Saving for college doesn't have to be difficult - but as with any new project, you may have questions about how a 529 plan works, different tax advantages, and the types of expenses that are allowable for your account withdrawals.
We've divided this question/answer section into the most popular topics. As always, if you have additional questions, never hesitate to contact your tax advisor, financial advisor, or the plan itself. If you don't have a 529 plan yet, we can help you find one; just click here.
Don't forget to check the Glossary for terms that may be unfamiliar.
What is a 529 plan?
A 529 plan is a tax-advantaged plan sponsored by individual states to encourage individuals and families to save for future higher education expenses. (The name "529" refers to Section 529 of the Internal Revenue Code, which established tax guidelines for this type of college investment plan.)
What is a beneficiary?
A beneficiary is the person for whom you are opening the 529 plan account. It can be a child or an adult; you can even be your own beneficiary.
Who can open a 529 plan account?
Most 529 plans are available to any U.S. citizen or resident alien of legal age who wants to open an account. You must have a Social Security number or Tax Identification number and a valid physical address within the United States or Puerto Rico. The student for whom you're saving (the beneficiary) can be anyone (including yourself) and must also have a Social Security number. There are generally no state residency requirements or income restrictions in 529 plans (with the exception of a handful of prepaid plans).
Where can I use my 529 plan assets?
Use them at any eligible institution of higher education! Assets in a 529 plan account aren't just for public and private 4-year colleges and universities. They can also be used at eligible trade and technical schools, graduate schools, as well as for qualifying 2-year associate degrees -in the U.S. and abroad- provided the educational institution is eligible under the rules applicable to 529 plans. Eligible educational institutions generally include all post-secondary institutions that participate in U.S. Department of Education student financial aid programs. To search for eligible institutions, click here.
How much do I need to open an account?
This varies by plan. Some let you start with as little as $25. You can set up an Automatic Investment Plan from your bank account or you may be able to set up a payroll deduction plan.1 Both are generally subject to your plan's contribution minimums.
What does a 529 plan cost?
Plan costs and fee structures vary by plan. However, there are some typical costs that you can expect to see as you review various 529 plans.
Program manager fee: This is a fee charged by program managers to pay for their administration of the 529 plan.
Estimated underlying fund expenses: This is a fee charged to cover the portfolios expenses of investing in the underlying mutual funds.
State fee: This is a fee charged by the state agency that offers the plan and often covers the state's cost to administer the plan.
Account maintenance fee: This is a fee generally charged to help cover the administration of the plan, which is usually an annual flat fee. Some states will waive the fee if you are a resident.
Advisor-sold plan fees:
Sales loads: Advisor-sold 529 plans may charge an additional fee or fees depending on their compensation structure. If you invest in an advisor-sold plan, you may pay a "sales load." Essentially, a load is a commission paid to your broker for selling the college savings plan. Please consult your program description and speak with your advisor for details.
- Class A shares: These shares typically impose a front-end sales load. This means that the load is paid when the investment is made, effectively reducing the amount of your investment. This share class usually has lower annual expenses than other share classes. Additionally, the front-end sales load may be reduced if you invest above a certain threshold.
- Class B shares: These shares typically impose a "back-end sales load" or "contingent deferred sales charge" ("CDSC"). This means that a fee may be charged when money is withdrawn from your investment. The CDSC typically decreases to zero if you hold your investment for a certain length of time. This share class usually imposes higher annual expenses than Class A shares. Over time, Class B shares typically convert automatically to Class A shares if held long enough.
- Class C shares: These shares may have an annual distribution fee, other annual expenses, and either a front- or back-end sales load. However, the front- or back-end load for Class C shares is typically lower than that of Class A or Class B shares. This share class usually imposes higher annual expenses than Class A shares. They do not convert to another class over time, as Class B shares do.
Fee-based advisors: Fee-based advisors usually charge a flat percentage of the investment assets managed for them -generally 1%- and you do not pay a sales load. Typically, the fee paid to the advisor is taken out of the client's account. The client is not responsible for paying the advisor directly.
1 A plan of regular investment cannot assure a profit or protect against a loss in a declining market.