4 Things to Know About 529 College Savings Plans

A 529 college savings plan can be a good way to help pay for a child's college costs. This is because a 529 is an investment account that grows tax-free (as long as the money is used for education expenses), helping your money work harder for you. Of course, since it is an investment, there is the risk of loss. Here are four other things you should know about 529 plans before you invest:

1. Some plans are inflexible: It can be difficult to change your 529 plan; you can only make changes once a year. Additionally, you might be limited as to how you can spend the money and what investments are available.

2. Watch out for fees: Like any other investment, there are fees associated with 529 plans. Many offer managed funds, whose administration fees can reduce your overall returns. If you add stocks, you are subject to transaction fees. You can reduce this problem by investing in low-cost index funds and ETFs, but some plans don't offer these options.

3. 529 plans vary according to state: Not every 529 plan is the same. States administer them and can put restrictions. Some states require that the beneficiary go to school at an approved state institution, while others will allow the beneficiary to go anywhere in the country. Make sure you know the specifics of your state's plan.

4. There is no federal tax deduction for 529 contributions: Contributions to some investment savings accounts, like 401ks and Health Savings Accounts, are tax-deductible on your federal return. Contributions to 529 plans, though, are not tax-deductible on your federal return. Some states, though, offer deductions on state income taxes.

529 college savings plans aren't for everyone. However, most people can benefit if they consider their needs and do some research to make sure they are getting a plan that works well for them.