California may not sponsor as many 529 college savings plans as other states, but its direct-sold ScholarShare 529 Plan definitely stands out for its low fees and high maximum contribution limits. And even though you can’t contribute past the $475,000 limit, your money can still grow tax-free in the market. You can invest in a variety of investment options, including age-based portfolios, which take the investment guesswork out of the equation for you. These portfolios automatically change their asset allocation over time to become less risky as your child gets closer the the college years. You can even invest in a portfolio option that offers a guaranteed minimum rate of return. Unlike many other states, California does not offer an advisor-sold 529 plan. But if you’re looking to get some professional guidance from an expert, you can find a financial advisor to help you through the entire college saving process.
How Do I Enroll in California’s 529 Plan?
The simplest way to enroll in California’s 529 College Savings plan is online. The process should take only a few minutes. You’d need the following information for yourself and your beneficiary:
- Social Security or tax identification numbers
- Your bank account and routing numbers if making initial $25 contribution electronically
You will also need to make an investment selection at time of enrollment.
How Much Does the ScholarShare 529 Plan Cost?
Each portfolio in the ScholarShare 529 Plan, with the exception of the Principal Plus Interest Portfolio, charges a total annual asset-based fee. This charge includes a board administration fee and program management fee, as well as underlying mutual fund expenses.
This total fee is factored out of assets in your portfolio, so you pay a pro-rata share through your account rather than out of your pocket. The total annual asset-based fee for portfolios in the plan currently ranges from 0.05% to 0.42%, making the Golden State’s direct plan among the most palatable we’ve seen across the country when it comes to fees.
Tax Benefits of California’s 529 Plan
When you invest in the ScholarShare 529 plan, the money your contributions generates in the market is shielded from taxes. This means your money can maximize the power of compound interest. The money you take out of the plan is also tax-free if you use it for 529 plan qualified expenses such as tuition and mandatory fees at eligible institutions.
However, you may face a financial hit if you take money out of the plan for anything else. In this case, you’ve made a nonqualified withdrawal and it may be subject to federal income tax as well as a 10% penalty.
You should seek a qualified financial advisor or tax professional in your area to discuss how a nonqualified withdrawal may impact you based on your unique circumstances. Be sure to use SmartAsset's tax calculator for additional insight. You can also discuss with your advisor additional tax benefits that may appeal to you. For example, 529 college savings plans offer distinct estate-tax benefits. And they open the door to several ways you can give money to students while avoiding gift tax even if you’re contributing a large sum.
What Are My Investment Options?
ScholarShare 529 allows you to invest in a range of portfolios with underlying funds that leading financial institutions like TIAA-CREF and T. Rowe Price manage. Your portfolio options span age-based, multi-fund, single-fund and guaranteed portfolios.
Age-based portfolios may suit the investor who wants to take a hands-off approach and pass on investment decisions to professional managers. These portfolios automatically change their asset allocation over time. They switch gears from focusing on growth-oriented investments like stocks in the early years to less risky options like bonds as your child gets closer to college.
The plan’s multi-fund portfolios may better suit the investor who wants more control of his or her portfolio’s investment mix as well as the investment strategy that’s applied. Most of these also allow you to choose whether you want your portfolio to be passively managed or actively managed. Passively managed funds try to mimic the performance of one or more indexes, a compilation of stocks and bonds that reflect a certain portion of the market. Actively managed funds are a bit more complex in the sense that the manager uses research and his or her own insight to select underlying funds in an attempt to beat the market.
The plan’s single funds invest in a solitary underlying fund such as one that invests only in stocks of large U.S. companies. You can choose to invest in one or more of these options based on your risk tolerance. If you’re not sure what your investment mix should look like, you can use our asset allocation calculator tool to see how different combinations may break down for different risk levels.
But if you’ve been saving for a while and your beneficiary is getting close to the college years, you may find it suitable to invest in a guaranteed portfolio. These options aim to preserve your investment, provide stable growth and minimize risk. Under this option, you can currently invest in a funding agreement TIAA-CREF Life has issued to the Board as the policyholder on behalf of the 529 plan.
But keep in mind that investment options are subject to change. It’s important to review your investment options periodically. Also, give your college savings strategy a year-end check up.
How Do I Withdraw Money from the ScholarShare 529 Plan?
You can request a 529 plan withdrawal by visiting your account online or by calling 800-544-5248 on weekdays from 8 a.m. to 7 p.m. (PST). It's also possible to download a withdrawal request form and mail it in. The payment can be made to you, your beneficiary or the school you’re funding. However, you’re limited to a maximum withdrawal of $35,000 per day when requesting one online or through the phone.
You can elect to issue payments via check or electronically transfer them if you’ve kept banking information on file with the plan for at least 30 days. Your child can use these savings in conjunction with financial aid and scholarships. But remember that it’s always best to use 529 plan money on qualified higher education expenses at eligible institutions. The scope of where you can use your funds is rather vast. You can use 529 plan money at virtually any accredited school that accepts financial aid from the U.S. Department of Education. That includes vocational schools, technical schools and four-year universities as well as some foreign institutions.
Of course, you’re not limited to California’s direct 529 plan. Any U.S. citizen can open a 529 college savings account that another state sponsors if he or she finds others more appealing. Overall, ScholarShare shines for its low fees and robust investment menu. But if you’re hesitant to invest in the plan on your own, you can use our SmartAsset Advisor matching tool. It asks you a few simple questions in order to connect you to qualified financial advisors in your area who can meet your financial needs and preferences.