How to Open a 529 Plan

529 plans are quickly becoming one of the most popular ways to save for college. Learn how you can easily start saving for college with a tax-free 529 plan.

October 23, 2020
Sootchy Team
How to Open a 529 Plan

For parents of a newborn, life can seem full of possibilities, but also full of challenges. Few things encapsulate this dichotomy like a college education, which can open door after door over the course of a child’s life but often requires exorbitant sums of money. To fund this endeavor, parents employ a variety of financial tools, from loans to savings accounts, and among the most effective of these tools is the 529 plan, also called a 529 investment account. Created by Congress in 1996 and administered by the states, 529 plans offer a way to build savings in a tax-free account for the purpose of funding higher education, so it’s easy to see why parents find them so attractive. If you’d like to start one of these accounts for your child, keep reading as the experts at Sootchy explain how to open a 529 plan today.

Finding the 529 Plan That’s Right for You

No matter where you live, you’ll have plenty of opportunities to choose from when looking to open a 529 account, but this wealth of options can make it difficult to pick the right one for your family. State have one or more plans, each with different characteristics that may or may not appeal to you – depending on your financial goals – and you have the option to pick plans from outside your state.

However, it’s important to note that more than 30 states offer some form of state income tax break for contributions to that state’s plan. If you live in, say, Nebraska, your contributions to a 529 plan may be deducted from your state income taxes up to a limit of $10,000, while that limit is $6,000 in Idaho; those in Kentucky, on the other hand, don’t get any state income tax benefit for contributing to a plan. In addition, some states offer better returns on their 529 plans, which means more money when college rolls around, and low fees are another feature to keep an eye out for. In short, shop around before choosing a plan, as some are better than others.

Picking the Account Type for Your 529 Plan

Once you’ve found the 529 plan that fits your particular needs, it’s time to consider what type of account you want it to be. In general, a 529 plan will be an individual account, meaning that it’s managed by the owner of the plan; most often, that owner is a parent, though accounts can also be owned by the student themselves or relatives like aunts or grandparents.

It may seem like the name on the account shouldn’t matter much, but who owns a particular 529 plan can mean a great deal when the beneficiary applies for help through the Free Application for Federal Student Aid (FAFSA). That’s because the federal government treats the funds in a parent-owned 529 account differently when calculating a student’s level of need: The first $10,000 in these accounts will not be factored in at all, and any amount above that will only contribute 5.64% to the government’s calculations.

However, if a student is both the account owner and beneficiary, the portion added is increased to 20%, while 529 plans owned by another relative, such as a grandparent, can contribute as much as 50% of its distributions to a student’s assets (though there are some ways around this). In other words, paying for your grandchild’s education through a 529 plan may have a significant impact on the amount of federal financial aid they receive, while funds given by a parent will have a relatively small effect, so consider who will own the account when opening it.

Apply for the 529 Plan

When enrolling in a 529 plan, the application process can be fairly straightforward, especially if you use a resource like the Sootchy app. Some plans allow you to sign up online through a form or enrollment kit, in which case you’ll need to provide personal information about both the account owner and beneficiary; some plans also require a successor account owner as well. If you have any questions about this stage of the process, contact the professionals at Sootchy or call the toll-free number for your 529 plan.

Contribute to the 529 Plan

Before you can start generating returns on your plan, you’ll first need to make an initial contribution. Some plans require a minimum amount when opening an account – in South Dakota, for instance, new account owners need to start with a minimum contribution of $1,000, though a more typical number is more like $20 or $25 – while other plans leave it up to you.

When setting up the account, you can arrange for automatic payments to help keep your contributions consistent, or you can transfer money from an account electronically or via a paper check. Keep in mind that there are no limits on how much you contribute each year, but donations of more than $15,000 per year may trigger the gift tax.

Pick an Investment Option for Your 529 Plan

The final step when opening a 529 plan is to choose how you want your money to be invested. Most plans offer a limited list of options, which can make this process simpler, and most have two types of portfolios: age-based portfolios, in which investments are automatically chosen and get more conservative as a child ages, and static portfolios, in which the account owner chooses each investment manually. Most parents pick the former, but depending on your level of comfort with investing, you may prefer to manage the investments on your own.

Get Expert Help with Opening a 529 Plan from the Team at Sootchy

Even if the process of opening a plan seems easy on the surface, picking the right state plan, account type, and investment portfolio can make all the difference when it comes time for freshman year. By turning to the team at Sootchy, you can get the guidance you need to ensure your child starts off their college years on the right foot. Learn more by visiting us online or download the Sootchy app today.



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