Though we don’t hear about them much, 529 Plans have been around since 1996. They were created specifically to give tax breaks and other financial incentives to parents who were saving for their kids’ college education. 529 Plans come in lots of shapes and sizes, so choosing the right one can be tricky. To help you narrow down your options, here are some things to consider:
How much can you afford to sock away?
The first thing you need to determine is how much you can invest each month or year. This may make some of the other decisions (like whether to use a financial planner) easier. Make sure the dollar amount you choose fits comfortably into your personal budget. Setting aside money for your kids’ education may mean making sacrifices elsewhere – like eating out or shopping less. If your child is old enough, include him in the conversation. And ask him to contribute to your savings plan. Even very young kids can save quarters and pennies. Though they may not save much actual money, they’ll feel much more personally invested in their educations as they get older.
Manage yourself or get the help of a financial planner?
Next, decide how you want to invest. There are two ways for you to invest in 529 Plans - through a broker or via “direct-buy” (purchasing the plan yourself instead of having an investor buy it for you.) There are pros and cons to both. Purchasing a direct-buy plan requires you to do all of the research yourself (and there’s a lot to research!). The benefit, however, is that once you’ve chosen your plan, you won’t have to pay broker fees, which can be between one percent and six percent of your total contributions.
You can avoid all the research by simply buying a 529 plan through a financial planner. He will do all the research for you, based on your current financial picture and your long-term goals, and present you with a few options. One benefit of using a financial planner is that he’s familiar with tax and other rules associated with the plans. A financial planner can also help you choose a plan based not just on your education-related goals, but other things as well – like your retirement plans. The most significant downfall to using a financial planner is that you will pay fees related to transactions and general maintenance of the plan. If you talk to a financial planner, make sure he details these fees for you upfront.
What do you want out of your 529 plan?
Once you’ve decided between investing on your own or through a broker, the next step is to decide what you want in a 529 Plan. For example, do you want a plan that allows other people to make contributions? Would you prefer a plan that sets a minimum investment requirement so you’re sure to put some money into it every month or year? Would you like a plan that moves from riskier to safer investments as your child gets closer to college-age? Answers to these types of questions will help you find on the plan that best meets your needs.
One of the more important questions to answer when choosing a 529 Plan is: Will your child attend an in-state college? If the answer is “yes” you may want to consider a Pre-Paid Tuition Plan. Just like it sounds, this plan allows you to pre-pay your child’s college tuition at today’s tuition rate. Typically, what happens is that you actually buy tuition credits, which can then be used at a later date. By locking in today’s rate, you can potentially save thousands of dollars. Pre-paid plans are run through state institutions and are offered in every state. Keep in mind, however, that enrolling in a pre-paid plan doesn’t guarantee that your child will get accepted into a particular college.
There are, of course, other decisions to be made regarding 529 Plans. But these few will start you off in the right direction and help you narrow down your options to a handful that will work best for you and your family.
For more tips and tools to help you financially prepare for the future, check out Quizzle.com, where you’ll get access to a Credit Personal Trainer to make sure you can qualify for private student loans should you need them and a Debt Planner that will help you get out of debt faster so you can start saving.
Related articles:
- Should You Save for College or Retirement – Or Both?
- 529 Plans: Investing in Your Kid’s Future
- Gaming the System: Score Points with Your Saving
- Saving for College: Why You Need to Plan beyond Financial Aid
- How to get Your Retirement Savings Back on Track
Quizzle.com is the easiest way to get a complete understanding of your credit. Visit Quizzle.com to get your free credit report and score. No credit card or social security number necessary!
