By Cathie Ericson
You probably associate the month of May with celebrations like Mother’s Day, Memorial Day and possibly even “May the Fourth” for Star Wars fans. But there’s another little-known day that could be far more meaningful in the long run—and offer more lasting payback than your kids doing the dishes on Mother’s Day.
That’s National 529 Day, which is on…wait for it… 5/29. It’s particularly fitting since the month starts with College Decision Day on May 1, which might quickly be followed by “How are we going to pay for this?!?” day on May 2, if you haven’t thought through your funding.
How to Pay for College with a 529 Plan
National 529 Day is a way to raise awareness for parents about the benefits of starting a 529 investment account today, before you even start thinking about college applications. And if your child was already sporting a college sweatshirt on May 1, this day is also for you—because it’s important to remember that it’s never too late to start a college fund.
“While the ideal time to start investing for post-high school education expenses is when a baby is born, we realize many variables prevent this from occurring,” notes Tim Gorrell, executive director of the Ohio Tuition Trust Authority, who manages the overall operations of Ohio’s 529 Plan, College Advantage. “Some will think the opportunity to save has passed or it’s too late to save. But at Ohio’s 529 Plan, we beg to differ.”
That’s because any dollar saved at any time is a dollar that doesn’t have to come from somewhere else to cover education expenses. Here’s what you need to know about 529 plans that will motivate you to start saving for college today.
What is a 529 plan?
First let’s start with the basics: A 529 plan is funded with after-tax dollars which then grow tax free for you to spend on any qualified college expense. That is defined quite flexibly and can include many costs beyond tuition and housing, such as room and board, classroom materials, technology, and more. The funds can also be used for community college, trade schools, as well as apprenticeships. And, thanks to a change in the tax code, you can use the account to pay up to $10,000 in student loans the year your child graduates college. (See what we mean about it’s never too late to save?)
What should parents look for in a 529 plan?
Every state (except Wyoming) and the District of Columbia offers at least one type of 529 plan. First, check your own home state to see if it offers state income tax advantages, suggests Gorrell. Then look at the nuts and bolts of the plan—the investment portfolio offerings, performance over the long term, and finally the way the state manages the plan.
“You can have a plan that performs well over a one-year period; however, the viability of the plan should be measured over the three-, five- or 10-year performance to ensure it’s not just a temporary success, but rather is positioned to provide a return on your investment consistent with your college savings plan goals,” says Gorrell. “The way a plan is managed and the reputation of the managing agency should further your trust and confidence.”
It’s also important to note that just because you invest in your state’s 529 plan, it doesn’t mean the beneficiary will be limited to only education opportunities in that state. “Regardless of which state you trust with your 529 investments, you can use those funds to pay for qualified education expenses nationwide,” says Gorrell, adding the caveat that if your state has a 529 plan where you are pre-paying tuition, you may be limited in those circumstances.
Why is 529 Day the time to start investing?
“Like any designated day, 529 Day brings attention to the benefits of a particular cause. In this case it’s terrific education savings and investment options which may be lesser known than plans like 401(k)s,” notes Gorrell.
So, get out the 529 party hats and napkins!
“The adage, ‘Farmers who wait for perfect weather never plant,’ goes for people who wait for perfect conditions to save and invest for education expenses,” says Gorrell.
And while the main limitation in failing to start saving early is time, investing in a 529 plan even when your child is heading off to college still allows you to take advantage of your state’s income tax benefit or to offset federal loans.