Money Talks, So Should You

Q&A: What is a 529 plan?

Lazetta Rainey Braxton
by Lazetta Rainey Braxton , NAPFA

529 plans offer a tax-friendly way to save for future college expenses. These accounts encourage families to set aside money instead of relying on future income, retirement assets or debt to finance their children’s higher education. 

529 plans are sponsored by individual states. The most popular type is the 529 savings plan. Very few states and some private colleges offer 529 prepaid tuition programs — plans that allow you to lock in future tuition based on today’s terms.

READ: Where does scholarship money come from?

529 savings plans are investment accounts that vary in selection by state.  It is important to compare fees, initial and future contribution minimums, age-based portfolios and individual investment options for building your own portfolio. Some 529 savings plans allow automatic investments from a bank account with a minimum investment as low as $25.

Investing early and regularly can yield a sizeable account balance when a child attends college. Grandparents, other family members and friends can make cash contributions directly to your 529 plan. Contributions make great gifts! 

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Lazetta Rainey Braxton, CFP, is founder of Financial Fountains, a fee-only financial planning and investment management firm. Braxton is a member of the National Association of Personal Finance Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.