Paying for College: Start a 529 Plan for Your Kids Today
A bit of unsolicited advice for parents of young kids: start saving for college now!
With two kids in college, we have a lot of money going out the door each month. Room & board, tuition, books, laptop, car, etc. can create a strain on any parent’s budget. According to US News & World Report, college tuition grew by nearly 80 percent between August 2003 and August 2013.
In actual dollars for tuition and fees, the average cost of a four year education is over $35,000 for state residents at a public college, $88,000 for out-of-state residents attending public universities, and $120,000+ at a private university.
And that doesn’t include room and board!
Worse yet, the cost to you when your children actually head off to school years from now will be substantially higher because college costs typically increase at a rate much higher than inflation.
But you can make it easier if you start your kid’s college savings when they’re very young (the day you bring Sport home is ideal).
Some states have plans that allow you to make one lump sum payment now — at today’s tuition prices — and then future tuition costs are covered when your child eventually goes off to school. These are called “pre-paid” plans. In Florida, for example, it’s called Florida Pre-Paid. If you have funds already saved, this is an excellent option.
But often, young parents don’t have a lump sum available to them that they can invest in such a plan.
If this describes you (as it did us) then open a 529 plan college savings plan. The advantage of a 529 plan is tax-free growth if the funds are used for college expenses. “Tax-free growth” means that the earnings on the plan are not taxed when you withdraw the funds. For example, if you are in the 15% tax bracket, typical investments might require you to pay a 15% tax on your earnings when you withdraw them. But a 529 plan eliminates that tax expense. Often, your state will offer tax incentives for college savings as well.
So, how do you start? Here are three ideas that should help:
- Do Your Research: Research 529 plans and pre-paid plans offered by your state first. However, don’t limit yourself to those plans only available in your state of residence. Shop around. Consult a stock broker or bank.
- Make Regular Payments: Once your fund is set up, pay into it each and every month. Remember, the longer the funds are in the plan, the more time they have to grow and, thus, the more tax benefit you will enjoy when your child heads off to college. Even $25, $50, or $100 each month can grow significantly over time.
- Start Early: I wish we had begun when our girls were still in diapers. But, unfortunately, we waited until they were in high school so we enjoyed very little benefit. Plus, our oldest daughter headed off to college right as the market dropped precipitously in 2008. That downturn eliminated much of the growth we had built up, especially since we started so late in contributing. Another reason to start early so your growth can outlive the ups and downs of the market.
In short, the small sacrifice you make today will lessen the much larger sacrifice 12-18 years from now.
I wish we had planned earlier.
If you liked this post, you might also find this one helpful: THE BEST FINANCIAL STRATEGY FOR PEOPLE IN THEIR 20S (AND OLDER FOLKS TOO)
(Note: I am not a financial planner or investment broker. So before doing anything, seek out a professional to learn the specifics of 529 plans and to discover which one is right for you.)
(Photo Credit – Creative Commons – Lou via Flickr)
You can open a 529 even before your baby is born! That’s what we did when our daughter was still baking in the baby oven. Your financial advisor can help you get one started.
I didn’t know that, Camille. Great to know. This article posted by a friend on Facebook sheds some more light on that point. Thanks again! http://www.forbes.com/sites/baldwin/2013/10/09/unborn-children-and-the-college-tax-dodge/
Completely agree, Greg! We’ve been putting $400 a month back since the boy was an infant. We figure that the more we can do in the beginning, all the better, since it compounds. Based on the recent inflation you pointed out, that still is only estimated to cover 1/2 of a BS/BA. WHAT?!
Yes, you’ll need to supplement the fund when he actually goes to school but what you’re doing now will make a huge difference!
We have all the kids in custodial accounts because we weren’t sure if college would end up being what they do. Would it be smarter to move them to a 529 due to it being tax free and because they probably will use it for that? Do you have any idea what the fees are if we take it out for something other than college?
Betsy…first let me say that you should check all my answers with a financial expert. My hunch is fees might be based on the kind or administrator of the plan. It “may” be that they change no fees but you lose the tax benefits.
I know that the plan we had allowed us to put a different child’s name on an account if the child who was originally on the plan didn’t go to college.
Hope this helps but please check my math with a professional.
I meant they may not “charge” fees not “change.”
Thank you Greg for sharing and your wisdom! As parents with young kids we struggle to take/have time to think about college. It’s a great reminder and encouragement! I’ll be looking into it and see what the best options are out there for us.
Thank you, Meri. Glad it was helpful. Start early. The sooner you do so the more benefit you’ll have.