As college costs continue to rise, families are turning to 529 savings plans to help prepare for future tuition bills.
It’s no surprise that affording college is a top concern among today’s parents. Tuition costs are at an all-time high and continue to increase at around 3 percent each year. As a new mom, you could one day end up paying at least $200,000 for a four-year degree.
529 savings plans were designed to help pay for future education costs. You can use a 529 plan to pay for college expenses including tuition, books, supplies, computers and even some room and board. Up to $10,000 can also be withdrawn to pay for elementary and high school tuition.
Here are some tips to help new moms maximize the value of their 529 plan:
THE EARLIER YOU START, THE BETTER
529 plans work like a Roth IRA - you deposit after-tax funds that grow tax-free over time and won’t be taxed when you withdraw to pay for qualified expenses. Tax-free compounding can be a powerful tool for new moms who have 18 years until their child starts college. Each day you wait to start saving, you miss out on potential earnings growth.
It’s never too early to enroll in a 529 plan for your child. In fact, you can open a plan before your child is born by making yourself the beneficiary and changing it once you have the baby’s social security number.
SHOP AROUND FOR THE BEST 529 PLAN
Most 529 plans are available nationwide, but you’ll want to check to see if your state offers any 529 plan benefits for residents, such as a state tax deduction for contributions or a matching grant. Be sure to review fees, investment options and historical performance. A state tax benefit might not be worth as much if the plan has high fees or poor investment performance.
SELECT INVESTMENTS CAREFULLY
Parents can set up a 529 plan on their own, or with the help of a financial advisor. Most direct-sold 529 plans offer age-based investment options for parents who want a hands-off approach. Age-based portfolios will automatically shift investments over time, starting out with a larger allocation to equities when the child is young and moving toward more conservative investments as they get closer to college age. If you’re not happy with your investment selection, you can make up to two changes per year without tax consequences.
GRANDPARENTS AND OTHER LOVED ONES CAN HELP
Most 529 plans have very low minimum contribution requirements (if any). But after that you can contribute as much as you want, whenever you want. Many plans offer gifting platforms that make it easy for friends and relatives to make a secure electronic contribution for birthdays, holidays, graduations or other special occasions.
529 PLANS HAVE A MINIMAL EFFECT ON FINANCIAL AID ELIGIBLITY
If a 529 plan is owned by a parent or a dependent student, it will be counted as a parental asset on the Free Application for Federal Student Aid (FAFSA). The maximum impact on your child’s federal need-based aid eligibility would be 5.64% of your account value. Other types of savings accounts in your child’s name are assessed at 20%.
YOU HAVE OPTIONS IF YOUR CHILD DOESN’T GO TO COLLEGE
It’s impossible to predict the future, and there is always the chance that your child won’t need the money you saved in a 529 plan. You have the option to take a non-qualified distribution at any time, for any reason, but you will have to pay income tax and a 10% penalty on the earnings portion of the withdrawal. The penalty is waived if your child gets a scholarship, decides to attend a U.S. military academy, becomes disabled or receives educational assistance through a qualifying program.
To avoid paying any taxes or penalties, you can keep the money in your 529 account and save it for a sibling who is going to college, a future grandchild, or even take a few classes yourself.
The best advice for new moms is to start saving for college as soon as possible. If your budget allows, set up automatic monthly contributions to a 529 plan. As your child grows, look for opportunities to put away additional money to help you get closer to your college savings goal.
Disclosure: The information contained on ProperGirl.com and in this article, is of a general nature and intended to be used as a guide. Information found here, including any ideas, opinions, views, commentaries, or suggestions expressed or implied, are for informational and educational purposes only and should not be construed as personal investment advice. It is neither to be construed as financial advice. Before making any decision, we recommend you consult a tax and financial advisor to take into account your investment objectives, risk, financial situation and individual needs.