The rising cost of college has people searching for new ways to save money. Though picking individual stocks isn't permissible in any 529 plan, you may be able to achieve similar results, depending on your particular 529 plan. 529 plans come in two flavors: prepaid tuition plans and college savings plans.
Prepaid Tuition Plans
With a prepaid tuition plan, you lock in a specified rate for college costs, so there's no investing to do on your part. These plans may require a lump-sum payment, a series of installment payments or a combination of the two. Generally, the plans only cover the cost of tuition and required fees, but some plans may offer an option to purchase extra course credits and even room and board.
College Savings Plans
College savings plans work differently in that you aren't locking in a specific rate at a specific school or group of schools. Instead, you're putting money into a tax-advantaged account that you can invest to pay for educational costs that you incur in the future. Your contributions aren't deductible on your federal return, but some states offer a tax deduction for contributions. However, the money does grow tax-free and, as long as the money is used for qualified educational expenses, it all comes out tax-free. You can generally change beneficiaries over time as well, so you can even open a 529 plan for future children before they are born or even conceived.
Your 529 savings plan investment options depend on the particular plan that you invest in, but no plans permit you to pick individual stocks. However, you can select stock-based funds, which can yield similar results, depending on how closely aligned your investing philosophy is with the fund that you select. With a 529 plan, you're limited to changing your investment selection just one time per year, so you can't buy and sell various funds throughout the year the way you can in a traditional brokerage account or some retirement accounts.
Though stock-heavy funds historically have outperformed other investment options, they also have the potential to lose money. Before you put money in a stock-heavy fund, make sure you can withstand a rough stretch. For example, if you're starting a 529 plan for your newborn baby, you have time to recover from bad years before college tuition bills start arriving in the mail. As you get closer to having to foot the bill for college, you can shift to more conservative funds.
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