plan can be its beneficiary.

3. Open the account

Most accounts can be opened online. Once opened, you can deposit funds directly into the account, and only some plans require a minimum deposit for opening. Be sure to keep an eye out for any fees associated with providers and plans. Plans may charge annual fees, account opening fees and fees for the assets being managed. Always read the fine print.

The information you will need to open a 529 account may vary by plan. In general, though, expect to be asked for details such as Social Security number (or tax ID), date of birth, and address. You must provide that information for both yourself (or the person opening the plan) as well as the beneficiary.

4. Build your portfolio

A 529 plan works much like other types of investment accounts. You can use age-based investment strategies; conservative, moderate, or aggressive investment mixes; or a mix of funds. And like other investment accounts, you can also set up automatic investments, so you don’t even have to remember to invest.

If you’ve chosen a savings plan, you can choose where to invest your money. Most providers offer both actively and passively managed investments, says Gorman — but she recommends using target-date funds.

“These funds are similar to target retirement funds,” Gorman says. “They automatically adjust the asset allocation based on the child’s age.”

That means the funds become more conservative as the date for tapping the funds nears, helping to ensure that you have the money when you need it.

If you need help, some plans have advisory fees — but be sure to review these beforehand.

“It’s really easy — you don’t need to be sophisticated or need someone who is sophisticated to open it for you,” says Leslie H. Tayne, Esq., founder and director of the Tayne Law Group in the New York City area. “Don’t be discouraged because it sounds complicated, because it’s not.”

Important 529 plan rules to know

Since 529 college savings plans provide tax incentives, the IRS writes strict rules to ensure they aren’t being taken advantage of. While contributing to a 529, keep these important rules and restrictions in mind:

Anyone can be named a beneficiary, including yourself, and there is no limit to how many plans you can set up. You can change the beneficiary over time, too, as your needs change.

Watch out for gift-tax consequences. If you contribute more than the annual gift tax exclusion in a given year – $18,000 in 2024 – then you’ll need to report the amount to the IRS. That doesn’t mean you’ll be hit with a gift tax, but the amount does go toward your total lifetime tax exclusion ($13.6 million for 2024).

Gorman does point out, though, that most Americans won’t come close to reaching that contribution threshold.

“Parents get very apprehensive that they’re going to overfund a plan — but most people don’t even really get close,” Gorman says. “So overfunding really should not be of concern.”

Balances in 529s could affect financial aid rewards. Balance amounts are taken into the expected family contribution (EFC) amounts, but Gorman points out the calculation used will vary, depending on who owns the account. For example, if a parent owns the account, the amount considered in the family contribution is nearly 6 percent. If the student owns the account, eligibility could be reduced by as much as 20 percent of the asset value.

“It does seem a bit draconian, especially in the day and age where college costs are so high and it really, truly takes a village.” Gorman says. “It’s a bit unfair, but they’re trying to make sure people don’t start gaming the system.”

Gorman adds, however, that considering financial aid implications should “never be a deterrent” when choosing to open a 529 plan.

What happens if your child doesn’t go to college

Since a 529 savings account is specifically for educational costs and provides tax benefits, account holders will face penalties if the money is not used for its intended purpose. According to the IRS, withdrawn funds used for anything other than tuition and qualified expenses will be subject to income tax and face a penalty on the earnings.

There are, however, instances when these penalties may be waived, including:

  • The beneficiary receives a tax-free scholarship.
  • The beneficiary attends a military academy.
  • The beneficiary dies or becomes disabled.

If your child chooses to sidestep higher education altogether, you won’t lose the money in the accounts. Instead, you have the option to change the beneficiary — which you can change to yourself for future education or for grandchildren. Anyone can be named a beneficiary, and there aren’t any rules capping how many times a 529 plan beneficiary can be changed.

In addition, 529 plans can be used to pay for other related education costs:

  • Private tuition at K-12 institutions
  • Apprenticeship programs, as long as they’re registered with the Department of Labor
  • Repayment of up to $10,000 in student loans

In addition, one recent legal change offers a huge boon to those who’ve saved via 529 plans. The SECURE Act 2.0 allows those with a 529 plan to roll over money there into a Roth IRA, subject to certain conditions. You’ll want to understand the details on a rollover, but the change means that you can easily avoid having money stranded in a 529 – one of its previous disadvantages.

This variety of options gives parents and others many ways to avail themselves of the 529 plan without fear of losing the money or paying a significant penalty to access it.

How to get help with a 529 plan

You have a few options when it comes to finding help with a 529 plan.

If you’re looking for some of the best plans, you’ll want to consider low costs, good benefits and a solid track record of investment performance. Here are some of the best 529 plans available.

If you invest directly with a state plan, you’ll have to manage the whole process yourself: registering, researching the investments and tracking the plan over time. However, you can also open a 529 plan through a broker, who can set you up with one of several state plans. This method also may allow you to use the advice of an investment professional, who can help you arrange the plan and oversee it through the years.

Finally, you can always turn to a certified financial planner, who can assist in choosing the right state plan for your needs and choosing the best investments. Look for a planner who has experience specifically with 529 plans and ideally one who is a fee-only advisor.

A 529 plan is not the only way to pay for college, and there are many unusual ways to stock away cash, while even getting a tax break in some cases.

Bottom line

Overall, 529 college savings plans are viable options for people looking to grow savings for educational costs.

The most important thing to keep in mind about 529 plans, says Tayne, is that they should be opened as soon as possible, giving the money time to grow. She acknowledges that this can be difficult for young parents who are early on in their careers, citing her own experience.

“When my kids were little, I didn’t have the money to spare,” Tayne says. “So I think what ends up happening is that unfortunately, when you have little kids, it might be difficult to put money into the account each month. But honestly, it’s never too late to open [a 529 savings plan].”