Being newly pregnant is an exciting time with a lot to do. It’s easy to overlook financial planning when you’re choosing a physician and planning your announcement, but those first few months are perfect for looking ahead. Before the showers, baby-proofing and endless doctor visits kick in, use these simple steps to start a 529 college savings account for your baby.
What is a 529 College Savings Plan?
A 529 college savings plan allows parents to save for tuition and other educational expenses. It uses a method that’s more like a 401(k) than a savings account. In most cases the plan is provided by a state or educational institution and managed by an investment firm. Contributions are invested in mutual funds in one of the following ways:
- An age-based option that adjusts your mix of assets so that they becomes less risky the closer your child is to college age
- A static option that maintains the same asset mix throughout the lifetime of the plan
Although contributions to a 529 college savings plan aren’t tax deductible, the plan offers numerous tax benefits. The most important benefit is that the income from your investment isn’t subject to federal tax or, in some cases, state tax.
Almost all 50 states offer at least one option for a 529 plan. Many states offer 529 plans to non-residents, allowing parents, grandparents or students to find a plan that’s best for them regardless of where they live. These plans can be used at most accredited colleges, graduate schools, trade schools and professional schools across all 50 states.
How Much You’ll Need to Save (and How to Do It)
According to the private nonprofit College Board, costs for tuition and fees during the 2015-2016 school year ranged between an average of $32,405 for a private institution and $9,410 for in-state tuition at public colleges. In 2030, tuition is expected to cost between $92,869 and $130,428 per year for a private university and between $41,228 and $57,609 for in-state public college.
That’s a lot of money, but you don’t have to save $30,000 a year for your child to go to college two decades from now. If you can save at least one-third of expected college costs you’ll significantly reduce debt for you and your child.
The website SavingForCollege.com has a helpful tool to calculate college costs. For example, if your child attends a college that currently costs $22,000 a year (roughly the average cost of tuition between private and public colleges both in and out of state) you would only have to contribute $186 a month to save one-third of your expected costs.
The key is treating this savings plan just like any other bill and contributing to it regularly.
The Real Cost of a 529 Savings Plan
529 college savings plans can be a great investment, but they aren’t free. Depending on the plan you purchase there are a number of fees you may have to pay, including broker commissions on some state-sold plans.
Make sure that whatever plan you choose, you’re aware of any hidden fees including wire transfer fees, administrative fees for out of state residents and application fees among others.
Which 529 Plan Should I Choose?
Finding a 529 plan that’s right for you means doing your research. The best place to start is with those named the best 529 plans. The investment research firm Morningstar gave Gold ratings to four plans including the T. Rowe Price College Savings Plan issued by Alaska, Maryland College Investment Plan, the Vanguard 529 College Savings Plan issued by Nevada and the Utah Educational Savings Plan.
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