college

How do I: Open a 529?

Topic: COLLEGE FINANCING
Who is affected: PARENTHOOD, STARTING OUT
DEGREE OF DIFFICULTY: MODERATE
What you'll need: COLLEGE SAVINGS GOAL, MINIMUM INVESTMENT

What you need to know

529 plans are a great way to save for college without having to pay taxes. There are two basic types: prepaid tuition plans and savings plans.

Prepaid tuition 529s allow you to buy a state college or university education for the future at today's prices. Parents pay for the education in fixed installments. It can be a good deal, but watch out: prepaid tuition plans can adversely impact financial aid eligibility.

529 savings plans are more flexible than prepaid plans, but less of a sure thing. You can contribute as much and as often as you'd like, but there's no guarantee your savings will end up meeting the level a student will need for an education down the road. Still, the tax-free growth and modest impact on financial aid eligibility do make 529 savings plans attractive for many.

Contributions to both types of 529s are tax-deductible. Remember that any withdrawals made for reasons the IRS doesn't deem qualified are subject to federal and state taxes, plus a 10 percent penalty.

Step-by-step
Want to know how much you can save in a 529 plan? Try the 529 college savings plan estimator.
Be on the lookout for high fees and expense ratios. Some 529 plans have subpar investment options or fees so high that even in good years investors can lose money.
Many states open their programs to other states' residents. Savingforcollege.com, a Bankrate company, allows you to compare 529 plans from all over the country to find the best one for you.

 

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