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Saving For College: A Beginner’s Guide to Using a 529 Plan

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From Everything Finance

Saving For College: A Beginner’s Guide to Using a 529 Plan is a post originally published on: Everything Finance – Everything Finance – Its all about Money!

College is expensive and that’s not changing anytime soon. The cost of a college education has been steadily rising in the past 10 years. That’s why saving for college right now is more important than ever.

According to U.S. News & World Report, attending a four-year public college or university can easily exceed $100,000 in tuition and fee charges for out-of-state attendees. The price tag for four-year attendance beginning in the 2021-2022 school year at a private university reached $240,000, and that’s for tuition and fees only.

So what’s can the average parent do? You should begin saving for your child’s tuition sooner rather than later. Many parents consider starting a 529 plan. A 529 plan allows you to save money for your child’s college education that grows tax-free. While plans differ from state to state, the opportunity to let your money compound tax-free is certainly attractive.

What Is a Section 529 Savings Plan?

Section 529 plans are considered one of the best options for saving for a child’s college education. They are called “Section 529” plans after the specific IRS code that permits their use.

There are two types of Section 529 plans: savings accounts, and prepaid tuition plans. This article specifically reviews Section 529 savings accounts.

The Section 529 savings account allows for after-tax contributions to be made on behalf of a designated beneficiary (not just a child). These contributions are allowed to grow tax-deferred and can potentially be withdrawn tax-free for qualified educational expenses.

Investing for your child’s education is one of the most important things you can do as a parent. A 529 plan is an easy way to accomplish that, while also enjoying some tax advantages. Originally intended for post-secondary education, 529 plans can now be used for K-12 education costs.

Here is How to Get Started 1. Take a Look at Your State Plan

All 50 states and the District of Columbia offer one or more 529 plans. What’s good is that you do not have to invest in your own state’s plans. However, if your state offers a tax deduction or credit, it makes sense to invest in your state.

It is important to note that seven states currently offer tax breaks regardless of which state’s plan you invest in. Those states are Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania.

The goal of the plan is to maximize the total amount of money in the 529 plan account when the beneficiary is ready to enroll in college. Thus, families should consider the 529 plan’s return on investment and costs, in addition to tax benefits, when choosing a 529 plan. Minimizing costs is the key to maximizing net returns.

2. Shop Around For the Best Plan

Fees vary substantially between direct plans, which are sold directly to account owners, and advisor-sold plans, which are sold by brokers and other financial advisors. New York’s 529 College Savings Program Direct Plan, for example, currently has annual fees of 0.15%, while New York’s 529 Advisor-Guided College Savings Program has fees of 0.65% to 2.15%.5

So if you’re comfortable making your own investment decisions, you’ll save substantially by investing through a direct plan.

RELATED: Which is Better for College Savings: 529 or UTMA

3. Determine What Plan is Best For You

There are two basic types of 529 plans: savings plans and prepaid tuition plans. Fewer than ten states currently offer prepaid tuition plans, but if your state is one of them, it will give you the opportunity to lock in future tuition costs at current prices. Bear in mind that prepaid plans can limit your choice of schools, typically to that state’s community colleges, colleges, and universities. With a 529 savings plan, you can use the money at any eligible institution in any state—and for a wider range of expenses, including room and board.

Prepaid plans also differ widely in what kinds of guarantees they offer, so be sure to read the fine print. Prepaid plans cannot be used for K-12 education.

RELATED: 5 Painless Ways to Save For Your Child’s College Expenses

4. Select Your Investments

Once you’ve picked a plan, your next step is deciding how you want your contributions invested.

Most plans offer a selection of mutual funds, such as stock and bond funds, ranging from conservative to aggressive. Some also offer other options, such as guaranteed investment contracts (GICs) from insurance companies and certificates of deposit (CDs) from banks. You don’t have to put all of your money in one type of investment; you can diversify among several.

As a general rule, the more years until the account beneficiary will need the money for education, the more aggressively you might want to invest. The reason is that you’ll likely receive a higher return over time and also have more time to recover if the financial markets take a tumble.

Many 529 plans now include age-based or target-date funds that adjust their asset allocation over the years, becoming more conservative as withdrawal time nears. If you aren’t comfortable choosing investments—or don’t want the hassle of reallocating your 529 portfolios periodically—these funds can be a smart choice. Just make sure their fees are not too high.

Automatic investment programs make funding your 529 accounts easy, and you’ll also benefit from dollar-cost averaging.

The most important thing with any savings plan is to start as early as possible.
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5. Start Investing Early

The sooner you can get started saving for college, the better. Many plans also offer automatic investment programs that will withdraw whatever amount of money you choose from your bank account on a monthly, quarterly, or semiannual basis and invest it in the plan. One advantage of investing periodically throughout the year, rather than in a lump sum, is you’ll benefit from dollar-cost averaging. Some plans and employers also allow you to have money automatically withdrawn from your paycheck to go into a 529 plan.

Bottom Line

The most important thing with any savings plan is to start as early as possible. Don’t wait! Do the research. That’s the same for saving for college as well. Most people begin looking into tax-advantaged 529 plans shortly after the birth of their first baby. The research may seem daunting because of the maze of 529 options, rules, and regulations. The internet has all of the information you need but if you’re stuck talk to a financial planner.

Saving For College: A Beginner’s Guide to Using a 529 Plan is a post originally published on: Everything Finance – Everything Finance – Its all about Money!

This post was published on Everything Finance


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