In every industry people that are experts in their fields sometimes forget how intimidating their “basic work” can be to outsiders. A routine oil change might as well be rocket science to many car owners and wiring an outlet can be terrifying to homeowners. Financial services is no different.
But it still surprises 529 professionals to find that one of the main reasons people aren’t opening 529s is that they don’t know how. In a 2015 study the FDIC found that nine million U.S. households used no bank at all. So for the average American that’s only ever had a basic checking account, the prospect of opening an investment account can be incredibly intimidating. How do I put money in if there is no bank branch? Who do I talk to? What information do I need? But opening a 529 account is actually pretty straightforward!
Step 1: Select a College Savings Plan
This is the most difficult part for many savers. There are over 100 savings and prepaid 529 plans available. But, like most things, you can make it as simple or complex as you want. So, here is the simplest way to pick a 529 plan:
- Choose a savings plan, prepaid plan, or both. Savings plans work like 401(k)s, and participate in securities markets, investing in stocks, bonds, and other securities. Prepaids work like pensions, growing at a rate guaranteed by the sponsor, and are usually limited to state residents and/or schools. If you can’t decide, open one of each type and put a little money in both.
- You’ll need to choose an in- or out-of-state plan. If you have a state tax benefit, you’ll usually – but not always – be better off using the in-state plan.
- Use a site like Collegesavings.org or Savingforcollege.com to compare costs and investment options in the plan. Don’t worry too much about historical performance, which is a lagging indicator rather than a leading indicator of a plan’s strength. Just focus on a plan with low costs. Study after study has shown cost to be the best leading indicator of diversified investment performance.
And don’t worry about picking the absolute best possible 529 plan. Most plans are very good, and you can always transfer to another plan if you don’t like the one you’re in at any time. It’s more important to just open a plan and start saving as soon as possible, giving your money more time to grow!
Step 2: Visit the Plan Site
The goal here is to determine what the plan requires in terms of documentation. Every state requires different information to open an account, but you will need – at a minimum – the following information:
- Personal information, including your address, birth date, and social security number
- Beneficiary information, including their birth date and social security number
You will be asked for a lot of additional information, but most everything else is optional. It is, however, a very good idea to name a successor account owner, which is a person to whom ownership will transfer in the event of the death of the original owner, such as a grandparent or another caregiver. This can save a lot of legal headaches (or worse in the event of divorce or estate issues), so it’s a good idea to name a successor.
Step 3: Open the Account
If you’re opening the account yourself, you can complete a physical application and mail it in (download from the plan website or call the plan to request a kit). Most plans will also let you complete everything online and mail in a check or transfer money into the 529 account directly from your checking account. This is a pretty simple exercise of completing the requisite paperwork or online fields.
The only place you might get tripped-up is when the plan asks what kind of account you are opening. In this case, you’ll need to select Individual, UGMA/UTMA (also called “custodial” accounts by some plans), Trust Account, or Business/Other Entity. If you don’t know what those last three are, you’re opening an individual account.
An important note here on 529 account ownership: There are only a couple plans that allow joint ownership. So if you are married, note that your spouse will not have access to the account unless they are given some form of Power of Attorney. Also, for couples with children from a prior marriage, consider having the birth parent listed as the account owner. Too often the college savings of a child is put at risk when a vindictive spouse threatens to pull back the assets during a divorce.
Step 4: Choose Investments
This is another step that can be simple or complex depending on your investment preferences. Most account owners will choose an age-based portfolio corresponding to the age of their beneficiary and be done. These portfolios are a one-stop-shop to a diversified investment that becomes more conservative as the beneficiary reaches college age.
Alternatively, many plans offer target-risk or individual portfolios that allow you to build your own investment mix. If you’re not sure which way to go, you can select the age-based option and change later. Just understand that:
- 529 savings plans do not have guaranteed returns and will fluctuate with the market, meaning that it is possible to lose your principal. If this is a concern for you, consider a prepaid plan such as the Private College 529 Plan, or speak with an investment professional for assistance selecting the right options for you.
- Under current law, you are only allowed to make two investment changes each calendar year in a 529 plan. This only affects funds already deposited. You can continue to make contributions and put them in whatever portfolio mix you want, but money already in the account can only be moved from Portfolio A to Portfolio B, C, or D twice per year. So while you’re not stuck with what you initially select, if you decide to change your portfolio selection you are limited to doing so twice in a calendar year.
Step 5: Submit the Application and Deposit Funds
If you completed the physical application, mail in the application with a check unless you are making a deposit using bank funds or another funding method. It will generally take a few days to several weeks to process a paper application.
If there are any errors or missing information, someone from the 529 plan will contact you to correct the error or omission, assuming they have sufficient information to identify you. Otherwise, the paperwork will be mailed back as “NIGO,” or “Not In Good Order,” so make sure everything is complete and accurate!
If you’re submitting your application online, it will not let you submit everything unless you have completed all the required information, making mistakes less likely. You will either fund the account immediately by providing your bank information, or you can mail a check using the information provided in the application materials. In the latter case, the plan will open the account, and deposit the funds when they receive them.
Who to Contact for Help?
Every 529 plan has a toll-free number you can call to get ahold of someone. I’ve contacted them all and, while you might need to navigate a phone tree or two (or furiously press zero), you can always get a person to answer questions. So, if at any point you are overwhelmed or confused, call the plan. Contact information is readily available from the plan website, disclosure documents (available in the fine print of every 529 plan site), or third-party sites.
The views of the author of this article do not necessarily represent the views of Gradifi. This article is not intended to constitute tax, financial or legal advice. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.