Saving for Your Childís College: The 411 on 529s
With the cost of college is skyrocketing seemingly on a daily basis, whoís to say how much tuition will cost once your child leaves the nest? Thatís why itís important to save in any way you can. Is it as important as saving for your own retirement? No. With Social Security an instable option at best and with pension plans going the way of the dinosaur, youíre pretty much on your own when it comes to retirement. Your child, however, will have several options when it comes to paying for college. Financial aid, student loans and scholarships are just the beginning. Regardless, itís many peoplesí goal to help their child through college. With savings plans like the 529 now available, you too can reach that goal.
Simply put, the 529 plan is a state-sponsored vehicle to help you save pre-tax dollars to go towards your childís college education. There are two 529 options: the savings plan and the prepaid tuition plan.
Through the prepaid plan, youíre able to pay for your childís school at todayís tuition rates, even though they wonít actually be attending until years down the road. The amount in your 529 account is guaranteed to pay for tuition to your stateís public colleges and universities when your child is ready to attend. Itís quite the deal, though it usually doesnít cover room and board costs.
One of the main drawbacks is that you or your child will have to be a resident of the state where your child attends college, which puts a damper on things if your California kid suddenly decides they want to attend Harvard. It depends on the contract, though. Some 529 plans do allow students to attend private or out-of-state universities, but you might have to forfeit some of the value of your account.
A safer and more flexible option than the prepaid plan is the 529 college savings plan. Through it, your child will be free to attend any university, public or private, in-state or out, and it includes room and board. The downside? The money you put into the college savings plan is only good towards whatever the cost of college is at the time your child is ready to enroll. No one know what thatíll be, but it wonít be cheap.
Most states put a cap on lifetime contributions to 529 college savings plans that range between 0,000 and 5,000, though most donít have a limit on how much you can invest annually. Problem is, contributions of over ,000 per year (,000 if youíre married) are subject to a gift tax. Thereís a loophole here, however. You can invest up to ,000 in one year to a 529 and it will be treated as five yearly payments of ,000. But beware; going this route will leave you unable to make another deposit for the next five years.
So where does your money go when you put it into a 529 savings plan? Much like a 401(k), the goals is to invest aggressively early on, then choose the safer path the closer you get to needing the money. If you choose an age-based portfolio, your money will be invested in stocks early in your childís life, and then moved to the bond market as he or she gets closer to college.
The 529 plan offers enormous tax savings if you use the money for its stated causeóputting your child through college. Though your contributions to the fund are not considered tax-deductible, it will grow free of taxes and any withdrawal is also not subject to federal taxes. Depending on where you live, you might also get state tax deductions or exemptions from contributions or withdrawals.
The one big-time fallback to the 529 is the fact that it may limit your chances of receiving financial aid. Thatís because withdrawals from the account are considered part of your childís income, and will be assessed for financial aid purposes. It may or may not be an issue, depending on how much you have saved in the 529 account.
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