How to open a 529 college savings account

Saving for college with a 529 account

Costs are increasing dramatically for all forms of post-secondary education. On top of that, higher interest rates on loans have led to a crisis, putting many recent graduates in significant debt. As concern over these issues grows, it’s becoming clearer that the best way to pay for college is to start saving early in a child’s life.

There are many ways to accomplish that goal, but a 529 college savings plan is specifically designed to help you get the most out of every penny you save. Your contributions to 529 savings plans can grow tax-deferred, and when your child starts using those funds for qualified education expenses, they can be used tax free. 

When is the best time to start saving?

You can start a 529 savings plan as soon as the beneficiary has a Social Security number. As with all long-term investments, the longer the investment has the opportunity to grow, the better the return can be. That’s why most recommend starting immediately, even if you can’t contribute much initially. Note, the money invested in 529 savings plan is subject to market volatility, and you can lose money.

How does a 529 account save on taxes?

With a 529 savings plan, you contribute after-tax money, and it is allowed to grow in an investment account. Normally, you would have to pay taxes on any gains made from those investments, but with a 529, if that money is used for qualifying expenses, it can be used tax free.² However, it’s important to follow each state’s withdrawal limits closely to avoid taxes and penalties. Calculate your potential savings. In addition, some plans provide additional state tax benefits to their state residents.

What are qualified expenses for a 529 account?

It may vary by state, but generally speaking, here are the expenses that qualify for tax-free 529 withdrawals:

• Tuition for colleges or universities
• Tuition at a trade school
• Postgraduate or doctorate programs
• Up to $10,000 per year for private or public K-12 tuition
• Room and board (up to a limit)
• College class fees
• Books, computers, and materials

What is the 529 minimum to open?

Some plans require a minimum deposit, and many require each deposit to be of a certain size. That is changing, however. More plans are starting to lower or remove these minimum requirements if you set the plan up in certain ways, like with automatic payroll or bank account deposits.

Are there contribution limits?

There is a maximum contribution limit which varies by state. Usually, it is over $300,000. Adding more than you need doesn’t make sense, however, as the tax advantages only work on qualified education expenses.

How to open a 529 account

Setting up a 529 savings plan is pretty simple. The most difficult step is choosing a plan. Each state has its own, and you don’t have to choose the plan of the state you live in. However, some states do provide extra tax benefits if you live in that state. Once you choose a state plan, you just have to complete a simple application and make an initial contribution.

Can a grandparent open a 529 account?

Yes. Anyone, even a family friend, can open a 529 savings plan for a child. However, if it isn’t in the name of one or both parents, it may affect the student’s ability to get other types of need-based aid. Understanding these differences is key. Learn more about starting a college fund for your grandchildren.

Can you open multiple 529 accounts?

Yes, but there are few reasons to do so. The contribution limits and rules apply to all of the savings accounts a single student has. There are a few reasons you might want more than one, though. Perhaps, for example, you plan to try different investment strategies in separate accounts if your current plan does not provide the diversification you look for.

Where should I open a 529 account?

You can open a 529 savings account in any state, and it doesn’t have to be the state in which you live, or the state in which your student will go to school. There are eight states, however (California, Delaware, Kentucky, Maine, New Hampshire, New Jersey, North Carolina, and Tennessee), in which 529 plans don't receive tax breaks. We offer 529 savings plans with 26 different states and can help you choose the one that best suits you and your family’s needs. Learn more about setting up a 529 college saving plan at New York Life.³

RELATED CONTENT

¹“Tuition Costs of Colleges and Universities,” National Center for Education Statistics, 2021.

²Unqualified withdrawals are subject to ordinary income taxes a 10% IRS penalty.

³529 savings plans are offered through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency and a New York Life Company.