How much do you spend a day on coffee? $3 probably? That’s almost $100 a month for coffee! What if I told you saving half that amount each month could pay for your kid’s college education? Well it can and it’s so easy you won’t even miss the $50. That’s all because of the power of a 529 college savings plan.
What is a 529 college savings plan?
A 529 plan is an investment vehicle that allows you to deposit funds for college education expenses for specified beneficiaries.
The great part about these plans is that they offer significant tax breaks, the most important of which being that the money grows tax free so long as it is eventually spent on college expenses. Additionally, some states will even let you deduct contributions on your income tax. You can see if your state is one by checking this list: tax deductable 529 plans.
Contributing to a 529 is easy because most plans can perform automatic paycheck deductions or automatic funds transfers from any bank account. Setting it up to take $25 per paycheck is a quick process even an Internet newbie can handle.
How to Pick a 529 college savings plan
As of this writing there are over 100 different 529 plans to choose from, but there are two basic types you should be aware of:
- Savings Plan – These plans let you contribute as much as you’d like, whenever you’d like. You choose how your contributions are invested based on the offerings of the program. These plans are a lot like the 401k plans you may have at work.
- Prepaid Plan – These plans let you lock in today’s rate for the state’s tuition costs, so even if the cost of a college education increases (which it will) you will pay the lower price that it costs today. Usually these plans have you purchase as certain number of credits or years of tuition in either a lump sum or with a set payment plan.
Which way should you go? Well it depends on how you think you’ll benefit the most. While a savings plan does have some risk involved (mutual funds are the major investment choice in these plans) you could have some huge gains it the stock market rises. Even then, considering this: the average increase in tuition fees at public colleges from 1990 – 2000 rose 85%. 85%!!! I don’t care what mutual fund you pick, it isn’t going up 85% in 10 years.
Consumer Reports actually just released their picks for the 5 top and bottom 529 plans in the country.
The biggest mistake people make with a 529 savings plan
You can pick the best plan in the country, but if you make this one mistake, you’ll still be the idiot your mother-in-law thinks you are:
Not starting early.
The earlier you start a 529 plan, the better of you and your child will be when it comes time for them to head off to college. And you can’t start early enough, so long as your kid has a name, you can open a 529 savings plan. I actually started the one for my son the night he was born while he and my wife were sleeping after the delivery. Yeah, I’m that kind loser.
Tagged with: 529 plan advice • 529 Plan comparisons • 529 plan rating • open a 529 plan
June 12th, 2009 at 10:43 am
Hi!
I’m Lauren D.’s cousin
I am currently researching the Coverdell Education Savings Account. I have never heard of this before yesterday! My son is 14 mos and has a 529, but since we live in NV (no income tax) we don’t receive a deduction. There is so much information. As a parent you want the absolute best for your child. It’s unfortunate that none of this is taught in high school or even college. I REALLY wish financial planning courses were mandatory in the curriculum! Now I’m scouring the Internet and trying to make sense of it all on my own! Wish me luck!
p.s. I love reading this blog. Thanks!