How to Invest in a 529 Plan – Poised Finance & Lifestyle (2024)

Saving for our kid’s education in a 529 college savings plan is a luxury that I am excited to do. Is it mandatory to save money for your kid’s education? No, absolutely not. But, it’s nice to be able to help our kids avoid going into student loan debt if we can. The whole point of saving early is to position ourselves to push the next generation forward. That may be having resources like extra tutoring and the option of which school they want to go to. But before we jump into 529 plans, let’s talk a bit about how to position yourselves to do this. We have to make sure we’re able to invest in your children with confidence before making any promises.

Invest in Yourself to Invest in Others

I know a lot of parents who want to prioritize their kid’s education and start dropping dinero towards savings. The only issue with this is if you’re not prioritizing your finances first, leading you to not be in a good position to help your kids in the future. That’s the whole point of investing in yourself is so you can invest in others the way you wish you could have been invested in.

In order to do this, you need to see how much you can comfortably set aside for your kid’s education savings. After that, make sure you have an emergency fund of at least 3-6 months of savings and are consistently investing in your own retirement plan. The goal is to make sure you have your mask on before helping your kids, just like in an airplane. You don’t want to offer financial help that you can’t carry. Especially, when you yourself need financial help.

Alright, now that I shared some pre-requisites to investing in your kids. Let’s discuss what a 529 plan is and how to invest in a 529 college savings plan.

What’s a 529 College Savings Plan

To keep it simple, a 529 plan is an investment account that’s specifically for educational expenses. They call it a college savings plan but don’t let that fool you. The money you contribute to this account is being invested in a low fee investment mix. Now, the most interesting thing about 529 plans is that you can use it for more than just college expenses. Back in the day, 529 plans were designed to be for college tuition, room and board, and textbooks. Effective January 2018, 529 plans can now be used for private, public, or religious K-12 educational expenses. You can also use the funds for educational supplies like uniforms, computers, or even starting a business. This shows that 529 plans are changing to be used for all educational expenses, which benefits our kids.

529 Plan Key Insights

The investments grow tax-deferred.
Funds pulled for educational expenses avoid federal taxes and generally state taxes as well.
Every state has its own 529 plan, but you can choose any state’s plan.

Where can you open a 529 plan?

I personally found it to be easier to open my kid’s 529 plans within the same ecosystem as my investment. Having one company that holds all of my investments has helped me stay on top of all my investment accounts. I think it’s worth considering opening your kid’s 529 plans with your existing broker to keep things simple. If you don’t have one, then consider Fidelity, Charles Schwab, or Vanguard.

But, the most popular route to opening a 529 plan is direct with the state plans website. They have a lot of information on state tax benefits, investment options, and contact information for questions. I want to share a link to quickly find your state’s 529 plan website. The important thing to note here is that you don’t have to pick your state’s plan. You do have the option to pick another state’s 529 plan and switch states if needed with a quick call. The top reasons people don’t pick their state 529 plan are based on fees, tax breaks, or investment options. Not all 529 plans are created equal and it’s best to compare them.

How to Pick Investments

Once you opened your 529 plan and have connected your bank account, you want to pick your investments. The great thing about 529 plans is that they keep it really simple when picking investments. Each state illustrates the type of investments they offer and the fees that are charged. Now, when looking over the investment options, don’t be shocked if the investment isn’t named exactly the same. Here are the top two investment options you’ll see.

Age-Based Portfolio

An age-based portfolio fund is pretty much like a target-date fund for your 529 plan. The investments modify from aggressive to conservative as your child gets closer to needing the funds. So as your child transitions from elementary to high school the investments will switch out of stock index funds into bond index funds. They do this to maintain a safe mix of investments that are appropriate for the goal and your child’s age. This way your funds aren’t being highly affected by the market as your child enters college and the funds are needed. An age-based investment will be a great choice if you’re a more hands-off investor.

Index Funds

Another great investment option inside your 529 plan is an index fund. Most of the index funds offered tail the market and remain invested in moderately aggressive investments. This is similar to an S&P 500 index fund that follows the top 500 companies on the stock market to offer reliable growth that goes with the market. I personally think this is a good investment option if you want to stay fully invested in the market even if your child starts college. This way your funds can grow as you’re pulling money out for expenses.

Personal Opinion

I personally choose to put my kid’s 529 plan contributions in S&P 500 Growth Index Funds with extremely low fees. This choice was made because I would like my kid’s investments to grow consistently with the market. I like this choice a little better because I am a more hands-on investor and like the growth potential. If the market crashes during the time the funds are needed I would personally take that L. For those that want less risk and are able to highly fund their 529 accounts the age-based investments are great. I am glad I have the option to pick which investment style best suits my family and our college funding goals.

Closing Thoughts

I hope the information and resources provided in this blog help you understand 529 plans and how to invest in one. Don’t feel rushed if you have to wait a few years to invest in a 529 plan for your kids. I know I had to wait until we could comfortably put money towards both of our kid’s 529 plans. I felt bad at the time, but what made it a little better was that we retroactive our contributions. We created a game plan for how much we want to contribute and made it work. So, don’t feel bad or stressed about investing in your kid’s education before you’re in a position to do so. The best way to invest is once you’re able to invest consistently. This is the best piece of advice I share when it comes to investing in your kid’s 529 plans.