We all want to save for our children’s college education. But what’s the best way to do so? One great way is with a 529 plan. This structured fund is usually set up by the parents, benefactor, or custodian of a child who will likely attend college in the distant future. Financial professionals usually suggest that 529 plans are set up at least six years before the child attends college, but I suggest that parents start much earlier than that.
Earnings in a 529 plan grow tax free, and withdrawals for qualified higher expenses are free from federal tax. The accumulated funds in a 529 plan should only be used for college/higher education expenses. Otherwise, deductions will be taxed as ordinary income and incur a 10% federal tax penalty on all earnings.
But before you run out and start your child’s 529 plan, realize that there are two options:
- 529 Savings Plans: These work much like a 401K or IRA, where you are investing your contributions in mutual funds or similar investments. As such, your account will go up or down in value based on the performance of the particular option you select.
- 529 Prepaid Plans: These let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges.
If you think the cost for college is expensive today, just wait and see what the tuition is in ten to fifteen years. The message is clear: Start saving for your child’s education today.