Education opens doors. One of the best ways to save for your child’s education is simple: start a 529 plan. However, choosing the right plan, knowing how much to put away, and selecting the best investment options is complicated. This guide to 529 plans is here to simplify the process of understanding the benefits of opening a 529 plan, and hopefully will answer any questions you have along the way.

A 529 plan can be used for public and private colleges, vocational, trade, technical, and professional institutions, as well as some international schools, are also eligible. For a full list, you can use this list of eligible schools from the Department of Education.

All 50 states offer their own version of a 529 plan. For the most part, the best plan to start with is the plan offered in your state. If your state does not have a state income tax, or your state’s 529 does not offer a tax incentive, then looking out of state starts to make more sense. (SavingforCollege.com is a great resource to use and compare plans.)

For example, Illinois state taxpayers who open an account can enjoy Illinois tax benefits by investing in a Bright Start 529 account. Contributions to Bright Start can be deducted from Illinois state income, up to $10,000 per taxpayer or $20,000 for married taxpayers filing a joint return.

These are aggregated limits. For example, if you are married and have three children, and put $10,000 into each account, you are limited to a maximum $20,000 deduction.

Contributions to a 529 are considered gifts, and, as a result, should stay under $15,000 per individual ($30,000 if married) per year, per beneficiary. If you’d like to give more, there are a couple ways around these limits.

The first way is pre-loading an account by contributing up to five years of gifts at once. This would allow a married couple to fund up to $150,000 in the first year. However, they would not be able to make contributions for the next 4 years and only receive one $20,000 state tax deduction. By spreading those contributions out, you’d be able to take the tax deduction each year.

You can also contribute more than the federal gifting limits if you are willing to report your contribution on your taxes and dip into your lifetime exclusion (also called the Lifetime Gift Tax Exemption). I recommended talking to your advisor or accountant to discuss in more detail.

Family members and friends can also contribute to your 529 accounts. They would receive the tax credit for their gifts. For example, if another family member lives in Illinois, then they could give $15,000 and receive their own deduction without impacting your ability to contribute and receive your own deduction.

Once the account’s open and funded, it’s time to focus on your asset allocation. Most plans offer three options: Target Date funds, Blended funds and Individual funds.

Target Date funds in 529s are like those found in 401(k)s. You choose the fund based on the age of your child, and the allocation becomes less aggressive as they get closer to college. Their simplicity is attractive, and they are a great option for those who’d prefer not to worry about changing the allocation over time.

Blended funds and Individual funds are mutual funds with a specific objective that does not change over time. For example, a 60/40 fund will start off as 60% stocks and 40% bonds and will keep that allocation regardless of how old your child is or how long you hold the fund. Individual funds like an S&P 500 fund track a specific index or objective.

You can use Blended funds and Individual funds to customize your portfolio. This is a great feature for those looking to have more control over the investments. But, as Uncle Ben says, with great power comes great responsibility. You will need to pay more attention to the account, and it will be your job to reduce risk in the portfolio as your child gets older.

When your child is young, a 100% stock or 80/20 mix may be appropriate because of the long 15+ year timeframe before they start school. However, I would caution against getting too aggressive with the portfolio. This isn’t an account to hit home runs in, it’s an account to consistently contribute to and to grow diligently over time.

Talk to your advisor and ask them for their recommendations. Even though they may not have direct access to your account. They should be familiar with your investment options and able to make recommendations that fit your objectives. If they are unwilling to help, consider a new advisor.

When it comes time for your child to go to college, you can only spend the money on qualified higher education expenses. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance; as well as certain room and board expenses.

If your child does not go to college or use all of the funds inside their 529, you have several options: leave the funds in the account in the event your child (or another member of the family) goes back to school. Change the beneficiary to another member of the family for their college expenses. Withdrawal the funds as a non-qualified distribution. The earnings portion is subject to federal and state income tax as well as a 10% penalty. While that sounds harsh, note that only the earnings - not your contributions - are taxed and penalized.

The final decision is how much you need to put into your child’s account. Determining the correct amount is tricky, especially when your child is young, and you don’t know what type of school they will go to or if college is the best option for them. Again, I recommend talking to your advisor who can help create reasonable estimates and work within your budget to start a savings plan.

Graduating from college is a monumental achievement for your child – and for you as a parent! A 529 plan is a great way to start preparing for that moment. If you are interested in learning more about setting up, funding, or managing a 529 account, please reach out to set up a call.