It’s back-to-school time and, if you’re like many parents, not only do you really want to give your children the gift of higher education but there’s also a big part of you that feels even somewhat obligated to put your kids through college. College is anything but cheap, and it will only become more expensive as the years flash by. It is for this reason that it’s best to begin saving for a child’s education while they’re still in their infancy — yep, that’s the ideal starting point. But even if circumstance didn’t afford you the ability to set aside funds from the time your kids were still in diapers, that shouldn’t stop you from starting an education savings plan once you’re able to afford it.
Just as your children will aim for the best university or college to suit their academic needs, you must aim for the smartest plan when it comes to saving for their education. If you’ve spoken to an advisor about your desire to fund your children’s education, odds are you’ve discovered the 529 college savings plans — state-sponsored investments designed to make saving for your kids’ college education convenient and even affordable.
With a 529 plan, the state sets everything up with an asset management firm, and you simply open a 529 plan account with that firm to become the plan owner and your child (or children) becomes beneficiary. While plan offerings vary by state, their benefits are strong and many:
- All the money you save in a 529 plan grows federal and state income-tax free.
- Most plans offer extremely low minimum monthly contribution limits, with some states going as low as just $15.
- All withdrawals made for paying qualified higher education expenses are taken free from federal income tax.
- Most states also treat withdrawals to cover expenses associated with higher education as exempt from state income tax.
- Your beneficiary can use the money to pay for more than just tuition: 529 funds can also be used to pay for room and board, books and supplies.
- There are no age limitations or income restrictions for 529s.
- Anyone can contribute to a 529 plan, and most states allow for a maximum of $300,000 per beneficiary.
- Assets held in 529 plans are protected in the event of bankruptcy.
Contributing to 529 plans is easy. Most plans offer the convenience of automatic fund transfers from your bank account or automatic payroll deductions. As the parent and account owner, you control the assets no matter how old the beneficiary. The plan owner has the right to transfer the 529 from one beneficiary to another family member if circumstances or plans change.
Of course, you’ll get more bang for your buck the longer you have to save, so get started as early as possible — even if it means investing just $20 a month toward your child’s education. If you’re a little late to the dance, try contributing as much as you can while you can. Many advisors recommend trying to set aside at least 6 percent of your income to invest in a 529 plan.
Each state has its own offering of different 529 plans, so before investing in any one plan, do a little research first. Both Morningstar and Kiplinger rank the best 529 plan in each state every year, so a good Internet search is always worthwhile. The best advice, however, will come from your financial advisor. After all, your advisor understands your financial picture better than anyone, and can help ensure you select the 529 plan that’s best for you and your children.