What The Heck is a 529 Anyway?


Almost every investment firm offers a 529 account.  They talk about how great it is and how everyone should have one.  Most people have no idea how a 529 works or what it is.  This post will give you a breakdown on the basics of a 529 and what you need to know if you are going to get started with this type of account.

What It Is

Explained simply, a 529 is an education savings account.  529 plans allow you to save for future education expenses.  The funds can be for your future education, your kid’s future education, or any other family member.  Generally people use them to save for graduate school or their child’s future college expenses.  529 funds can be withdrawn to pay for “qualified expenses” such as tuition and fees.

Why You Want One

You might be thinking that you can stash away cash in any old savings account or investment account and do the same thing.  Not exactly.  A 529 account is special because of its tax status.  You can make contributions to a 529 account “pre-tax” from you income.  Like a 401(k), 403(b), or traditional IRA, you can deduct 529 investments from you income before you are taxed on it.

How It Works

 A 529 works just like a 401(k) for the most part.  Many employers offer to make deposits in a 529 account automatically.  This is the best way to fund a 529.  If you can just set it up and forget about it, you will never have to worry about writing a check or transferring the funds every month.

Also like a 401(k), you can pick how it is invested.  You can leave your 529 funds in a savings account or CD, or you can invest it into mutual funds or stock.  If you open your 529 through a brokerage firm, you have total flexibility to invest as you please.  Companies like Charles Schwab or Oppenheimer often give suggestions of how to invest 529 funds to have the cash ready when you need it.  This is probably the best route if you are saving for your own education.  Just remember, like any investment, there are risks.  The firm can help you figure out what is best for you.

While investment firms all offer a 529, you might be better off to check with your state government.  Many states operate a 529 fund where you can safely keep your child’s future.  I know my state, Colorado, has a plan that many parents start investing in when their children are born.  Some state funds perform very well while some have suffered from stock market losses.  Check into your state for details.

Where To Start

Start with your employer.  Look into making an investment straight out of your paycheck.  If you can, you can most likely manage your funds easily and invest into an assortment of funds.  You will have to do a little paperwork when you set it up, but it is easy from that point on.

If you can’t invest in a 529 through your employer, look into a state government or private option.  Compare fees and how easy it will be to make contributions.  Also look into what you will need to do when you are ready to make a withdrawal.  For some plans, it is as easy as writing a check.  Others are more complicated.

Finally, before you make your first investment, take a little time to read the IRS website for 529 details.  It is important to know what you can use 529 funds for and what the penalties might be for withdrawing early.  Be well versed in how the 529 codes work when you get started.  If you have a tax adviser, consult with him/her as well.

It really is that simple.  Use the automatic investing plan to make things easy, even if you can’t with your employer.  You can use bill pay or automatic transfers in an online bank account to fund your 529.  Keep track of the paperwork for tax season.  You can save a lot on taxes if you use this investment method correctly.  It is also nice to have the peace of mind that your education, or your child’s education, is going to be funded without worry.

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