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How to Save for Your Child’s College Education

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The cost of college can easily be the biggest expense you ever incur for your child. FinAid.org reports that the cost of a college education sometimes increases more than double the rate of inflation. Further, tuition is only one part of the cost of education. Fees, rent and books keep getting more expensive as well. If you plan on contributing to or financing your kid’s higher education, you need to start saving sooner rather than later. 529 plans, while not your only option, have long been the gold standard.

What is a 529 Plan?

A 529 is a way to plan for your child’s educational future, available in two flavors: Pre-paid college tuition and a savings plan. The pre-paid college tuition plan might sound good, but leaves you little recourse if your child decides not to attend college at all. The savings plan is a far better option, so we’ll concentrate on that.

529 savings plans don’t just cover college tuition. They cover all costs associated with higher learning, including room and board, fees, books and other costs associated with attending college. There’s no age limit on who 529 savings can be used for. Contribution limits are generous — many allow you to contribute over $200,000 toward education and related costs.

How 529 Plans Work

A 529 works in much the same way as your 401(k) at work. Some states even offer matching funds to make the investment more lucrative. Louisiana has a particularly generous program called START that offers as much as 14 percent matching for qualified state residents. Check with your state laws to see about matching programs.

Some catches: First, the 529 must be reported as an asset on your taxes and the Free Application for Federal Student Aid (FAFSA). If your son or daughter attends college after the age of 24, this won’t matter at all. If they attend before then, it won’t have much an effect anyway. You may also have to subject the 529 to the gift tax. However, the gift tax only applies to 529 plans if you contribute more than $12,000 as an individual or $24,000 as a joint filer in a single year. The best part is that you can make as much as five years worth of contributions at once without incurring the gift tax.

In the event your child chooses not to go to college, 529 plans are flexible. You can pass the savings off to your other children, brothers, sisters or cousins. If you don’t have any of those lying around looking to go to college, you can save it until you have grandchildren. By then the compound interest on the account will add up to a hefty sum indeed. You can even use the money for your own education, but it must be spent within 10 years of your opening the account.

Another perk for parents: Your kids can’t touch the money. It’s all under your control.

Choosing the Right 529 Plan

You have a variety of plans to choose from when it comes to 529s. When shopping around, you want to focus your attention on three factors:

  • Incentives: You can buy a 529 plan in a state you don’t live in, but you might not be able to take advantage of certain incentives offered to state residents. It’s a good idea to compare 529 plans by state to see which states are providing the best incentives for you.
  • Investment Choices: The sheer number of investment options with 529 plans can be overwhelming, and range from conservative, low-risk certificates of deposit to high-risk aggressive stock fund options. If you’re unsure about which options would be best for you,  talk with an experienced financial advisor– preferably one that has a 529 plan for their own children.
  • Fees: There ain’t no such thing as a free lunch. 529 plans come with fees and charges, including fees for transfer, enrollment and expenses. Don’t pay into any 529 plan with an expense ratio of 1.5% or more on its underlying investments.

Planning for Your Child’s Future

529 plans offer tax-friendly ways to save for your child’s future.  With the cost of tuition outstripping inflation, you need an investment better than just socking money away in a savings account. Depending on your financial needs, a 529 might be just what you are looking for.

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