How to Open a College 529 Plan

College 529 plans have been around quite a long time – lately they are gaining popularity as many parents make a wonderful attempt to try to save for their child’s college.

As a parent of 5, I know that college is going to be an avenue that at least a few of my kids will take. Will they all take that path? That I don’t know – and while I do think that education is important, I also think it’s important for kids to understand that college doesn’t always guarantee your success. It’s not a path that everyone will take, for some kids, a vocational school is a wonderful option too. I actually took the military path, completing my B.S. and M.A. years after I graduated high school and had a few years of valid work experience – looking back, I would do the same thing all over again.

Besides adding our children on our life insurance as a rider when they were born, one of the first things I did when they discovered the world for the first time was opened up a 529 plan and set a plan in place to contribute an initial lump along with a regular monthly contribution.

Obviously we don’t know if all of our children will go to college – I have always taken the direction of starting them off in a way that helps them stay out of debt, not get into debt.  Considering most children opt to go and rely on financial aid, I would prefer to help them in a way that doesn’t encourage taking on debt if it can be avoided.

If they opt not to go, the funds can be easily used for someone else.  Loans are not how we want our kids to start off their adulthood. 

For many people, the concept of opening up a college 529 savings plan can be daunting.  In every industry, there are experts in that field that sometimes forget that basic things that may seem simple to them can be incredibly intimidating to outsiders. My husband, for example, loves working on cars – he can change spark plugs, change oil, swap out a transmission, change a timing belt, and even fix wheel bearings and brakes. Those things can be somewhat daunting to others, which is why we have automotive mechanics in place to help folks who aren’t experts in that field. Sometimes it’s easy for him to forget that, especially when it comes to his family needing automotive help.

The same goes for financial services – insurance, investments, and even family planning.

Despite the number of financial professionals out there in the field, statistics are still quite alarming.  Fewer than half (48%)of Americans are saving for their child’s college; of those saving, only 27% of them are using a 529 plan. (source) Yikes!

While money (or, lack thereof) may be a factor for some, one of the largest reasons that people don’t open a 529 plan is that they simply don’t know how.  The concept of opening up an investment account is overwhelming for most.  These people may not understand how to contribute to a fund that isn’t necessarily connected with a brick and mortar branch; others may not know exactly who to talk to, and the exchange of information that is involved.

My husband is a great example of not knowing exactly where to start — after 5 kids, I still don’t think he would be able to figure out how to open one never mind make a regular contribution.  If that go-getter is you, then act upon your instinct and take the initiative to make that plan for your children. You will thank yourself years down the road.

Believe it or not, I found that opening up a 529 plan for each of our kids relatively easy, pain-free and straightforward – each plan was opened and an initial contribution made in a matter of a 30-minute phone conversation (as I wrangled boys and nursed a newborn).   I really did enjoy talking with our finance professionals – not only were they incredibly knowledgeable, they are there to help you reach your goals.

Put your trust in them — they are experts at what they do and they are there to help you, not hinder your goals.

Step 1:   Select a Savings Plan

529 plans can vary – you can opt for a savings plan, a prepaid plan, or a little of both. 

A 529 College Savings Plan operates similar to an investment account… that offers investment portfolios that will increase or decrease and are based on the market.   Or, you can opt for a prepaid plan (which works similar to a pension) — which grows at a rate guaranteed by the sponsor.  Both plans allow your contributions to grow federal income tax free – provided the funds are used for qualified higher education expenses.  

The investment plan covers tuition, fees, room, board, books and even a computer –– if the school requires the kids to have one.  Both have their advantages and disadvantages – it’s best to talk to your investment professional to determine which one may work best for your situation.

Step 2:  Check out the Plan Details

Determine what your type of plan requires for documentation (to open the plan) — each state is slightly different. Most states require at least personal information and beneficiary information (address, date of birth, social, and more).  Your plan may also require you to note an alternative plan owner just in case something happens to you (death, divorce, etc).

Step 3: Complete the Application

Many plans will give you the option to complete the application process online, or over the phone, while also taking your initial deposit via your checking account to that new plan through way of transfer. It’s a very very easy process.

When you open the new plan, your institution or advisor will also require you to select either individual, UGMA/UTMA (custodial), Trust or Business entity.   That first option is an individual account, while the others are not.  Only a few plans allow for joint ownership – if you are married and opening a 529 plan, you will need to provide your spouse a Power of Attorney so they have access to the account (otherwise they will not). 

If you have children from a previous marriage, it’s a good idea to list that birth parent as an account owner just in case – if you ever end up in a nasty divorce case, sometimes the spouse can put the college savings in jeopardy.

Step 4: Select your Investment Portfolio

529 plans typically allow you to opt between age-based plans that start off more aggressive and level out to more conservative funds as the child gets older.   There are also other plans that allow you to have more control (perhaps you want it to be more aggressive for a longer period) – at least ours do for our kids.  

Some employers let you funnel money from your paycheck into your 529 plan… so check with your human resources department, as that might interest you as well.

Step 5: Finish your Application and Make any Necessary Deposits

If you opted to print and mail in your application then you will want to send that in with your check – or, if doing an application online, follow through with your chosen method for funding. I would encourage you to budget a monthly amount for each child that is drafted and automatically transfers to that college fund.  If you have lots of kids like we do, opt to have half of their 529 plans come out at the early part of the month and the other half near the middle of the month.

Don’t forget to get in the habit of checking your account every few months and making a continued effort to increase your monthly contribution by a small percent each year.   Don’t despair if your fund doesn’t grow by large percentages at first – remember that the key to investing is the long haul. Over time, that contribution will compound and will outperform what you may have received in your standard bank savings account.

For many parents, once the child hits college, contributions come to a screeching halt. In reality, the 529 plan doesn’t necessarily need to stop.   The child can continue to earn tax free money while their son or daughter are attending college – and that money can be used for future education expenses, too.