Exploring the most popular college funding options: 529 Plans
Saving for a child’s college expenses can seem like a daunting task. However, it is a lot simpler than many people think. When it comes to paying for a child’s education, parents tend to have a million and one questions. All of which are completely understandable. Some of the more frequently asked questions are:
- How do you get started saving?
- How much do you save for college?
- Where do you invest the money?
The answer to the first question, “How do you get started saving?” can be answered by referencing the article, “Three Steps to Start Saving for Your Child’s College.” As for how much to save for college, there is a bounty of online calculators available to determine just how much of a contribution is required to meet savings goals. These calculators work by looking at a variety of factors including a child’s specific circumstance, public or private education, and the level of funding.
In regards to the final question, “Where do you invest the money?” there are several options to consider. Here are some of the most popular college savings plan options.
The first college savings plan option is the 529 prepaid tuition plan. If parents live in a state where prepaid tuition plans are available, they can buy or make payments at a locked-in tuition rate for in-state public and, occasionally, for private schools. Essentially parents can purchase tuition at roughly today’s rates and redeem the credits in the future, with the state often making up the difference of the increase.
Being able to save thousands on your child’s college tuition is appealing, but these state sponsored plans are not for everyone. In fact, with widespread budget cuts and rising college costs, some states have been forced to freeze their payouts at certain tuition levels, close the plans to new account holders or end the program entirely.
Another state sponsored plan that is very popular with parents is the 529 college savings plan. The primary benefit of the 529 college savings plan is the principal grows tax-deferred and distributions for the child’s college costs are exempt from tax. Anyone can contribute to the account and there are no income limits that make someone ineligible for an account.
Worried that little Jimmy will get a full scholarship and not need his 529 plan thereby money unused? Don’t be, if he does, any unused money can be withdrawn without paying a penalty. However, someone will need to pay the tax. Another option is to transfer the funds to another family member of the original beneficiary.
Getting started with a 529 college savings plan is very easy. Before taking any steps though, take the time to thoroughly research all the options. A financial advisor is not a necessity, but one can be consulted if desired. To get started, simply call your state’s 529 plan to establish an account. Many states even have online forms you can complete instead.
Kelli Bhattacharjee is the owner of Freebie Finding Mom, where she blogs about the best daily freebies, coupons, online bargains and savvy money saving advice. The advice Kelli provides comes from world experience and a financial background. She is passionate about helping consumers save big money and have fun along the way.