What is a 529 plan?

Today's question is about 529 plans. What are they and do I think that you should open one? The short answer is if paying for your child's college education is an important financial goal for you, then a 529 plan can be an excellent tool to help you reach that goal. A 529 plan is just a technical term for a college savings account that has a number of tax advantages. You put money into the account and it's invested tax-free compounding hopefully over 18 years so that when your child goes to college you have money to pay for that education and the money that you use from the account for education you can take out tax-free. So it's a fantastic benefit and setting aside money is a fantastic way to hit any financial goal. However, it turns out there's a lot of complications with 529 plans that you need to think about before opening the right one for you.

The first question you have to ask yourself is do you actually have extra money available to put aside for college? Because once you put money in a 529 plan there are penalties for taking it out for the wrong reason and life has its ups and downs. You need to make sure that you really don't need this money until your child goes to college. Second, you have to look at the fees on these accounts. Every state has different 529 plans and some of these plans have investments with very high fees, particularly the ones recommended by advisors. Those fees can be so high that they eat up all the tax advantage. Third, you need to think about which plan you want to open. Now some states have specific tax advantages for 529 plans and if you live in one of those states you can actually get a tax deduction for putting money into those accounts.

But for most people you should open a plan in the state that has the best plan for you and the lowest cost. A lot of people make the mistake of thinking that they have to open up the plan in their state.

So once you've answered all of these questions, if saving for your child's college education is important for you, then definitely consider opening a 529 plan that features low-cost index funds like one from Vanguard or Wealthfront. Thanks for watching. If you like this video, be sure to hit like or subscribe. Or better yet, if you have questions on how to save, invest, or give, be sure to ask Adam by posting a question down below.