If you’re saving up to pay for your child’s college education, odds are either you’re already using a 529 college savings plan (or "qualified tuition" plan) or you’ve at least considered it. (For the rest of us, a 529 plan is a savings account, designed solely for college expenses, that enjoys certain tax advantages.) It’s a good way to put aside money tax-free for that first day of college, and unlike some investment products the rules surrounding a 529 plan are fairly straightforward.
But what you might not know are the following tricks, each of which can help you get more value out of your plan both now and in the coming years.
#1 - You can open a 529 in any state—and your home state may still give you the state income tax deduction.
Each state offers its own version of a 529 plan, with different investment options and fees. Matt Becker at Mom and Dad Money says one of the best ways to get more bang for your buck with a 529 plan is to shop around for the state with the best combination of features for your particular needs. Some states with a state income tax will let you take a deduction for your 529 plan, and if your state is one of them you’ll need to factor that into your choice.
But where it gets interesting is if you live in Arizona, Kansas, Maine, Missouri, Montana or Pennsylvania. Those states offer something called "tax parity" and will let you take a state income tax deduction for your 529 plan no matter which state you got it from. Here are some more details on each state’s plan features [PDF].
#2 - You don’t have to use the money on your child.
If your kid decides to become a rodeo clown and skips college, but you want to go back to school to become a rodeo physical therapist, you can use the money to pay for your own education. Or you can transfer the money to pretty much any member of your immediate family up to and including first cousins. And you can switch beneficiaries as often as you like. This gives you more flexibility with how you spend your savings than you might have assumed.
#3 - You can jump start your plan’s earning potential by putting the first 5 years of contributions in all at once.
Each person can contribute up to $14,000 a year to a 529 plan ($28,000 for a married couple) without triggering the gift tax. But you can contribute up to 5 times that much—$70,000!—all at once and still avoid the gift tax by averaging out your contribution over the next 5 years. You’ll just have to be careful that over those 5 years, your total contributions don’t exceed that $70k limit.
Assuming college costs increase annually by 3% (which is in the mid-to-lower range of estimates), then by 2025 a year at a public college will cost $26,000, and at a private one, $58,000. With that kind of forecast, saving now for future college expenses is pretty much a necessity.
So if you’re considering taking advantage of a 529 plan, then the sooner the better. Just keep in mind that a 529 has several quirks that make it more flexible than it first appears—and you’ll get a much better return on your investment by using those quirks to your advantage.