Are you planning to give your children a leg up in the real world? Not sure you want your kids at home until they are 30? In order to do so, you need to start planning their college funds as early as possible; as soon as they are born is not too soon.
Did you know?
Tuition at a 2 year public college is $3,347; room and board is $7,705 per year!
For in-state 4 year colleges, tuition is $9,139 and room and board is $9,804 per year. Having $80,000 available for your child’s education is only possible if you start saving today. These are not even Ivy League schools.
The 529 Plan
With only 3% of Americans saving for college through this plan, you would think that it is a terrible plan. Unfortunately, that is not true. The 529 College Savings Plan was designed for families in order to help save for college. Its earnings are entirely tax free, as long as the money is used for approved educational expenses. These expenses include any nationally approved college, tuition, books and even room and board living expenses while at college. The best part is, contributions can be made to the plan by anyone, not just parents.
Although the plans are state administered, it is a national savings option for college. Some states even tack on their own tax savings onto their 529 plans doubling up the savings in taxes that you could get. There are two types of plans, the Savings Plan and the Prepaid Plan. Most families will most likely use the Savings Plan because it works much like a 401k or IRA so you can invest the contributions as you see fit into stocks, bonds or mutual funds and you can choose any approved college to spend it on.
A Prepaid Plan allows you to prepay all or part of the costs of an in-state public college, but can be converted for private or out of state colleges. If your family has a long tradition at one school this may be an option for you.
Choosing the Right Plan
Of course there are words or wisdom to live by when it comes to these 529 Plans, as they are confusing, daunting and depending on the plan you choose could have a number of fees and terms you may not understand.
Surprisingly, you do not have to choose the plan in your own state of residency, you could choose any state plan anywhere in the US. However, be careful you are not giving up state tax deductions by going out of state. Arizona, Kansas Missouri, Maine and Pennsylvania are the only states that allow tax deductions for plans arranged from anywhere in the US. So if you do not live in one of these states and set up an out of state plan, you will not get your state’s tax deductions.
One of the best ways to ensure you are getting the right plan, the terms are explained properly and you are not inundated with fees is to talk to your tax planner or financial planner for quality advice.