Help your child get a hard start in paying for college with a 529 plan.
Every month, money is automatically debited from my checking account and deposited into a 529 plan that I opened on behalf of my son. While it's not a huge amount of money, and the end result will probably not pay for his entire four-year degree, it's still something that will help him in the future.
A 529 plan can be a great way to put the power of compound interest to work for your child. While I believe that a child should take an active role in paying for college (getting scholarships, saving, working, etc.), I do think there is room for parents and others to help out. And one way to do that is to contribute to a 529 plan.
What is a 529 Plan?
Basically, a 529 plan is an investment account meant to help you save for college. (Jeff Rose at Good Financial Cents has a great post answering questions about college savings plans.) You put the money in the account, and if the investment does well, you end up with more money. It's a way to boost college savings since you are investing.
One of the great things about the 529 plan is that the money grows tax-free. So, as long as your child withdraws the money for qualified education expenses, he or she doesn't have to pay taxes on the earnings. It is possible to change the beneficiary of the account if something happens to prevent your child from attending college and you own the assets in the account.
Realize that there is no federal tax benefit for contributing to a 529 plan. Some states will offer you a tax deduction for contributions, though. So, if you contribute to your state's 529 plan, you might be able to receive a deduction on your state income taxes. Check with your state and your state's plan to see if this is the case.
Choosing a 529 Plan
Many states offer 529 plans, and you probably ought to start your 529 search in your own state. However, realize that your state's plan might not be the best for your needs. Choosing a 529 plan should involve thought and research. Some things to consider as you look at 529 plans include:
- Eligible schools: While many state 529 plans don't confine you to a single state, some do. Make sure you have various schools in various states to choose from. Unless you are certain that your child will attend college in your state, don't choose a 529 plan that limits choices. Consider plans that have more school choices.
- Investment options: Look at the investment options offered. Some plans offer a wide variety of low-cost funds that you can invest in. Other plans, unfortunately, offer limited choices and you could be stuck with high-fee plans. These plans erode your earnings. Try to find a plan that will let you choose low-cost investing options.
- Convenience: Many 529 plans are easy to open and will allow automatic investments. This can be a great way to ensure that you make regular contributions. Have a direct debit arranged if possible so that you can conveniently contribute each month.
Do a little research, and you should be able to find a 529 plan that works for you and your child. And, even better, as your child gets older, he or she can help the fund grow by contributing money from an after-school job, or by contributing a portion of his or her allowance.
There is no reason not to get a head start on saving up for college. One way to boost your college savings is to make use of investing. Realize that there is a risk of loss, though. Anytime you invest, you could lose money, and there are risks associated with 529 plans. However, with the right research and some planning, you can choose a 529 plan that helps ensure your child's future.
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