October 13, 2006
By: Jim Oosterman
Next to saving for retirement, if you have children, the largest financial challenge you face is the ability to pay for their college education. A college education today is more costly than ever, and continues go grow. Until recently, there have not been many tax-free options for parents, to help them save for higher education.
One way to save – investing in a 529 plan – provides more benefits than any other. It is a simple way to save money for your children's college education.
What is a 529 plan?
A 529 (named for its section number in the IRS code) is a state-sponsored investment program. Every state, including Massachusetts, now has at least one 529 plan available. The state sets up the plan with a financial management company of its choice, and you open a 529 account with that company according to the state's plan features. You don't have to live in a particular state to participate in its plan.
The options for 529 plans are usually categorized as either prepaid or savings. 529 pre-paid plans, like the U.Plan in Massachusetts, lock in today's tuition rate at public and some private colleges. The program will pay future tuition at more than 80 of the state's public or private schools.
The advice here deals primarily with savings plans, which are made up of mutual funds that grow tax-free and can be used to pay for any aspect of higher education – tuition, room and board, and even miscellaneous expenses, such as transportation, computers and books. If you decide to use a 529 savings program, like Massachusetts' U.Fund plan, the full value of your account can be used at any accredited college or university in the country.
529 plan advantages
One big advantage for those less comfortable with investment pursuits is that a 529 plan offers a very easy, hands-off way to save for college. Once you decide which plan to use and complete an enrollment form, you can make periodic contributions – or arrange for automatic deposits – then relax and forget about it if you want to. The ongoing investment of your account is handled by the plan, not by you, and plan assets are professionally managed.
Among the other benefits:
You can open accounts for any number of people no matter how old they are. Start one for each of your children, or even yourself, if you're thinking of going back to school. Grandparents can start one for grandkids as well. You can have each child's 529 in a different state if you want to diversify your portfolio. There are limits to how much money can be contributed at once or each year.
Choosing a 529 plan
Because each state controls some of the features of its own plan, there are variations from state to state. Most plans follow the same general scheme, but it's worth comparing plans among states for the best deal.
As you evaluate each plan:
You can sign up for a 529 plan on your own at any number of web sites that offer information about college savings or with a broker. Both types of sources can help you sort through the details of all the state plans available.
As with any investment, the sooner you start saving, the better. A newborn today can have hundreds of thousands of dollars ready to help pay for higher education 18 years from now!