Saving for your children’s education is extremely important. The sooner you plan and save, the more money your child will have for their college education and less money out of your pocket while they attend school. Tuition and fees have steadily increased and are continuing to do so. Learning about and investing in a 529 Savings Plan can help you save money, be more prepared or future expenses, and less stressed about finances while your child attends college.
What is a 529 Savings Plan
A 529 Savings Plan is a state-sponsored tax-advantaged savings plan. All 50 states have some type of savings plan; some private colleges and universities sponsor a prepaid tuition plan as well. Setting up a savings plan and inviting family members to contribute is a true gift that will be appreciated for years.
BONUS TIP: Savingforcollege.com publishes an annual 529 Fee Study compares direct-sold 529 savings plans. Check it out here.
There are two types of 529 plans to help families save and be more ready for the expenses of college: a prepaid tuition plan and a college savings plan. The differences between the two types of plans are outlined in the chart below.
What’s Covered?
All qualified education expenses are covered by the 529 Savings Plan.
- Tuition
- Fees
- Books and supplies
- Equipment required by school
- Room and board
- Computers & peripherals (i.e. software, printers, etc.)
BONUS TIP: Room and board are covered on and off campus. Groceries are also covered in lieu of a meal plan; just be sure to keep your grocery receipts separate (and ensure you’re truly purchasing items that qualify as groceries).
Investment Options
Putting money away for college via a 529 Savings Plan can be done so in a very risky or conservative method. The earlier you start saving, the more risks you can take. Investing in exchange-traded portfolios are riskier and used when you begin saving for younger children with hopes of getting higher returns.
Bond funds and fixed-income funds are generally better for saving for older children as they are more conservative in the savings approach. Some states allow certificate of deposits to be tied to the index measures of the cost of college tuition.
MYTH BUSTER: Although the stock market fluctuates, the stock market has averaged 7% increase over a long-term investment. And, compounding will be effective if given enough time.
Fees, Charges & Expenses
- Management & administration
- Expenses of underlying investments
- Sales charges
- Maintenance fees
- Enrollment fee
- Penalties for withdrawing and not using for college-related expenses
Contributions & Gifts
- Maximum of $250,000 invested
- Minimum of $250 initial investment & $50 subsequent contributions
- $70,000 year in non-taxed gifts are allowed from family and friends (Usually anything over $14,000 is taxed)
- Not subject to federal tax if used properly
- If NOT used for education expenses, an income tax plus 10% is charged
BONUS TIP: You can also compare two savings plans using FINRA’s 529 Expense Analyzer to make the best, well-informed decision.
Learning about investment options, no matter how early or late in your child’s education, can help you prepare for the financial burden college costs can cause for a family. Researching, making notes and tracking the best options for you should be kept in a safe location so you can access it and update it each year. Section 12 of the ScholarPrep Organizer is a perfect spot. Saving a digital copy in your college prep folder in Google Drive or another storage location is also ideal so you can access it from anywhere with Internet capabilities.
Have you started a 529 for your children? Which plan worked best for you? Let us know your thoughts, questions, and how you are saving to give your child the gift that will last a lifetime!
