How does it work?Little by little, you can move toward your goals
You know the saying, "slow and steady wins the race?" That can be a good motto for a 529 plan, too. When you keep adding to your account over time, your money has more time to work harder. Plus, you might find that it's easier to make multiple, smaller contributions than to try to make a single, large contribution once or twice a year. Here are several ways to put your contributions on autopilot, so you'll have one less thing to remember.1
Automatic Investment Plan (AIP)
An AIP lets you choose to have a contribution deducted automatically from a savings or checking account on a regular schedule, generally monthly or quarterly. AIPs are popular because they can help families save for college slowly and steadily. You don't have to commit large amounts; some 529 plans let you make AIP contributions of as little as $15 or $25 a month (though you can set one up for as much as your individual plan and financial situation allow). To see how investing "little by little" can potentially add up, see the chart below.
You can usually set up an AIP (if your 529 plan offers one) when you enroll. If you already have a 529 plan account, you can usually set up an AIP for future contributions by visiting the plan's website, filling out a form, or calling the plan's client service line.
Payroll deduction
Many employers and 529 plans now offer payroll deduction. Like other benefits that you might sign up for, a pre-arranged amount is deducted from your paycheck (after taxes) and is deposited directly into your 529 plan account. Learn more.
Dollar-cost averaging
An automatic contribution plan can also help you take advantage of dollar-cost averaging. This technique is designed to help reduce market risk - the risk of investing at the wrong moment. Instead of investing an entire lump sum of money at one time, you buy smaller amounts over a longer period of time. As an example, instead of investing $5,000 all at once on February 1, it could be invested in $500 increments for 10 months. The idea behind this is that if the market goes up and down, you can average out the volatility by buying at different points. This could potentially help you smooth out large, single drops in the market (of course, the opposite holds true as well).
1 A plan of regular investment cannot assure a profit or protect against a loss in a declining market. Such a plan involves continuous investment in securities regardless of fluctuating price levels. You should consider your financial ability to continue making purchases through periods of low price levels.
