What You Don't Know About Picking a 529 Plan Can Cost You

Money for college.
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Preparing for your child's education can take a lot of research. You want to make the best decisions to fund their higher-education expenses later on -- and a 529 savings plan is one of the more common ways to make it happen. But it's easy to miss some key pieces of information about these state-sponsored plans, prepaid plans, fees and beneficiaries.

1. Pick a State, Almost Any State

Some states offer two variations of 529 plans, while others only offer one. Since accounts are sponsored by individual states, intuitive reasoning would say you could only participate in your own state's 529 plan. Right?

Wrong. You're not limited to using the specific plan for the state you live in. You can also have plans in multiple states. This is great news if your state doesn't offer any income tax deductions (and not all do). You're free to choose the cheapest, best-performing plan.

First look into whether your state offers any state tax deductions. Go to www.savingforcollege.com and click on your state. Click on a plan (or two) and scroll down to the "taxes and other benefits" section to see if you're eligible for a state tax deduction or any sort of program match on contributions. While other state plans could have fewer fees, the income tax deductions or matching funds available from your own state may make that plan more attractive.

2. Fees Can Vary Wildly

Speaking of fees -- they play a huge factor in which 529 plan is right for you. SavingforCollege has charted the fees among various states, which range from $0 to $1,735 for 10-year costs on a $10,000 investment. BankRate lists nine "stealthy" fees.

3. Choose Prepaid Plans with Caution

Prepaid plans sound really great -- at first. They allow you to purchase tuition at today's rates, which means you no longer have to worry if your investments will keep up with tuition increases, which often outpace inflation. Here's what you need to know about these plans, and why they're different from other options:
  • When you choose a prepaid plan, you don't get to make hands-on decisions with your contributions. You're buying tuition, not making an investment. It's a completely different financial product than other plans that allow you to invest money in funds that you choose.
  • State prepaid plans are typically only eligible for their entire value at in-state public universities. You may be get partial value at private schools or out-of-state colleges. If you choose to go with the private college 529 plan, then the college your child chooses must be a member.
  • If you feel like a prepaid plan is the best bet for your family, make sure that plan is guaranteed by the state. Some plans have closed due to lack of funds; they simply can't keep up with inflation. It's smart to look at how the plan has performed in recent years.
4. You Can Change the Beneficiary of the Plan

Some parents worry that their child will decide not to attend college, making it a waste to save so much for their child's higher-education expenses. Thankfully, it doesn't have to be a waste.

Account owners can change the beneficiary if the original beneficiary decides not to continue his or her education. The most common beneficiaries are siblings or cousins; however, you can change the beneficiary to yourself or your spouse, which might be a great way to pay for grad school.

You can consider other immediate family members. You just need to stick with IRS guidelines about beneficiaries.It might be worth it to check with a financial adviser before you change to a nontraditional beneficiary to see how this move might affect your tax bill.

These 529 plans provide families with an excellent choice to save for future college expenses. But as with any investment vehicle, it's best to do your due diligence. Educate yourself -- or find a trustworthy professional to help you -- before choosing a plan and starting to contribute funds.

Sophia Bera is a virtual financial planner for millennials and the founder of Gen Y Planning. She is location-independent but calls Minneapolis her home. She offers a free Gen Y Planning newsletter.

15 Important Expenses That You Forgot to Plan For
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What You Don't Know About Picking a 529 Plan Can Cost You
Is your water bill due quarterly? Figure out how much you need to save each month to have enough to pay for the bill when it comes, and put that amount aside each month so you'll be prepared. Do the same for any bills due regularly but not monthly.
Bills you only have to pay once a year can be even harder to remember, so be sure to note things like property taxes, auto registration fees and insurance premiums and budget for them as well.
Annual subscriptions and memberships regularly trip up people's budgets. Be sure to set aside money each month for things like:
  • Newspaper and magazine subscriptions.
  • Gym memberships.
  • Warehouse club memberships.
  • Union dues.
  • Road service membership fees.
Other expenses don't happen on a regular basis, but you can still predict the need to pay for them over the course of the year. Chief among these are repair and maintenance expenses, with the biggest ones being car-related costs (oil changes, inspections, new brakes or tires, etc.) and home costs (leaky faucets, spring-time yard work, etc.).
Some home repairs go beyond the scope of "routine" and require a significant amount of money in reserve. These can include replacing your roof, installing new windows or doing a major home renovation. You can anticipate the need for most of these repairs before you have to make them, so be sure to start budgeting for them in advance.
You also need to repair and maintain your body, so factor in medical costs like annual physicals, eye exams and dental checkups, as well as co-pays and prescriptions costs if you have any ongoing conditions.
If you plan to purchase any large items in the foreseeable future, from appliances to a new car, make sure you're putting aside enough each month to pay for them in cash. It's always best to pay for big-ticket items upfront rather than finance them (unless you can get a fantastic discount by financing and can pay the balance in full before any interest kicks in).
From birthdays to holidays, there are plenty of special occasions each year to budget for. Make sure to include:
  • Birthday gifts.
  • Holiday gifts.
  • Anniversary gifts.
  • Party hosting costs.
  • Dinner costs if you take someone out to celebrate.
  • Wedding expenses (gifts, travel, hotel stays, etc.).
Your four-legged family members also need to be part of your budget. Pet care costs to consider include:
  • Food and treats.
  • Toys.
  • Vet bills and medications.
  • Grooming.
  • Boarding or pet sitting.
Do you take an annual vacation? Travel twice a year to visit family for the holidays? Set aside money each month for any travel-related costs such as airfare, hotels, meals, rental cars and souvenirs.
Whether you run a business or simply a household, there are certain expenses you may need to plan for in the business category. These can include:
  • Tax preparation fees and tax payments.
  • Conferences.
  • Trips.
  • Continuing education.
  • Dues for professional organizations.
Whether you give annually to a charity of your choice or like to have some money set aside for your friends' and family's fundraisers, make sure to allocate enough each month to cover these donations
A good budget allows for a little "free" spending money you can do with as you please. It can be $20 a month for fancy coffee at your favorite coffee shop or $100 a month to feed your favorite hobby. The amount doesn't matter so much as the fact that you're allowing yourself a little guilt-free fun to keep your budget from feeling too restrictive.
Depending on your lifestyle, your eating out and entertainment budget could be a little or a lot. Whether you prefer to have dinner out once a weekend or see a movie every few weeks, figure out how much you'd ideally like to have and then examine any budget categories you can tweak to make room for it. If you realize you need to cut back on your habits a little to save money, that's fine too-at least you're aware of it now so you can act accordingly.
Even if you're not a clothes horse, chances are there are certain items you'll need to purchase throughout the year. These can include:
  • Updated work clothes.
  • A new coat, hat and other accessories come winter.
  • A new bathing suit for the summer.
  • New shoes as yours wear out.
  • Back-to-school clothes for your kids.
Calculate your annual spending on all clothing and accessories and divide that amount by 12 to determine how much you should be putting aside each month.
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