In honor of 529 College Savings Day on May 29th, Money wants to help you better understand how 529 plans can boost your college savings.
Your investment in a 529 account grows tax-free, and when you withdraw the money to pay your college bills, you don't have to pay any taxes on the gains you've made. If you start saving in a 529 plan when your child is young, that tax advantage can mean thousands more dollars to pay college bills. Vanguard found that a family that saves $100 a month for 18 years could save more than $7,000 by putting their money in a tax-free account.
There are nearly 100 different 529 plans you can invest in. You don’t have to save in the plan sponsored by your home state, or the state in which your child will go to college. Fees and returns vary, and in some states, you can get a tax break for investing in your own states' plan. The money in 529 accounts, like a 401(k), is invested in stocks and bonds. That can help your money grow faster than it would in an ordinary savings account.
You really don’t have to be a savvy investor to open a 529. Just look for a low-fee fund, one with annual costs lower than 0.5%. A simple choice is an age-based portfolio, which reduces risk as your child gets closer to college age. If your state doesn’t offer tax advantages to residents, shop nationally. Look at Morningstar’s rankings for silver or gold plans and look at the best plans rated on Savingforcollege.com. For a quick guide to the best of the best—those that have been highly rated for several years—go with direct-sold plans (not broker-sold plans) offered in Nevada, Utah, Alaska, and Maryland.