A 529 college savings plan is a newer type of investment that has already gone through a roller-coaster of debate with regards to the effectiveness and need. Sometimes it’s best to look into the details of the plans and find out if it is right for you. Here is some information that may help with that decision.
If you have decided to invest in a 529 College Savings plan your next question is definitely going to be, “How much can I invest in a 529 college savings plan?” Let’s take a look at the factors to consider before determining how much to invest. We will look at ways of finding out how much you will need to invest to reach your goals first.
The Growing Cost of A College Education.
The first thing to consider is how much is a college education going to cost when the perspective student is ready for college. This figure will be important when setting up a 529.
The average increase for college tuition is about 4 to 6% per year. In order to find out the cost of a college education, you will have to figure out how many years before your perspective student will begin college and then make the calculation for each year. Ok, I’ll make this part simpler. Here is a table you can use to calculate the cost for the amount of years.
1 = 1.05 11 = 1.71 21 = 2.79
2 = 1.10 12 = 1.80 22 = 2.93
3 = 1.16 13 = 1.89 23 = 3.07
4 = 1.22 14 = 1.98 24 = 3.23
5 = 1.28 15 = 2.08 25 = 3.39
6 = 1.34 16 = 2.18
7 = 1.41 17 = 2.29
8 = 1.48 18 = 2.41
9 = 1.55 19 = 2.53
10 = 1.63 20 = 2.65
(Table figures are based on a 5% increase per year.)
Here is an example.
A student wishing to go to college in 10 years and the current college tuition rates are $10,000.00. Take 10000.00 and multiply by 1.63 (reference number ten above.)
The cost of that same college in ten years would be $16300.00 per year.
How much will my child need.
Now that you have an idea of how much will be needed for tuition, plans can be made to determine how much you can afford to invest and how much you will need to invest to reach your goal. Even if you do not plan on having enough to pay all four years in one shot, which is difficult at best, you can plan and identify approximately how much you will have.
Note: before allowing the large increase in tuition to intimidate you, remember that the amount placed into a 529 College Savings plan is also going to grow.
Now we will take a look at what an initial investment can do over time. We will use the figure of $5000 to start with and assume nothing else is contributed for the duration of 10 years. 5000 multiplied by the figure for 10 years above. (1.63) That is equal to $8144.00, assuming a 5% interest increase per year. That’s a contribution of almost half the first year.
There is a lot of math and calculating in the previous examples but it is one of the best ways of figuring out how much investment will be needed for your child’s 529 plan. Do not worry however, many websites like SallieMae.com and Savingforcollege.com also have calculators for use to help you determine how much you need to invest in a 529 college savings plan.
Are there limitations to how much I can invest in a 529?
The other question that was asked was “How much can I invest in a 529 College Savings plan”? Unlike a traditional IRA which limits the amount of money a family can contribute, in most states there is no maximum amount for a 529 plan. It is best to check with the state that you live in first to find out if there are any limitations. In over 37 states one can invest as much as possible each month or year depending on their financial ability. There are a number of different 529 plans available and some states do not even require you to reside in that state. To find out what plan is right for you, here are a couple of articles for your reference. Also be sure to check with your individual states requirements and regulations.
Grose, T. (2006). Spend Your Way to College. Retrieved from TOPICsearch database.
Lim, P. (2007). Nickel and Diming Your Kids to College. Retrieved from TOPICsearch database.