How to Open a '529' Account to Save for College
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Here's your Money Briefing for Monday, June 14th. I'm J.R. Whelan for The Wall Street Journal. As high school students graduate and prepare to begin their college careers, their families are about to take on one of their biggest financial responsibilities and paying for it. Many families start saving money for higher education years in advance, even decades in advance, through a savings plan known as a 529.
Most of the time they're used for things like tuition and college-related expenses like books, room and board, computer equipment, things like that. You can even use the funds to pay for up to $10,000 a year in K-12 tuition.
Coming up, WSJ contributor Cheryl Winokur-Munk will tell us more about how 529 plans work and how to invest in them. That's after the break.
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The cost of higher education has never been higher, but there are college savings accounts known as 529s that can make things a bit easier if you start saving early. WSJ contributor Cheryl Winokur-Munk has been on the show a few times before to talk about paying for college, and she's back to explain the ins and outs of 529s. Cheryl, thanks for being with us.
Thanks for having me.
So Cheryl, let's start with the basics. What exactly is a 529 plan, and why would parents want to open one?
So a 529 is a college savings account. There are two different kinds of varieties for 529 plans. The more common type is called a 529 college savings plan, and that's where parents, grandparents, and others invest money to be used for a beneficiary's qualified education expenses. There's a less common type, and that's called a 529 prepaid tuition program. And some states and a consortium of private colleges offer this type of plan to allow the same types of people, parents, grandparents, and others to prepay tuition at participating schools at a set price today. Some states offer both plans. It really depends on, there's a whole analysis that you would need to go through to decide which one is best for you.
And some families actually have both types of plans.
All right. And so what are the benefits of opening a 529 as opposed to another kind of savings plan?
So contributions to 529 plans aren't tax deductible at the federal level, but your money is going to grow tax-free and withdrawals to pay for tuition and other qualified expenses are going to be free from federal taxes. Many states also offer income tax deductions or credits. So there are many benefits to these accounts.
How early in a child's life can parents open up a 529?
The day that child is born, you can open that up. And so really, the earlier you save, the better off you'll be, the more compounding and the more benefits you'll see from the money being able to grow over time. So really, as soon as you can open these accounts, you're really going to see the benefits from doing so.
Okay. And so how do you actually go about starting one of these accounts?
It's actually pretty easy. You can go through an advisor.
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