So you’re thinking about saving for college. You feel like the time is right, you have finally made that commitment, and the baby is on the way in six weeks. Sadly, what’s become ever more par for the course is that if you don’t put that savings away before your child is born, there will be a million other things distracting you until you look back and “wham!” suddenly your 15-year-old is bringing home application packets from Ivy League schools and going on out-of-state visits and you’re wondering what just happened to the last decade and a half.
For this reason state-sponsored college savings plans may be the way to go. But what is a state-sponsored college savings plan? How can a state-sponsored college savings plan really make a difference for my child? Where can I go to learn more? All excellent questions, each tackled here in the top 5 things you need to know about state-sponsored college savings plans.
Tax-deferred or Tax-free? A Section 529 college savings plan “is a tax advantaged state-administered investment program that is authorized under the IRS Code Section 529.” But what does that mean? Tax-free is what they are, so get hip. Tax-free means that as long as you use the proceeds on “qualified higher education expenses,” you don’t pay any federal income tax on this money. From a state standpoint, you also may be able to take advantage of local programs which mirror the tax free status, tax deductions or credits for the contributions, and much more. It’s worth it to have a look.
Anyone Can Contribute: Unlike savings bonds or individual accounts, a vehicle like the 529 is able to be contributed to by anyone who wants to give. Friends, family, co-workers or whoever. Grandma can also set up her own account for each beneficiary and contribute to it regularly if she prefers.
Prepaid College: Another thing many people wish their parents had done previously is pre-pay for college. You can pre-pay now, at today’s rates, for your newborn child. Lump sum or over time; it’s up to you. Not only will this pre-payment of the college program get your kid started without having to worry about paying for school, but it also puts you in a much stronger position. Get your kids into school, keep them in state, and enjoy their experience in the colleges of tomorrow at the prices of yesterday.
Not For Me: If college is not for your first child and you do something through a state-sponsored plan like pre-pay school or set up a 529, you may be thinking you’re out of luck. Not true! Your 529 can be used for non college related expenses minus a fee (currently 10%). The risks of having to pay a fee are well worth the rewards of having your kid’s college paid for. Also if you want to change the beneficiary to another child, nephew, niece, or even yourself, you can do that too (and avoid fees as long as it’s used for qualified educational expenses).
Do It Now: Don’t wait on this. If you are having a child or are thinking about having one and want to take advantage of these state-sponsored college tuition programs, you should do so. You may not see the rewards for years and years, but one day, 18 years or so down the road there is going to be one pretty smart head honcho sitting at the table and that would be you. Mr. and Mrs. State-Sponsored College Saving Program.
Take a bow indeed.