Investing for your child’s education is among the greatest things you can do as a parent. A 529 Savings Plan is a straightforward way to achieve that goal. Initially intended for post-secondary education, you can now use 529 Savings plans to finance K-12 educational expenses. And, since the passage of the SECURE Act in Dec. 2019, you can also use 529 plans for student loan repayments.
A 529 College Savings Plan is facilitated by a state agency or state. It can offer a range of investment alternatives and plans. Any earnings you invest grow federal income tax-deferred. Distributions for skilled educational expenses are free from federal income tax. If you withdraw the money for an alternative reason. You’ll pay federal and state income taxes in addition to a 10% federal tax penalty on earnings.
Here is how to get started with A 529 Savings Plan
1. Begin by Checking Your State’s Plans.
All 50 states and the District of Columbia offer one or more 529 plans. Over 30 states ,including the District of Columbia offer a state income tax deduction or credit. You do not necessarily have to invest in your state’s plans. Investing in another state’s plan might entitle you to a tax credit or income tax deduction. Seven states provide such tax breaks.
These seven states are Arizona, Kansas, Arkansas, Missouri, Minnesota, Montana, and Pennsylvania.
Independent sites, such as Savingforcollege.com. Rate state 529 plans from time to time, based on their investment merit and several other factors. Investopedia has recently published its list of the top 5 best 529 plans.
2. Compare Plan Fees
You might want to invest in an out-of-state 529 plan. If you can get a better deal on plan fees. You can look for information on a plan’s annual fees. Compare the plans side-by-side with the College Savings Plan Network site. Which is connected to the National Association of State Treasurers. That difference in fees can build up with time.
3. Consider Prepaid & Savings Plans
There are two primary kinds of 529 plans: prepaid tuition plans and savings plans. Keep in mind that prepaid plans may limit your choice of schools. Usually to that state’s community colleges, universities, and other colleges. With a 529 savings plan, you can use the savings at any qualified institution. In any state for a broader range of costs, which include room and board.
Prepaid plans also vary broadly in what kinds of guarantee they provide. Therefore, be certain to read the fine print. Also, prepaid 529 Savings Plans can’t be used for K-12 education.
4. Choose Your Investment
Once you’ve selected a plan, the next step is determining how you want your contributions invested.
Most plans provide a range of mutual funds, including stock and bond funds, in the range of conservative to aggressive. Some also offer alternative options, like guaranteed investment contracts (GICs) from insurance firms and certificates of deposit (CDs) from banks. It’s not a necessity to put all your money in a single fund or investment; you can distribute among several.
5. Invest early—and frequently.
The sooner you start, the better. For instance, $1,000 deposited when your child is born. Will grow all the way to $3,996 in 18 years at an interest rate of 8%. If you wait until your child is 10. Then that $1,000 has only eight years to grow and will grow to only $1,850. By the time your child is 18.
As earlier mentioned, you can start a 529 plan either via an advisor. Or less costly, by investing directly with the plan’s sponsor. As states administer 529 plans. They generally turn over the daily operations to predominant financial services firms, like Fidelity, Vanguard or T. Rowe Price.
Different from most mutual funds. 529 Savings Plans generally do not need a minimum investment. It can be started with a minimal investment such as $25.
For future contributions, most plans also offer automatic investment plans. That will withdraw the amount of money you select from your bank account on a monthly, quarterly, or semiannual basis. Then, invest the money in the plan.
One benefit of investing from time to time all throughout the year, instead of in a lump sum. Is that you’ll enjoy dollar-cost averaging. Some plans and employers also allow you to have some money automatically withdrawn from your paycheck. Then direct deposited into a 529 Savings plan.
Automatic programs like these make investing nearly effortless. Which can be of great help for busy parents. All the best as you save for your child’s college education. Good luck!