Money: How to save for college with a 529 plan

8:32 a.m. EDT April 4, 2015  Saving for college is tough for every family, but 529 plans can help people save more with added tax benefits.

"For parents or grandparents looking for a way to put aside money for a child's college education, the tax advantages of 529 plans can be a great way to leverage their savings," says Eleanor Blayney, consumer advocate for the Certified Financial Planner Board.

You can contribute to a 529 plan through your employer with automatic payroll deductions. It's rare, but some employers may even match your contributions.

"It's a very easy way to make sure you're contributing on a regular basis to your 529 plan," says Joseph Hurley, the founder of Savingforcollege.com.

Here are some tips for saving with a 529 plan:

Q: What is a 529 plan?
A: A 529 plan is a college savings plan run by a state or educational institution. The money you put in a 529 won't be taxed when it's used to pay for approved educational expenses, such as tuition, room and board. It's "a way for parents and grandparents to save for their children's colleges in a tax-advantaged way," Blayney says.

Q: What benefits do I get with a 529 plan?
A: The money you save in a 529 plan won't be taxed as long as it's used to pay for college expenses. You'll be left with more money for college than you would have in a taxable account, and you'll have extra motivation to make sure that money is used for college, since taking it out for any other reason will subject it to taxes, Blayney says.

Q: How do I choose a plan?
A: Start with the state you live in, and see what options they have, advises Hurley. Going with your home state's plan can come with extra tax benefits. "Once you understand if there are advantages for your own state, feel free to shop around and look for a 529 plan you feel offers the best investment options at the lowest cost," Hurley says.

Q: When should I open a 529 plan?
A: The earlier you open a 529, the more time you have to save. You can ask for contributions to your child's 529 for her birthday or even for her baby shower. You can open a plan with as little as $25, Hurley says.

Q: How does a 529 plan affect my child's chances of getting financial aid?
A: A 529 plan is one of the best ways to save for college while minimally affecting your chances of financial aid, Hurley says. A 529 doesn't create income that has to be reported on financial aid forms, while a taxable account does.

Q: Can I contribute to my 529 plan through my employer?
A: Some employers do offer payroll deductions for 529 plans, like they do for a 401(k). What's more rare is for an employer to match those contributions, Hurley says.

Q: How would recent legislation proposed to update 529 plans affect my plan?
A: H.R. 529, passed recently by the House, would allow families to use 529s to pay for more educational expenses with their 529 savings, most importantly, computers, according to Betty Lochner, chair of the College Savings Plans Network, which advocates for legislation that would positively affect 529 plans. When 529s were introduced as a savings option over 20 years ago, computers weren't necessary for college students. Now that they are, the bill aims to update the savings plan.

The bill would also allow for money used for tuition not to be taxed if a student has to leave partway through a semester because of illness or other serious personal reasons. Currently, that money would be taxed once it's no longer used for a full semester's tuition.

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