College 529 Savings Plans
A 529 college savings plan, also known as a qualified tuition plan, is one of the best choices for a college fund for baby. The 529 plan allows you to save money for future education expenses and, as an added benefit, it is tax-advantaged. Even though the federal government does not allow you to deduct the contributions you make to a 529 plan on your federal tax return, those contributions are often deductible on your state tax return. In some cases, a state may offer a tax credit instead. The rules regarding tax-deductibility of contributions are made on a state-by-state basis.
When choosing a College 529 Savings Plan, be sure and choose one that is flexible. That means you can move your money between mutual funds within the plan. If you choose a plan that is fixed or life phase, you wont be able to stay in control of your money. The amount of your contribution per year is not specified except that the law says you can only contribute up to the expected amount of education expenses. The lifetime limit on contributions to a College 529 Plan is $235,000 to $529,000, depending on the state in which you live. This college fund for baby stays in the name of the parents.
How Much You Really Need To Save In A 529 Plan
Part 2 of that “scary” number that you need to save each month for your child’s college is that number is based on saving 100% of their college costs. As a parent, you don’t need to pay for 100% of their school. Or, maybe you’ll pay for 100% of their public in-state tuition, and the rest is up to them. Or maybe you’ll just have a target savings number, and the rest is up to them.
It’s simply important to remember that you don’t have to save and pay for all their college. It’s THEIR college – not yours. Plus, there are tons of ways for them to find help paying for school, from finding scholarships, to getting student loans.
So, instead of stressing out about saving $500 per month, I’m going to make the following assumptions and save based on that:
- I’m going to save for an in-state college that currently costs $10,200 per year
- I will contribute to all 4 years of college
- I will pay 50% of the projected college costs
- I’m done contributing to the 529 plan when my child is 18
- I expect college costs to continue to increase by 4% per year
- I expect to get 6% per year return on my investments in my 529 plan
With these assumptions, you should be saving about $96 per month for your child’s college, or $1,151 per year. Let’s see how that breaks down.
However, if you’re on the high end, and want to contribute to pay 100% of your child’s education expenses at a 4 year private college, I included that in the chart below too .
Have Your Kids Budget And Save For Their Future Education
Emphasize the importance of saving to your children and encourage them to establish their own college savings fund. This will not only give them a sense of investment in the process, but it will also help them see the value of a college education. In addition to having them maintain their own college savings account, consider matching their fund with your own contributions to encourage them to save.
Consider the various savings vehicles available as part of your college financial planning and choose one or more that meet your needs. In addition to savings and money market accounts, for example, you might consider a certificate of deposit , which offers higher interest rates in exchange for a commitment to not access the funds for a set period of time from six months to 10 years. Also balance the benefits of investments, a 529 plan, an ESA, and other types of savings plans. Chances are you will want to use more than one.
Above all, start saving now. The more you can save, the more you can help your children lay the foundation for a successful future, starting with a college degree. If you need advice on financial planning, we can help.
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What About Your Retirement Account
Some parents are tempted to raid their own retirement accounts in order to help their children with college costs. While it’s possible for you to withdraw money penalty-free from an IRA to cover college costs for your child, it might not be the best idea.
Once you withdraw that money, it’s no longer working on your behalf. As they say, there are loans for school, if necessary, but no loans for retirement. Don’t put your own future at risk to pay for your child’s college.
Start Saving For Your Childs College Early
Ideally, the best time to start a college fund is when your child is born. With compound interest and regular investments made monthly or yearly, the funds have an opportunity to grow over a longer period of time, and you dont need to put aside as much each month or year to reach your savings goal.
Your funding can be modest, and many parents find they can afford $25$100 from each paycheck, automatically deposited into the college savings plan of their choice. If you get a raise or bonus, that money can also be allocated toward college savings.
Family members can contribute to a child’s college savings by opening their own 529 plan accounts. They can also make contributions to an established 529 account under the child’s parents’ name, if the plan that the parents use accepts third-party contributions.
Some plans don’t accept these contributions, in which case it’s best to create a new account or gift the parents cash intended for deposit into the 529 plan. Regardless of how the plan is set up, its important to maintain contribution levels that will ensure you can afford tuition and other costs. Such discipline can be particularly useful if you face additional financial obligations later.
No matter what plan you choose, starting a college savings fund for your child is a big investment. Let a Nationwide financial professional help guide the process.
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Be Brave And Start Now
Of course, the above calculations are all simplified and very general. Its difficult to predict exactly how much money will be necessary to cover college expenses, especially so far in advance. Use the NC 529 College Savings Calculator to adjust the above figures based on what makes the most sense for your situation. As long as you find the best ways to save for college, you can get on the right track.
While saving to pay the full amount of college expenses is an ambitious goal, it is essential to at least minimize the amount of aid needed to fill the gaps leftover. By aggressively pursuing grants and scholarships, and starting a savings strategy, families will come closer to college savings goals, avoiding the long-term stress faced by many with large student loan balances.
How To Maximize Net Investment Returns
Minimizing fees is the key to maximizing net returns.
Choose a 529 plan that charges less than 1.0% in annual fees, often called the total expense ratio. Some 529 plans charge less than 0.5% in fees.
Choose a direct-sold 529 plan, since they have lower fees than advisor-sold 529 plans, and dont charge commissions.
Consider both your state’s own 529 plan, if your state offers a state income tax deduction or tax credit on contributions to your state’s 529 plan, and a few out-of-state 529 plans with lower fees.
Generally, lower fees matter more when the child is young and the state income tax break matters more after the child enters high school. The fees are charged on the full value of the 529 plan every year, while the state income tax break applies only to that years contributions.
Passively-managed investment options, such as index funds, charge lower fees than actively-managed investments.
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Strategic Ways To Save For Your Childs College Tuition
529 plans are the most popular savings vehicle for college, but other options may be a better fit for you and your child.
With rising costs for college tuition which range from $9,410 for in-state public universities to $32,410 per year at private colleges saving for your childs tuition is a challenging task.
But as daunting as it may seem, you can successfully create a savings plan for your childs college education by carefully considering your options like investment planning, tax deductions and other financial planning tools. In other words, its not only important to know how youll save money, but also where youll place your money.
Consider these five strategic places to save money for your childs college tuition and avoid heavy debt later from student loans:
If you want to get a head start on saving for your child’s college savings plans, visit Credible’s online marketplace to compare rates for a high-yield savings account.
1. High-yield savings account
A High-yield savings account is an ideal place to store short-term savings and emergency funds. If your student is nearing the enrollment period, its important to keep your money in safe investment accounts.
2. 529 plans
Find Niche Scholarships & Grants
Scholarships and grants can get weird. For example, the National Potato Council offers a $10,000 scholarship for students bound for agricultural college who persuasively declare their love of potatoes, while Duck Brand Tape sponsors a $5,000 scholarship for students who accessorize their prom outfit with duct tape.
There are scholarships for students of all kinds, from those who live in mobile or manufactured homes, to those with red hair, to those with dwarfism. In short, there are likely scholarships for your child, no matter what their hobbies or personal attributes are.
For details on how to start your research, heres how to find college scholarships and grants.
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Next Steps To Consider
Investing involves risk, including risk of loss.
Please carefully consider the plan’s investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
Take Advantage Of The Aotc
The American Opportunity Tax Credit allows you to knock up to $2,500 off your tax bill, per student, per year. It can be applied to you, your spouse, or your dependents. The first $2,000 of your college expenses earn you a dollar-for-dollar tax credit, after which you get a credit of $0.25 for every dollar you spend on tuition, up to another $500 in tax credits.
Keep in mind that a tax credit is far more beneficial than a tax deduction. Deductions come off your taxable income credits come off your actual tax bill. You can find more details about the American Opportunity Tax Credit and other college tax deductions and credits here.
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Avoid Paying Tuition By Investing Early
Instead of taking out loans to pay for your kids college, why not invest in their education earlier ?
Shelling out a few hundred dollars for ACT or SAT preparation courses now could pay off when your kids begin applying for financial assistance.
Look at kids grades and test scores because thats where the majority of money for college comes from these days merit-based aid, Dickenson said.
If youre concerned that your kid wont qualify, call the college financial aid officer and ask what the cutoff is for merit-based scholarships, advised Amy Irvine, a Certified Financial Planner and founder of Rooted Planning Group.
Maybe youre only three points off from something, and you could re-sit for the SATs, she said.
Another option: Advanced Placement classes. By encouraging your kids to sign up for AP classes in high school, they can take the exam for that subject and potentially receive college credit for it.
Although the AP exam costs $94, its a deal compared to the $301.23 sticker price for one credit hour at a four-year institution , according to a Penny Hoarder analysis of National Center for Education statistics.
And the fewer courses they need to take, the smaller their tuition bill.
How And When To Start A College Fund For Your Child
Many parents want to help their children attend college without accruing debt, and they know that its best to start saving early to achieve this goal. They understand the benefit of a college education not only in terms of personal growth but also in earning potential, career opportunities and financial stability.
However, college expenses have risen considerably over the years, making it difficult for many families to afford without accruing some debt. Tuition and living costs can run over $60,000 for a year at a private college and more than $30,000 per year at a state university.
Fortunately, there are ways to start a college fund that can help you and your child cover tuition. Heres what you can do:
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Invest Your Savings Tax
Nearly 7 in 10 parents arent familiar with a 529 college savings plan and they should be.
Putting it simply, a 529 college savings plan can help your savings go further. Its a tax-advantaged investment account that works like a Roth IRA, offering tax-free growth and tax-free withdrawals. And yes, parents can open a 529 plan for their childs college savings. Its not just for grandparents!
Most 529 plans also offer a passively invested, age-adjusting portfolio option that starts with higher growth investments and becomes more conservative as your child approaches college. This means your money grows over time, but youre also reducing risk as it becomes time to pay for college.
What difference do these tax savings and investment gains make? If you have a 4-year-old child targeting a private university, your monthly savings goal might be $700/month using a savings account versus $400/month with a 529 college savings plan. Thats a big difference!
There are a lot of 529 plan options, but investing doesnt have to be complicated. Here are a few guidelines in case youre doing the research yourself:
What Can I Do If I Start Saving For College Late
Look for ways to trim your budget so you can free up money to save. You can also ask friends and family to make contributions to your childs college savings as birthday gifts. You might also encourage your teen to consider starting at a two-year community college, where they can earn credits at a fraction of the cost of a four-year programand may be able to transfer those credits to a four-year school later on. While youre spending less on tuition for those introductory, transferrable credits, the bulk of your childs college fund can have the potential to continue growing.
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How To Save For College Before Your Child Is Born
We hear congratulations are due! What an exciting time for your growing family! As youre waiting for your bundle of joy to arrive, there are steps you can take right now to secure their future, saving for their higher education costs in a 529 plan. Ohios 529 Plan, CollegeAdvantage, is here to help you reach your savings goal.
How To Save Money For Your Childrens College Education
Parents consider saving for their childrens college education as one of their most important goals. They also view this goal as both daunting and overwhelming. As a result, most parents simply kick that can down the road. If youre a parent, maybe youve told yourself any or all of the following:
- Theres still plenty of time to save for college,
- Ill start saving for college once I get that raise,
- After I finish making my car payments, Ill start saving for the kids college education
The list of reasons parents conjure up to defer saving for college is endless. But, taking this approach will truly put you in a daunting and overwhelming situation come time to send your high school graduate off to university.
Our recommendation: Start now. Not tomorrow or when you get a raise, but right now. Well show you how. Also, do not assume that you need to start the college savings fund with a lot of money. If you maintain that perspective, youll never get around to starting. Instead, start with something thats achievable like $25 .
Equally important to starting now is making regular contributions to the college savings plan, even if they are small. When it comes to saving for college, consistent and steady contributions outperform infrequent, lumpy contributions.
So where does Upromise fit in?
Over the past 2 decades, families like yours have saved over $1.1 billion dollars toward college using Upromise.
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Ugma And Utma Accounts
UGMAs and UTMAs are custodial savings accounts, which is another way to save for college funds. The account is in the child’s name, but the parent or grandparent is custodian of the account and has control until the child reaches the age of maturity in your state. There are no limits to how much money you can put into these savings accounts. The money can be used for expenses that are a direct benefit to the child, including but not limited to college expenses. The downside is that UGMAs and UTMAs are reported on the FAFSA, which can cut into your university financial aid eligibility. The account has to be distributed in full by the child’s 30th birthday, and once they reach 18, the fund is theirs to do what they want with.