For many of us just starting a family, the cost of a college education can be daunting. The expenses are already enormous and are only expected to rise in the coming years. Take a look at the chart below to see the anticipated cost of going to a 4-year college.
|Years until college||Public (in-state)||Public (out-of-state)||Private|
Before you start freaking out and screaming at your kids to start reading all the books they can to get scholarships, let’s take a step back. Most of us have a huge time horizon till our kids reach college and that means that we need to start making a plan to invest! The power of compounding and periodic investments will allow us to achieve our savings goals and not worry about if we will be able to put our kid through college. In today’s article, I’m going to be explaining on of the greatest avenues for educational savings which is a 529 plan.
529 Plan Overview
A 529 plan is an investment account, sponsored by a state or state agency, specifically for higher education savings. You can open and contribute to almost any 529 plan, no matter which state you live in. In my opinion, the 529 plan is the greatest way you can save for your child’s education. Let’s go over some of the benefits now.
- 529 plans are contributed to with after-tax dollars but they grow tax-deferred
- All contributions and gains in the account can be pulled out tax-free if they are used for higher education expenses (books, room/board, courses, all things college) This is significant because if you had a normal account any gains you would make on your investments would be taxed as capital gains!
- If funds are pulled out and not used for higher education expenses, there will be a penalty of roughly 10% on the funds withdrawn
- Anyone can open an account and designate a beneficiary
- Anyone can contribute to the account (friends, family, grandparents who need to reduce their estate taxes)
- You can contribute a lump sum of 70k (filled single) or 140k (filled jointly) without incurring a gift tax.
- Whomever opens the account has full control over the investments
- Investment options vary from firm to firm but you pick the investments within the account
- If your named beneficiary does not go to college you can change the beneficiary at any time
- Investment options are more conservative investments such as index funds so you do not have to constantly worry about their value and therefore you take a hand-off approach to investing
- The funds will become more conservative as your child reaches the age of going to college to preserve capital
- You can set up an automatic investment plan to automatically contribute a certain dollar amount at regular intervals (saving at its finest!)
College expenses can be daunting but you won’t lose any sleep at night if you:
- Start Planning Now
- Make regular contributions to save
- Establish a 529 account to let the power of investing go to work!
Homework: If you have a child or were looking to start a family soon, start to look at opening a 529 account. These accounts are offered by all major brokerage companies and they can be opened in a matter of minutes. All you need is a social security number to name a beneficiary on the account.