Understanding the 529 College Savings Plan

I am the proud mother of an adorable and brilliant future college student named Gwendolyn. She’s three years old and she’s already starting to sound out words, so of course we’re hoping that college is in her future! Of course, as we look with alarm at what college costs now, we’re pretty nervous about what it will cost in 2023. So we’re figuring once we’re done with daycare costs, it’s going to be time to start saving up for college — quite possibly with a 529 college savings plan.
So what is a 529 college savings plan? Simply speaking, these are plans that help parents invest and set aside money for college. Although investments in these plans are not tax free (that is, the income people place into these plans is still subject to income tax), many states offer tax deduction for money invested into these plans. The money in these plans can be used for tuition, room, board, books, fees, and supplies for accredited U.S. colleges and universities, and at many international institutions as well.
Typically, 529 college savings plans involve mutual funds. Parents typically invest a certain amount of money every month — or when they can — into these plans. Their money is invested into mutual funds (which consist of organized investments into stocks, bonds, and other investments) , which (theoretically) will increase in value over time. A second type of 529 savings plan involves paying tuition credits, at today’s rate, to a college or university.
Are there disadvantages to these kinds of plans? Of course, as people are well aware right now, any investment in the stock market is risky — although we’re sure hoping that with 15 years to go before college, our investment will pay off by then! Money that’s not used is subject to a 10 percent federal tax penalty. And 529 tax plans affect student eligibility for financial aid, of course.
If you’re someone who’s thinking about starting a plan like this, contact your bank or financial advisor. An initial investment is required, and that amount varies — as does the minimal monthly or annual contribution.