College fund for your child | Considering the 529 plan
If you have a child, no matter the age, today is the day to start planning for their college education. Even the smallest of starts can, over time, accumulate to a nice amount of extra cash when your child is ready to start college.
“But where do I put the money?”
There are so many options out there that can make it confusing as to which option or options will be best for you. Let’s focus on one option, the 529 Plan, which every parent needs to know about and understand. When considering how you should invest your money, I hope that I will, by the end of this article, have outlined a new option for you. With the tax breaks helping you avoid tax debt, flexibility and ease of use, the 529 Plan should be at the very top of every parent’s list of financial options when they start researching for their child’s college education fund.
The 529 Plan
Many of us have never heard of the 529 Plan, but it can be a great way to help with your child’s college fund. It is a state operated savings fund, which offers tax incentives. Every state has some kind of 529 Plan; we will look at 2 common types.
- Savings Plans: These are most similar to a 401K or IRA. You invest money into mutual funds and/or investments. Your state’s plan will outline several choices for you to choose to invest in and depending on what you choose, your savings plan will fluctuate based on the performance of the option you chose.
- Prepaid Plans: These are a great option if your child is a bit older and knows that he wants to attend an in-state college, because with this plan you will start to pre-pay all or some of the cost for your child’s education. Some of the funds can be transferred to an out-of-state college; please refer to your state’s laws on this.
529 Plan Advantages
There are many advantages to the 529 Plan, starting with State and Federal Tax Benefits. Federally your 529 investment will come out tax free. Each state has different rules for their 529 Plan, but it is worth the time to figure out what your state offers. Also, the plan offers you the freedom of changing which investment option you choose, usually once every 12 months, so you are not tied into any one investment. After you have chosen your first investment option and made a contribution to the fund, you can set up automatic deposits, allowing you to continue to grow your investment, without having to sit and worry about when and how much you will put in next.
Financial Aid and 529
When being considered for financial aid, as of the 2009-2010 college school year, the 529 Plan will be taken into account, along with the parental assets, at a maximum of 5.64% rate when figuring the student’s Expected Family Contribution. This is another reason why the 529 Plan is a great option; it has minimal effect of the student being able to get financial aid.
Do yourself a favor and look into your state’s 529 Plan and start your child’s college fund today.