It is never too early to start saving for your son or daughter’s future college education. Whether your child is five years old, five months or is still a couple months away from entering the world you should get your savings plan into gear. After all time passes much faster than you may realize. Having a financial head start can make you feel less burdened as a parent once the big day arrives.
The price of college tuition and all related fees has outpaced inflation and this is expected to remain the same in the years to come. To look at a concrete example of what college tuition costs, to attend a public college for four years costs approximately $7,000 annually. That means that a four year program can cost a whopping $28,000. Attending a university or a private school is even more costly than that. This is the average financial costs for the present time. If your child (or children) is only young now who knows how much a four year college degree may cost by the time he or she is ready to graduate from high school.
Besides saving for retirement for many parents saving for their child’s future educational needs is front and center in their minds. Even if it is not financially feasible to start putting money away when your child is a youngster you should start saving as soon as you are able to. Find a way and make it happen.
Save with a 529 Savings Plan
One option available to you to help you save for your child’s college education is to invest in 529 college savings plans. A 529 college plan is a plan that has tax advantages and makes it possible for families to save money for the future educational expenses of their kids. In most cases these plans are sponsored by the state. All 50 states have their own set of requirements for the plan and they all come with their own unique list of benefits (of which tax breaks are included).
Every state has one form or another of the 529 college savings plan. What is really good about this plan is that you do not have to be a resident of a particular state to invest in the plan. For example, you could live in Massachusetts and choose to invest in the New York plan. Your child may then decide to attend college in California. That is perfectly fine and permitted.
The 529 plans can be broken down into savings plans and prepaid tuition plans. Let us look at these now.
Defining the 529 Savings Plan
If you have a 401K or an IRA then understanding the 529 savings plan will be easier because they are very similar. The contributions you make to the plan will be invested into a variety of products, such as mutual funds or the like. Due to the fact that the plan is sponsored by the state it originates in, the state will work closely with an asset management company to take cater of the investment and make sure it is in line with the features of the plan.
Whoever sets up the 529 savings plan (be it yourself, your spouse or the two of you together) will communicate directly with the asset management firm, as opposed to the state that you opened the plan with. Your child (and future college student) is the beneficiary of the account.
Defining the 529 Prepaid Tuition Plan
The second type of 529 saving plan is known as the 529 prepaid tuition plan. Also sometimes referred to as a guaranteed savings plan, this plan is handled by the state it is opened in as well as the institutions of higher learning. What these plans do is that parents can save for future educational needs by prepaying tuition costs that have been locked into the rate that tuition costs today.
What this program then does is it pays for the future costs connected to a college education at any of the institutions in that particular state. This does not limit the student in where they can go to school however. If they decide to attend a school out of the state or go to a university instead of a college then the same amount of money will be made available to them.
You can choose to purchase this plan in units or in years. The choice is yours. You also have the option of choosing between a one-time lump sum or selecting monthly payments made in installments. This prepaid tuition plan works by pooling all of the contributions being made to it and from there finding suitable investments that can grow the plan over time.
If you are considering investing in either one of these plans then you should find out the details and specifics from the state you are thinking about investing in. For example, the minimum initial contribution and the tax benefits vary widely from state to state and even from plan to plan in every individual state. The same can be said for the minimum monthly and yearly contributions. All of the withdrawals that are made from 529 plans that qualify for school expenses are not charged federal income tax. Many are also not charged state income tax. This is something you should find out about before you make a final decision to put your money into one. There are also instances where there may be incentives from the state to take into consideration. Examples of these include matching grants, scholarship opportunities and deductions made for contributions.
Other Important Information Worth Knowing
It cannot be emphasized enough that a student is not required to attend a college in the state the 529 plan was set up in. The money from these college savings plans can be used at any higher education institution as long as the school is eligible to be a part of the U.S. Department of Education student aid program. The vast majority of schools are but you should check into this before you commit your money to a plan.
The funds saved in a 529 plan can be used for any expense that is education related. This includes tuition, school fees, equipment and supplies. The student’s attendance must meet certain requirements in order for room and board to qualify as an expense that can be paid for with this plan. Be aware however that there are more strict requirements when it comes to the prepaid tuition plan. Under this plan only tuition and mandatory school fees are covered.
It happens sometimes that for one reason or another the beneficiary of the plan (a.k.a. your child) does not attend college. If this happens then the parents who opened the account can change the name of the beneficiary to another member of the family. For instance, if you have only one child and they decide not to go to school you could then change the name to a niece or nephew who does wish to attend college. If there is no one to attend college then the money can be taken out of the 529 plan as a non-qualified distribution. The earnings will then be taxed by both the federal government as well as the state government. A 10 percent federal tax penalty will be charged on the earnings from the plan.