by Saving for college can seem like a daunting task. We have found there are often two groups when discussing saving for college. There are those who have started practically from the day the child was born and there are those that say something like “I really need to get started on that”.
Whether you started at day zero or your child is now in school a 529 college savings plan can help. By the way if your child is already in college well this might be one of the few times that a 529 might be less valuable.
Before we get into too many details let’s get the definition of what a 529 savings plan is from our friends at the SEC.
What is a 529 Savings Plan
According to the SEC a 529 plan1 is a tax-advantaged savings plan for future education costs.
So what is it then? By saving for education now, that will cost more down the road (think college), the government rewards you. They reward you by allowing your money to grow without having to pay the taxes along the way on the gain of the assets in the plan. Provided you use the account proceeds for qualified education you won’t owe any taxes on the gains at all. This makes the account advantageous to growing and not affecting your finances from a gain perspective.
In Plain English Why Do I want a 529 Savings Plan
Your money will grow without taxes and you won’t owe any taxes on the gains provided you use the money for a qualified educational expense. When you make regular contributions say $25, $50, or $200 or more a month you effectively help chip away at a large college bill in smaller increments.
This Sounds Like Work…How Long Does it Take to Set-up a 529 Plan
A 529 is surprisingly easy to set-up. If you are focused it takes maybe 15 minutes to set-up. The challenge comes in deciding which plan to select. Each state generally has a plan and companies such as Vanguard, Fidelity, and TD Ameritrade also offer plans.
We recommend taking time to research 529 plans and then blocking off time to set-up the 529. To ensure that you get this task done we recommend setting a deadline for setting up the account to avoid procrastination.
There are many dedicated websites to 529 plans and one that we have found great information on is Saving for College.
Questions to Ask and Have Answers For Before You Open a 529 Account
Answers to a few questions will help you decide on which plan is the right place to start. Please keep in mind we are recommending that you get started and the questions below are by no means an exhaustive list of the questions that you can ask before putting funds away in a 529.
- Do I want a plan that has no minimum balance to start? – Certain plans allow you to start with no minimum while others may require $3,000. Check out 529 plans with no minimums to get an idea of what is available.
- How much should I put into the 529 plan to start? The answer to this question will also provide guidance as to whether you select an account with no minimum or one that has a higher minimum account. As to the actual dollar amount you are investing in the 529 plan we encourage you to weigh this against the rest of your financial picture. For example if you have a tax return coming up, have an emergency plan in place, maybe you can put in more dollars compared to if you just had an expensive car repair bill come due. Whatever dollar amount you select we encourage you to get started.
- Do I want a plan for my specific state? Some state plans offer tuition incentives or specific state tax incentives for choosing the state plan.
- Do I already have an account at the financial institution? If you already have an investment account with say TD Ameritrade opening a 529 with that firm can be easier compared to starting from scratch.
- How many years away from college is my child or the child I am choosing to help? An answer to this question will help you select a fund that is either more aggressive, you have 10+ years to the college years, or more conservative, you have 3 years or less to the college years.
Other Than Minimums What’s One Big Item To Watch For When Saving For College
We would tell you to watch the fees. Fees will eat away at your return. 1% may not sound like much however it makes a difference.
Additional College Savings Resources
A few websites that we like when looking for more information about saving for college are listed below.
- Tons of information on college savings: https://www.savingforcollege.com/
- Sweet College savings planner/calculator: https://vanguard.wealthmsi.com/csp.php
- Also has a large list of state plans: https://www.nerdwallet.com/blog/investing/529-plans-list/
1https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html
