While most of you are in the midst of paying for college today, or will be very soon, there are also some of you who have younger children and, therefore, time to invest for college. Or you may have grandchildren soon, and you could be looking for ways to help pay for their college education.
With your support, of course, we are fighting in Washington, and in state capitals, to keep college costs as low as possible for the greatest number of people. But there’s no way around the fact that college is expensive.
The only way to make the cost of college more manageable is to start saving as far in advance as possible. No one way of investing for college works for everyone, but some investment plans have easier eligibility and contribution requirements, making them accessible to a broader range of people.
That is the case with 529 college savings plans. Unlike contributing to a Coverdell Education Savings Account (ESA), you aren’t limited by the amount of income you earn, and you aren’t restricted to a $2000 annual contribution. With a 529 plan, you can contribute up to the limit set by the sponsoring state and that is not chump change; in fact, it is, in most cases, $100,000 or more.
As you begin to compare 529 plans with other popular ways to invest for college, such as accounts that can be set up under the Uniform Gifts to Minors Act (UGMA), you’ll soon find that 529 plans have a major advantage: you keep control of the money. Assets held in a UGMA account, or an account under the Uniform Transfer to Minors Act (UTMA), belong to the beneficiary once he or she reaches a certain age. Depending on the state where you live, this is generally either age 18, 21 or 25.
And, compared to regular taxable investment accounts, 529 plans look especially good. Although you contribute after-tax dollars, any earnings in your plan grow tax deferred and may be withdrawn free of federal income tax as long as the money is used for qualified higher education expenses.
There is lot more to know about 529 plans. To get the most from a plan, you’ll have to choose the one that you believe will work best for you from among the many 529 plans available.
Whether or not you decide to use a 529 plan to save for college, there’s one thing that nearly expert I’ve talked to recommends: keep your college savings separate from your other investments. Doing this will make it easier for you to track the performance of your savings. Also, you will be less tempted to tap into the money for everyday expenses.
Of course, the same “separation policy” should apply to your saving for other long-term goals, particularly when it comes to retirement savings.
It may seem like a good idea to use money that you’ve set aside for retirement to fund your child’s or grandchild’s college account, since college has a relatively firm deadline and retirement can be delayed. But keep in mind that while there is always a chance that your child may get a scholarship, or decide to go to a school that is less expensive than you anticipated, no one else is going to fund your retirement. Not to mention that if you withdraw money early from a retirement account, you will lose the tax advantages of that account and will likely have to pay a penalty too.
The actual process of opening a 529 account couldn’t be easier – most plans simply ask you to complete a brief application and make at least the minimum contribution to open the account.
But the simplicity of opening an account doesn’t mean that you should jump into a 529 blindly. To help you find the plan that works the best for you, we have struck an arrangement with a New Jersey-based 529 research and analytics firm. This company, called 401Kid, has a subscription service that will help you better understand the investment options available and the fees involved in different plans, weighing the advantages and drawbacks of each.
We are excited about this new arrangement, which will provide College Parents of America members a 25 percent discount on a 401Kid subscription. We encourage you to watch our Web site in the coming weeks for more information. Meanwhile, please enjoy a safe and relaxing Memorial Day weekend.