Want to know a little secret? Less than 10% of Americans are “in the know”……
it’s a financial tool that could more than double your money for college over your child’s lifetime, and it’s called a 529 College Savings Plan.
What is a 529 College Savings Plan?
A 529 College Savings Plan is widely considered the best way to save for college. It is a tax-advantaged investment account designed to help you pay for college. It works like a Roth IRA – you put in post-tax dollars, and then the gains and qualified withdrawals are tax-free.
These accounts are more flexible than you might think. Eligible institutions include any higher ed institution that qualifies for federal financial student aid, including state universities, out-of-state colleges, private colleges, and many institutions abroad.
And it goes beyond tuition – you can also spend the money on school fees, room and board, books, computers & related equipment, and special education expenses.
Lastly, you can always withdraw the principal (i.e., your original, post-tax contribution) without paying any taxes or penalties. However, if you do spend on any nonqualified expenses, you’ll pay taxes plus a 10% penalty on the gain.
But I don’t have any money to save!
Want to know an even bigger secret? Anyone can contribute to any child’s 529. So even if you’re a little constrained on your finances (you just had a baby, after all!), you can still get ahead.
Your friends and family are probably asking how they can help. Once you’ve got enough diapers, just ask for contributions to your child’s 529. Baby showers, early birthdays, and other milestones can be great moments to kickstart that college savings plan.
Okay. How do I get started?
Here’s where it pays to do a little research. Each state has its own 529 College Savings Plan, but you are not required to sign up for your state’s plan. Check if your state offers a generous tax-deduction for using your state plan, but otherwise, you’re free to choose any plan in the country. If that’s the case, look for a plan with low fees, reputable management, and tools to allow other people to contribute. When choosing your investment portfolio, consider keeping it simple with a passively invested, age-adjusting portfolio.
If you’re overwhelmed by the options, don’t go back to using a regular savings account! You’d give up thousands of dollars in lost investment gains and tax benefits. We built CollegeBacker to make it easy to find the right plan, choose the right investment portfolio, and get your friends & family involved.
CollegeBacker is an SEC-registered investment adviser dedicated to helping families save for college. With CollegeBacker, parents can find the right tax-advantaged 529 College Savings Plan, determine a personalized savings goal, and invite family & friends to contribute. Plus, anyone can use CollegeBacker to kickstart another child’s college savings plan.