Starting a 529

You should know what a 529 plan is. A 529 is a special type of savings or investment account that is used to save money for college. It's called a 529 because it's covered in section 529 of the IRS code. They're offered by all 50 states, plus there are some private ones. (You don't have to live in the state you use for your 529, nor do you have to go to school in that state. For example, I live in Texas, but we have Utah 529 accounts for our kids. We picked Utah because at the time it was considered one of the best, and it's one of the largest. The states are just the sponsors of the funds--they don't limit your school choices.) A 529 isn't the only type of college savings plan, but it's one of the most popular.

I'm not qualified to give financial advice, and I'm certainly not licensed to give financial advice. So I'll stick to the family dynamics aspect for students. 

Advantages of starting a 529:

Dedicated savings. You know how this goes. Your grandmother gives you fifty bucks for your birthday, and says it's for college. Or you get a job, telling yourself that you're going to use most of the money you earn for college. But then that money is just sitting there, with the money you also use for things like clothes, food, gas, and entertainment. So what ends up happening? You spend that "college money"' on clothes, food, gas, and entertainment. (I'm not judging--adults have this problem at least as much as teenagers do.) But if you put that fifty bucks or portion of your paycheck into your college account that can only be used for college, then guess what you spend that money on? College.

Tax advantages for your family. There are all kinds of 529 options and technicalities, and I'm still not qualified or allowed to give financial advice, but let me at least give you the basics the same as if I were an economics teacher at your high school. Imagine you have a thousand dollars you want to put into savings for college. First of all, that income was taxed, so you actually had to earn more than a thousand dollars to have that grand for savings. If you put that thousand dollars into a regular savings account, any interest it earns will also be taxed. If you put that money into a regular investment account, when you withdraw the money plus whatever extra you got from the increase in value, you have to pay taxes on that increase. But if you put the thousand dollars into a 529 for college, when you withdraw the money from the account plus any extra you get from the increase in value, you get all the extra money--you don't have to pay taxes on it. So that's more money for college than the other options.

It gives you a way to discuss money with your family. One of the Five Foundations is that you should talk to your family about money, soon. But that's really hard to do for most people. Asking about a 529 might be a way to enter that conversation. Instead of something weird and intimidating like "how much money do you make" or "how much can we afford to pay for college," you can ask something a little less threatening, like "do you know what a 529 plan is" or "can we please look into a 529 plan so we can be smart about paying for college?" You can even show off your dedication by asking something like "can you please set up a 529 for me so I have a place to put my savings for college?" For more on talking to your family about money, start here.

Anyone can contribute. Once your 529 is set up, anyone can contribute. You can contribute directly without going through your parents, and so can other family members or anyone else helping you with money. Apparently a large portion of 529 contributions are made by grandparents (because your grandmother already knows what's going to happen with that 50 bucks she gives you for college. She isn't stupid).

There are lots of options. No matter your age, amount you can contribute, or comfort with risk, there are different options for how the 529 will handle your money. The Utah 529 program where we put some money away for our kids has 14 different options. 

Disadvantages of starting a 529:

It can only be used for education. I know I had dedicated savings in the advantages category, but to be fair you also have to think about the problems with that. If you take the money out of your account for anything but college, you not only have to pay the taxes, but you also pay a penalty. So if you end up getting a full ride and no longer need the money for college and want to use it for travel or a down payment on a car, then it's going to end up costing you a lot more than if you had just put the money in a savings or investment account. The same is true if you end up not going to college. So if you think you may need flexibility on what the money goes for, be careful with a 529.

It takes time and effort. Setting up a 529 isn't something you're going to do real quickly in an afternoon. An adult has to set it up, and there's paperwork involved. Social security numbers, bank routing numbers, and things like that. I don't really think this is a good reason not to get on with it, but technically extra paperwork and time counts as a disadvantage.

There's risk involved. The disclaimers you see in the fine print for any investment advertisement apply here. 529s are not insured by the FDIC. Past results are not an indicator of future performance. Your account can lose value. But as investments go, these are some of the less wild-and-risky ones. You're mostly buying into standard index funds and stuff like that, not speculative real estate or start-ups. And most 529s have age-based options that start out using more aggressive--and risky--funds when you're young and have time, and then shift to more predictable and stable strategies when you're getting close to college and need to not have the value going up and down frequently.


Unless you're a senior about to go off to college, it's not too late to get a 529 (or other college savings plan) started and get some of the tax breaks. And it's definitely not too early.


Learn more:

Here is the official government website on 529s from the Securities and Exchange Commission. It doesn't get more legal and legit than this.

Here is a more user-friendly site from Fidelity Investments.

Here is the Wikipedia page on 529s. Because let's be honest, Wikipedia is where most of us start.

Please share this with anyone, of any age, who may be saving money for college.

Photo by Angela Elisabeth Portraits

Photo by Angela Elisabeth Portraits