Monday, 4 May 2015
When you first have kids, cute babies may occupy your mind, but thoughts of college costs can cause your head to spin.
The U.S. Department of Education estimates that a public college education will cost over $200,000 by 2030. While those numbers may seem overwhelming, those of us who aren't billionaires can still make a significant dent in our children's college costs by establishing some savings goals and setting up a smart savings vehicle.
A tax-advantaged 529 College Savings Plan is an excellent option for many people. Motivation: The Benefits of a 529 Plan A 529 plan allows you to make tax-advantaged annual contributions to a savings account specifically geared to future college tuition costs.
Most states offer at least one 529 plan (seven states currently offer other alternatives). You may invest in a plan from any state; however, you should check your home state regulations in order to maximize tax benefits.
While rules vary from state to state, the basics are the same:
The beauty behind 529 plans is their simplicity and wide applicability. They can be used at qualified schools nationwide (including vocational schools). In most plans, you can be a Florida resident, invest in a New York plan and send your student to college in South Carolina. Rules vary from state to state, but information is readily available online.
The parent usually controls a 529 account, with the child named as the beneficiary. This means you call the shots and decide when withdrawals may be made. If the child named in the 529 account decides not to go to college, the money can be used for another family member's higher education with no penalties. Most plans allow you to reclaim the funds at any time, no questions asked.
However, if the money is used for anything but college expenses, the funds are subject to applicable federal and state tax rules, plus a 10 percent penalty on any earnings the fund made.
A 529 plan won't disqualify your child for financial aid. Only a small portion of the account (5.6 percent of the total balance) is counted as “income" in the federal student aid formula.
Setting up a 529 plan is pretty simple: you'll need to sign paperwork to open the account, and then set up a monthly contribution plan. In order to get the most out of your 529 plans, however, you should do a little research. We suggest using the following guidelines to get the most out of any 529 plan:
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College may be far off for your little ones but it's never too early to start saving. A 529 plan can get you started saving for college.
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