One of the biggest financial challenges you may face as a parent is saving for college. The burden will not be too overwhelming if you start saving now. Plant the seed, water it and watch it grow.
There is a savings vehicle where you can put money aside, avoid taxes on the interest and dividends earned AND receive a state tax deduction (in most states). This savings vehicle is called the 529 Plan.
The 529 plan is a great way to save for college.
What is the 529 Plan?
- It is a savings plan operated by a state or educational institution. It allows owners (you) of the account a tax-advantaged investment vehicle to save for college.
- The money invested in this account can be used for qualified educational expenses, which are:
- Tuition and fees
- Course related books, supplies, and equipment
- Computer software and laptops
Types of 529 Plan:
Savings Plan – Allows you to save for college by investing your contributions into mutual funds or similar investments. This plan can be used for in-state or out-of-state institutions (this is key for flexibility of use).
One option is to invest in “Enrollment-Based” savings plan (may also be called Age-Based savings plan). This type of plan becomes conservative (less risky) over time as the child approaches college age/ or by the year they enroll into college.
- For example, Baby John is 5 years old. He is expected to attend college at age 18 (in year 2025). If the Enrollment-Based option was selected, one could invest in the 2025 plan. This plan will automatically become conservative (less risky/less stocks) as baby John gets older. (I hope I didn’t lose you - if I did just post your questions). J
Prepaid Plan – Allows you to “pre-pay” for college for in-state institutions. The plan may be converted for use for an out-of-state institution.
One benefit of the 529 plan is the flexibility. As the account owner, you can choose the recipient of the account (the beneficiary) and change to a different person if necessary. For example, you saved to baby John’s 529 plan for 13 years - his college education is now fully funded through this 529 savings account; he does not have to pay a dime. (Thanks Mom & Dad). However, John has excelled in school, aced his SATs and now has an all expense paid full academic scholarship to Virginia Tech. What are you going to do with the money saved? No worries, the beneficiary of this account can be change to his sibling, cousin, or even you if you want to go back to school.
If you do not want to change the beneficiary to another person/do not want to use the money for an qualified education expense, then the money can be withdrawn. However, Uncle Sam will receive his cut as no qualified expenses were paid.
Back to the positives - anyone can contribute to this account! Now the birthday money received from friends and family that is usually blown on candy and soon forgotten toys can be saved into the college savings account.
This is a glimpse of information - I highly encourage you to learn more about 529 plans and start saving. Check out some useful links below…
Just in case you think you can still wait to save for college, check out some of the facts below:
Cost of College Today:
- The average annual cost for tuition, fees, and room and board at a four-year institution is $17,000. ($68,000 for four years)
- From 2011, the average total charges increased by 6%
- The average annual cost for tuition, fees, and room and board at a four-year institution is $30,000. ($120,000 for four years)
- From 2011, the average total charges increased by 5.2%
- The average annual cost for tuition, fees, and room and board at a four-year institution is $40,000. ($160,000 for four year) Yikes!
- From 2011, the average total charges increased by 4.2%
One thing is for certain, when it is time for baby John to attend college, the cost will be higher. Start saving today, it will be one of the best decisions made.
I couldn't help myself.. this is too cute. J
Misconceptions about 529 Plans:
In-depth Information about 529 Plans: