It’s never too late to start saving for college, and I can’t think of many reasons not to, when the alternative is an expensive, burdensome student loan. A 529 plan is a great place to start if you’d like to lower your taxes while you save. A 529 plan, named for the tax code which authorizes them, allows you to save money for post-high school expenses without ever paying federal taxes on the earnings – as long as they are used for proper “qualified” education expenses.

529 Plans are available to everyone, there are no income limits, although gifting rules apply to the amount you can invest each year. Opening a 529 account should be very easy, and once you have an account you can contribute up to the gifting limits each year, even birthday money and other gifts can be added to help it grow. The hard part may be choosing the right one – almost every state and the District of Columbia (Wyoming does not offer a 529 plan)  offers a 529 Plan, some offer more than one, so where do you start to determine the plan that’s right for you?

4 Things You Need to Know About 529s

Not all 529 plans are alike and there are a few things to know to be sure you pick the plan that will provide you the most benefit. The 529 that is best for you is the one that offers the most tax benefits, with the lowest cost and best performance. Sound confusing? Here are some steps to take to find your 529.

1. Understand your own state’s 529 plan and rules first

Many states offer incentives to their residents for using their plan, these range from tax incentives to monetary grants and scholarships. For example, in Pennsylvania there are not many tax deductions available to residents for state taxes, but, contributions to a 529 plan – both a Pennsylvania plan and others – can be deducted for state taxes purposes.

In contrast, the District of Columbia only allows a deduction of up to $4,000 per contributor and they must be made to the D.C. plan to gain the tax deduction. Connecticut will provide $100 to families that open a 529 college savings account by their child’s first birthday or within the first year after an adoption. Families that save an additional $150 in the first four years will receive a state match of $150, for a total of $250 in state funds. And, New Jersey offers a $1,500 one-time scholarship to a New Jersey college or university.

2. There are two types of 529 Plans

Basically, there are two types of 529 plans: prepaid tuition plans and college savings plans – and this can be confusing.

Prepaid tuition plans allow you to buy credits for college at today’s price to be used when your child is prepared to attend. This way, you will know that your dollars are keeping up with the cost of education inflation. Not all states offer these plans, and they may be limited only to the residents of their own states. Several other state prepaid plans have been closed or suspended until further notice.

College savings plans allow individuals to contribute to an account which is generally invested in mutual funds. When a child is younger, these accounts can be invested more aggressively, possibly in stock and bond funds. As the child gets older, the investments can be switched to less aggressive investments so that they are available when it comes time to pay.

3. You can purchase a plan directly or through your broker

Nearly half of all 529 plans are sold through brokers, meaning that you would need to have a relationship with a broker in order to open and begin contributing to one. You will probably also pay some extra fees to open and contribute to an account this way. But, you don’t need to go that route. Direct-sold plans generally have lower overall fees and almost every state offers one. Start by checking out the plan offered by your state here.

4. No state incentives, no problem

If your state doesn’t offer any incentive, you can still invest in many other state plans and reap the rewards of saving federally tax-free. If you already invest directly with a mutual fund company, you may want to check out their 529 offerings. For example, Vanguard provides the Vanguard 529 Plan, USAA offers the USAA 529 College Savings Plan, Fidelity has the UNIQUE College Investment Plan, and there are many more.

Finally, whatever choice you make, you need to know that the underlying funds are going to work hard to help you reach your goals. Check out performance. Most plans have aligned with strict regulations and perform rather well, but, it’s always buyer beware. Check out fund performance to be sure that your money will be there when you need it.

If it’s time to get your portfolio on-track for financial success, schedule a call with me to start the discussion..