The perfect time to set up a college fund for your kids is right now, and a 529 plan is the way to go.
A 529 college savings plan is an investment plan set up by a state or educational institution that allows you to save money for your child’s college education. These plans are easy to create, manage, and they allow you great flexibility in the amount you can save, what you can pay for, and where your child can go to college.
Before you establish a plan, there are some important things to consider.
1. How Much Can You Contribute?
The earlier in your child’s life you begin saving, the better it is for your family. Over 18 years, you’ll be able to save more money and accrue more interest, giving your family greater financial flexibility to pay for post-secondary education.
2. A Pre-Paid Tuition Plan vs. College Savings Plan
A pre-paid tuition plan typically requires you to reside in the state where the plan is set up. This plan enables you to lock in the cost of a college education and pay for it ahead of time for your child. You can also pay for other things, such as room and board.
A college savings plan is akin to a 401K or an IRA, where you invest money into a mutual fund and watch it grow over time. This type of plan can typically be used at any college or university, giving you and your tremendous flexibility.
3. Finding the Best Program for You
Is your child likely going to want to stay close to home for college? If so, a pre-paid tuition plan is probably best for you. If not, or if you don’t want to lock them into a school in your state, then a college savings plan will likely be a better option. Because these decisions are made years before your child will even think about college, you should know that most pre-paid tuition plans allow you to remove the money and use it for other educational expenses. However, that money will not have achieved the same type of interest over time as a college savings plan.
4. Look for Low Fees
Not all college savings plans are created equal. Make sure you invest in one that doesn’t sock you with high fees, siphoning off precious money for your child’s education.
5. Get Others to Chip In
A 529 plan offers flexibility on the amount of people who contribute to the plan, giving family members or others a chance to chip in.
6. There May Be a Tax Break
If you invest in a 529 plan offered by your state, there might be a tax incentive for you.
7. Your Money Will Be Protected
As your child nears college, the money invested in a college savings plan becomes more conservative, reducing the chances of losing money to the whims of the stock market. That’s obviously a benefit, as you’ll want to preserve as much capital as you can to pay for school.