1. Define Your Investment Goals & Objectives
  2. Define Your Investment Strategy for Your Portfolio
  3. Building Your Own Portfolio to Match Your Goals
  4. Monitoring and Rebalancing Your Portfolio
  5. The Bottom Line
  6. 401(k)s
  7. Exchange Traded Funds (ETFs)
  8. IRAs and Roth IRAs
  9. Mutual Funds
  10. 529 Plans
  11. Stocks
  12. Life Insurance
  13. Bonds
  14. Annuities
  15. Health Savings Accounts (HSAs)

529 Plan Basics

  • What they are: College savings accounts that are exempt from federal taxes.
  • Pros: No income restrictions for contributors; investments grow tax-deferred; distributions are tax-free at the federal level.
  • Cons: Contributions greater than $14,000 can trigger federal gift tax.
  • How to invest: Through participating state and university providers.
  • Tip: 529s are a good way to help a child financially while limiting your own tax liability.

A 529 plan is an investment plan that lets you save for the future college costs of a beneficiary (for example, your child or grandchild) while potentially reducing your own tax liability. While contributions aren’t tax deductible on your federal return, they may be on your state return, and your investment grows tax-deferred. Distributions used to pay for the beneficiary’s qualified education costs are tax-free at the federal level.

The maximum amount you can contribute to a 529 depends on the state: In general, the total amount contributed can be no more than the beneficiary’s eligible education expenses. As far as annual contributions, they are treated as gifts, so contributions up to $14,000 each year (current for tax year 2017) can be made without triggering the federal gift tax. You can also make a lump sum contribution that covers five years’ worth of contributions, giving a total of $70,000, or $140,000 for married couples – provided you don’t make any other gifts to that beneficiary during the five-year period.

There are two types of 529 plans:

  • 529 savings plans: These are similar to some other investment plans in that your contributions are held in mutual funds and other investment products. Account earnings are determined by the performance of the underlying investments, and most plans offer an age-based investment approach that gradually becomes less risky as your beneficiary nears college age, so you’ll have a higher concentration of stocks in the beginning, gradually shifting to more cash and bonds over time. You can also choose a static approach, where the investment fund or group of funds keeps the same allocations.
  • 529 prepaid tuition plans: Prepaid tuition plans (or guaranteed savings plans) let you lock in today’s rates by pre-purchasing tuition. The program pays out at the future cost to any of the state's eligible institutions – a good deal considering the rising costs of college. If the beneficiary ends up going to an out-of-state or private school, you can transfer the value of the account or get a refund. These plans can be administered by the state and higher education institutions. See the 529 Plan Tutorial  and 529 Risks to Take (Or Not) for more information.

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