How to open a 529 college savings plan for your children

0 comments

As a mom of small children who spends time with other parents of small children, I’m often asked how to open a college savings account. Below I’ve put together a step-by-step plan to open a 529 plan. I’ve tried to keep it simple, as I often find the reason for not doing anything is because we are overwhelmed with too much information.

Review the definition, advantages and a disadvantages of a 529 plan to make sure it is right for you.
Determine which state plan you will select. This step has been made overly complicated for investors because each state has a plan (or many plans). The state plan you select will be personal based on the following considerations:
- Home state plan: do you receive a state tax deduction?
- What are the investment options?
- What are the expenses of the plan and underlying investments? I prefer to use a combination of plans to achieve our investment goals. However, in general I prefer index funds with low expense ratios. In the absense of a good home state plan with tax benefits, I currently use the Ohio plan for the majority of investing for our children.
Determine the asset allocation. Do you want to set it and forget it? Or manage the money routinely? For most people, I recommend picking one of the age based portfolios. The age based portfolios will adjust the asset allocation as your children get closer to college. If you are using the Ohio plan, they offer excellent low expense Vanguard age based options in conservative, moderate and aggressive portfolios. If you do not know your risk tolerance, there is a helpful questionaire to determine which one is most appropriate.
Determine how much money you want to contribute. This is a personal decision based on how much of your child’s education you want to fund. Here is a good calculator. Do not get hung up on this number and let it stop you from opening a plan. Something is always better than nothing. Start small and add to it later.
Sign up. This is easily done online. Most of the time you can link the 529 plan to your checking account and have money taken out automatically.