In this current day and age, education has never been more important. However, with the rising cost of college, it has become increasingly difficult to know how best to save for a college education. Many parents can start to feel overwhelmed and even give up in frustration at the idea of saving. “I’ll never be able to save that much”, or “I’ll start saving when my child is older” are common thoughts that run through a parent’s mind.
How can you best save for your child’s college education? The answer is simple: By using a 529 plan. Named after an IRS code, 529 plans are plans designated for college savings. Many states offer 529 plans in order to help parents pay for their children’s college education.
There are two types of 529 plans: Prepaid and savings plans. Prepaid tuition plans allow parents to purchase tuition for their child at today’s price. For example, a parent with a five- year-old would be able to pay for that child’s college tuition today even though he won’t be going to college for another 13 years. This option can be very appealing for parents who know early on what school their child will attend and wish to take advantage of lower tuition costs.
For those who haven’t planned this far in advance, a 529 savings plan might be a better idea. 529 college savings plans work similarly to an IRA. Parents put money into an account which is then invested in stocks, bonds and mutual funds so that it has the opportunity to grow exponentially. Although there is a risk of losing money, this can be minimized by moving towards more conservative options as the child ages.
529 plans can be used to cover qualified higher education expenses such as tuition, books, supplies, and in some situations, room and board. The funds for 529 college savings plans can be used at any accredited school; not just universities. Some states even offer tax incentives to residents who invest in their 529 plan.
Confused? Don’t be. You can look up your state’s 529 plan on the internet and give them a call if you still need more information. It is always a good idea to contact your tax preparer as well for more specific, individual questions. If you have children, investing in a 529 plan is a great strategy to put away enough money for college, and have it work hard for you over the years as your child grows up. Why not check out a 529 plan today?