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While setting up a 529 plan for others is common, you can also set one up for yourself. In fact, setting up a 529 plan can be a great way to invest in yourself by helping you fund your education now or in the future. Read on to learn what you need to know about setting up your own personal 529 plan.
Should You Set up a 529 Plan for Yourself?
A 529 plan is an investment account that allows individuals to save or invest money for qualified higher education expenses. The plans cover costs like tuition, room, and board, books, supplies and other qualifying education-related fees at colleges, universities and even apprenticeship programs.
Setting a plan up for yourself has a lot of benefits:
- Tax advantages: One of the biggest perks is that a 529 plan provides tax advantages, so it's beneficial if you're looking to fund your own tuition. When you contribute to a 529 plan, you aren't taxed on your money's growth and, when you do withdraw funds, you won't be taxed, either.
- Student loan help: You can also use withdrawals from your plan to pay principal or interest on student loans up to $10,000 total. Unfortunately, though, using your 529 funds for this purpose doesn't qualify you for the student loan interest deduction.
- Financial aid benefits: If you withdraw money from your 529 plan to pay for college, it doesn't count against your financial aid eligibility. Earnings from your plan don't have to be reported on your Free Application for Federal Student Aid (FAFSA) either.
- Furthering your career: Because the funds from 529 savings plan can be used at most accredited post-secondary institutions—including vocational and technical schools—you can use it to invest in yourself to further your education (like for a master's degree) in the field you already work in. You might even decide to change careers entirely and apply it toward a program in a different field.
If you think you might want to go college or even grad school at some point, the tax advantages and other benefits make it a great way to set aside money for future education costs.
How to Set up a 529 Plan
Setting up a 529 savings plan for yourself is easier than you may think. Here are the basic steps to get started saving for college.
- Choose a 529 plan. Educational savings plans can be found through your state or a specific school. You can choose between direct-sold and broker-sold plans. Choose a broker-sold 529 plan if you want help choosing and managing investments. Go with a direct-sold plan if you're comfortable making your own investment decisions.
- Complete the application. You'll need to provide basic information like your address, telephone number, email address, date of birth, and Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).
- Fund your plan. Once you've chosen an account, it's time to make your first contribution. You can either mail a paper check or, more commonly, transfer the money electronically from a bank account.
- Select investments. Consider your goals and risk tolerance levels, and then allocate your money among several investment options or just one. If you select a broker-sold plan, they will handle your investment distribution.
You'll also want to consider naming a successor owner if something happens to you before the money is used.
One thing to know is, when it comes to 529 plans, each state has its own set of rules governing fees, tax incentives, withdrawals and transfers. Each state also limits the lifetime amount you can contribute to 529 plans.
With this in mind, make sure to research these rules before you commit to one. For example, some states may offer greater tax deductions than others. When in doubt, consider consulting with a financial advisor who understands 529 plans to ensure that you're making informed decisions about how best to manage your plan in the future.
Alternatives to a 529 Plan for Paying for College
While it's never too late to start saving for education costs, if you're just now opening your 529 accounts, you'll likely need more money to cover your education costs completely. The good news is there are many different ways to save for your education:
- Look for grants, scholarships and fellowships. They'll help decrease how much you'll have to finance or pay out of pocket.
- Apply for student loans. If you qualify, choosing federal student loans over private student loans is often a better financial choice.
- Go to school part-time. This won't likely decrease how much you'll pay for your education overall, but it will spread out the costs and allow you to save—or even pay tuition outright—as you go.
- Pick up extra work. Even driving for a ridesharing service or tutoring on the weekends can help add to your education fund.
- Consider online or hybrid programs. This decreases costs associated with living on campus, such as room and board, bringing down the total cost of your degree.
- Build solid financial habits. Budgeting, cutting out unnecessary spending and saving when you can will help set you up for a strong financial future.
The Bottom Line
If you hope to pay for your education, there's never been a better time to start saving. A 529 plan is a great way to fund your education while reaping the tax benefits. Research the various plans, compare fees and see what works best for your goals before committing.
But if a 529 plan alone isn't going to be enough to cover the costs of returning to school, you may need to supplement with student loans. Know that for some types of loans, especially private loans, your credit history and credit score plays a role in determining how much interest you'll pay. This can have a big impact on how much you wind up paying overall, so take time to review your credit report and score before you apply for these types of loans, making adjustments to improve your credit to secure better terms.