How to Set Up a 529 Plan to Pay for College

It's never too late to open a 529 for your future college graduate. This article shows you how it's done.

Determine which state's 529 plan you want to use. In most cases, you will get a state tax deduction for any 529 plan contributions that you make for a program that is sponsored by your home state. (About two-thirds of all states offer this deduction.) There are currently 118 state-sponsored plans available, and you can view them all at savingforcollege.com. The various plans have been ranked by several different experts and magazines and you should evaluate the actual investment choices that are inside your state's plan. Getting a state tax deduction may not be worth it if your state's plan does not offer good investment performance.

You can open a 529 Plan for anyone, not just your child. Nieces, nephews and grandkids are eligible as well, and all of them will benefit from this plan. For those who are looking to reduce their taxable estates, these plans allow donors to make gifts of up to $60,000 in one year without incurring gift tax.

Cost is another factor that should be considered. Although brokers and financial planners offer these plans, you can invest in these plans directly without having to pay a broker a sales charge. These charges will reduce the amount of money that is available in the plan for you when you need it.

If you're not an investment expert yourself and need some help deciding which investment choices are appropriate, just pick one of the age-based portfolio allocations that are available in many plans. These plans automatically adjust the allocation of the portfolio between stocks, bonds and cash based upon how soon you will need to begin withdrawing the money.