College Savings Plans
While we know money doesn’t grow on trees, starting a college savings plan early, such as a 529 Plan, can quickly grow into a sizable nest egg for college. Anyone can open an account with as little as $25. Ask family members to contribute to the account. Instead of another toy or outfit, consider contributing to the college fund. This is an easy and inexpensive way for family members to support your savings efforts.
State-sponsored 529 Plans
529 Plans are after tax contributions to a tax-deferred investment plan specifically for college, technical school and graduate education for state residents. Withdrawals for approved “purposes” are tax exempt. Depending on the state, additional tax advantages may include earnings exemption from state taxes, and contributions may be claimed as a tax deduction. Accounts may be started with as little as $25 and contributions may be as small as $25 ($15 for payroll deduction). Savings limits vary from state to state and span from $235,000 to over $300,000 for each child. Multiple accounts can be opened and you can name who you want as a beneficiary, even yourself, to cover educational expenses.
Independent 529 Plans
Currently, TIAA manages an independent 529 plan that allows parents to prepay college tuition at over 260 schools. Unlike state prepaid plans, this is run by a consortium of private schools. Unlike state sponsored programs, there is no requirement of state residence and the plan applies for all participating schools. The plan also provides a .5% discount off of current tuition prices.
State-sponsored prepaid 529 Plans
These programs allow state residents to prepay tuition costs at state schools at today’s prices. These plans do not cover the cost of room and board; these costs should be factored in. Participation in these programs does not guarantee enrollment, but may be used at all participating schools within the state. These plans must be started at least 3 years before attending school and require that the student be younger than age 15.
When considering a 529 plan, look at:
- Investment options: age-based track vs. fixed track?
- What is the history of returns for this plan?
- What are the fees, expenses, tax treatment for the plan?
- What is the amount of risk?
- Is there a fund manager and what is their track record?
In addition to 529 plans there are other ways you can save for college. Coverdell Educational Savings Accounts, Mutual Fund Custodial Accounts (UGMA/UTMA), College Sure CDs, and Savings Bonds. Figure out which plan fits your needs.
