In the U.S., September is National College Savings Month. It is a good time to consider your options for saving for college, and consider what you can do to try and come out ahead in the university tuition game. One way that many families work toward saving for college is to open a 529 plan.

What is a 529 Plan?

Basically, a 529 plan is an investment account meant to help you save up for college. Most 529s invest in mutual funds. Some plans choose the funds on your behalf, while others allow you to pick the funds in the account. 529 plans are set up by different states, so you have to be aware of different rules governing the plan you open in a particular state. However, if you do not like the plan offered by your state of residency, you can shop around. You do not have to be a resident of a state to contribute to that state’s 529 plan.

A 529 plan comes with specific tax advantages as well. Earnings in a 529 plan grow tax free, and there are no federal taxes paid on the withdrawals — as long as the money is used for qualifying educational expenses. While there is no federal tax deduction for contributions to 529 plans, some states actually offer deductions or credits for contributions to their state plans. So if you do use a 529 plan, be sure to check with your state to find out if you can get a break on state income taxes.

Money from a 529 plan can be used at educational institutions specified by the state plan. Some state 529 plans limit the use of funds to colleges and vocational schools only in that state. Other states, though, will let you use the money anywhere in the U.S. Federal law also allows the use of 529 money to pay for educational expenses in approved foreign universities. There are more than 100 educational institutions in Canada where it is possible to use 529 money to pay expenses.

Enrolling in a 529 Plan

It is fairly easy to enroll in a 529 plan. Most state plans allow you to enroll online, setting up an account for a beneficiary. Many plans will allow you to enroll with as little as $25. You will need Social Security Numbers, addresses, phone numbers and other pertinent information for opening an investment account.

Next, look through your investment options. Some state 529 plans offer a wide variety of investment options, in index funds as well as actively managed mutual funds. Consider expenses, since 529 plans will come with fees. If you can get a plan that has low-cost investment options, that is ideal, since the expenses of the fund will not erode your returns as much.

You can set up an automatic debit from your account as well, providing a simple way to make sure that money is invested in the 529. You can add extra money later, if you want. Many parents encourage their children to invest in their own educations by contributing to a 529 plan. Check with the state to find out what limits there are on contributions to a 529 plan, since some states have them.

Some of the best 529 plans include:

All of the above state plans are marked by their reasonable variety of investment options, including several that are low-cost. Additionally, these plans are flexible in terms of where you can use the money.

Warning About 529 Plans

Remember that 529 plans are investment accounts. This means that there is a chance that your account will lose value, rather than gain. Additionally, gains may be small in some years, depending on market conditions. The earlier you start, the less likely it is that short-term market volatility will significantly impact the 529. However, you have to realize that there is always the chance of loss.

Miranda

Miranda

Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.