College is expensive, and the student loan market is only growing larger by the day.
Enter the 529 plan. If you have a child and you aren’t saving money in a 529 plan, I believe you are missing out on the best opportunity to pay for, or at least help pay for, your child’s higher education.
The 529 plan is a saving/investing vehicle offered in every state. These plans allow you to invest money after-tax; this means you do not get a federal tax deduction for your contributions, into mutual funds or exchange traded funds depending on the plan.
Some states do offer state income tax deductions on your contributions if you are a resident of the state and you utilize that state’s plan. Either way you are free to use whichever state’s 529 plan you want. If your state doesn’t offer the deduction or if it just offers a sub-par plan, you have many other options to choose from.
Once you have chosen which plan you will use, you must decide how to invest the funds. Most plans offer target date options. You choose the fund based on what year your child will start college. Usually this is the best option if you aren’t working with a money manager because as your child gets closer to college, the investments will automatically get more conservative.
It is important to look at how those funds are invested, though. There were many horror stories from 2008 when some of these target date funds took large losses a year or two before the child was to start school because they were too aggressively allocated.
The biggest benefit of the 529 plan is the tax free growth. As long as you use the funds in the account for higher education costs you will never have to pay taxes on the growth in the account.
If your child gets a scholarship or decides to attend a military academy you will only be responsible for paying income taxes on the growth in the account. Finally, if you use the funds for something other than higher education with no available exceptions, you will have to pay income taxes and a 10% penalty on the growth. You always get your principal back without having to pay either.
As in everything with personal finance, it is important we keep an eye on fees for these accounts. Each plan from state to state can vary greatly in investment offerings and fees.
With these plans you can pay financial advisor fees, expense ratios on the investments and administrative fees. Some plans I have reviewed are extremely expensive while other plans offer a great lineup of exchange traded funds or index funds at much lower costs.
You can begin your research on 529 plans at www.savingforcollege.com then contact your CERTIFIED FINANCIAL PLANNER™ to get started.