Saving for College: A Dramatization
I found Bobby in the fetal position behind the dumpster of my apartment complex. "What’s wrong?" I asked.
"I passed out, Mr. Yale."
I was alarmed at his response. I had never known Bobby to drink, and here he was passed out behind the dumpster of my apartment complex in the fetal position. His eyes were swollen, his cheeks drawn, and chicken nugget vomit dripped down his neck. "I’m ruined," he said, "I didn’t get the scholarship, and I can’t afford Harvard. If only my parents would have started a 529 College Savings Plan when I was young!"
Don’t let this happen to your kids. Start a 529 College Savings Plan now.
Saving for College: 529 Basics
There are many reasons to consider a 529 Savings Plan:
- Funds can be used for qualified higher education expenses. These include tuition, books and supplies, room and board, and fees at most accredited colleges and universities.
- There are no income limits. Any U.S. citizen or resident, 19 or older, can open a 529 account. Corporations, trusts, and some not-for-profit organizations are also eligible.
- Most states offer a plan for as little as $1,000.
- You can add to the account value until it reaches $300,000 with accumulated earnings allowed beyond this point.
- The account owner controls the account at all times, even after the beneficiary turns 18. The beneficiary can be switched at any time to another family member.
- Earnings accumulate tax-deferred.
- Withdrawals are exempt from federal taxation if the funds are used for qualified higher education expenses. Keep in mind that funds used for something other than higher education are subject to taxes on withdrawal and a 10% penalty (similar to an IRA).
- You don’t want your children to end up behind the dumpster of your apartment complex, in the fetal position, with chicken nugget vomit dripping down their chin because they can’t afford to get into a good school.
Which is the Best 529 College Savings Plan?
Most states have their own 529 plan managed by an investment firm, which means you get to decide which is the best 529 College Savings Plan. You do not have to reside in the state from which the plan originates; there may, however, be incentives that make your state’s plan more attractive. Here are some suggestions on choosing the right plan:
- Because it offers greater flexibility, the 529 College Savings Plan is superior to the 529 Prepaid Tuition plan.
- Begin with your own state’s plan. The tax incentives may make your state’s plan worth it even if it lacks in other areas. To find a 529 plan by state, click here.
Look for a plan that gives you flexibility. Here are common options:
- A Years to Enrollment Portfolio: With a Years to Enrollment Portfolio, your investment becomes more conservative the closer the beneficiary gets to receiving the funds, which means if you needed the money for college in 2009, your portfolio would have been affected only slightly by the 2008 market turmoil. Those who do not need the funds until 2020 will have lost more but still have plenty of time to recover. In addition, investors may opt for a conservative, moderate, or aggressive approach in their Years to Enrollment Portfolio. This option is ideal for parents who have little experience with investments or don’t have the time or the desire to monitor it consistently.
- Fixed Portfolios: With a Fixed Portfolio, investors select the asset types–equities, bonds, government bonds, money markets. Investors can allocate their assets in the manner they feel best. This strategy is best for those with investing experienceand basic knowledge of asset allocation strategies.
- Individual Fund Portfolio: With an individual fund portfolio, the investor chooses the specific funds or assets he or she wants in the portfolio. This option is best for experienced investors who understand the fundementals of picking funds.
Before investing in any plan, be aware of the risks and consult professional advice from somebody who is looking for more than just a commission.