If you are like most people with children, you know that you should be saving for college. But, the mere thought of investing; choosing the proper allocation of stocks, bonds, and funds; and then managing these investments for many years to come can send shivers up anyone’s spine!
There is an answer – 529 college savings plans. 529s are special tax-advantaged plans. Not only are these savings plans easy to use, they are certainly one of the best college investment strategies available to you.
What is a 529 Savings Plan?
Named after the section of the IRS Tax code that authorizes them, a 529 savings plan is basically any state-sponsored, tax-advantaged college savings plan. A 529 allows anyone, regardless of income, to make monetary contributions which grow tax-deferred and then can be later drawn on, again, tax free as long as withdrawals are used for college costs such as tuition or room and board.
One of the major benefits of a 529 savings plan is that you don’t even have to remember to save. Most 529s let you set up an automatic investment plan, similar to how your 401k operates. As little as $25 opens up a plan, and you can continue with low monthly deposits, which makes 529s attractive to all families regardless of income level.
You don’t need to know the nitty-gritty details of investing because the 529 plan does it for you. But, because each state offers different plans and because you don’t even have to be a resident of a state to invest in that state’s college savings plan, you do need to do your homework to know which state’s plan is the best one for you!
Things to Consider in Selecting a 529 Savings Plan
- Start with your home state when looking for a college savings plan. You can buy it directly through your state finance authority or contact an independent investment broker. Many state plans offer state tax deductions to residents with 529 plans. State tax incentives can be a powerful incentive, but you need to also make sure the state plan offers low costs and investment options you like.
- Consider going it alone and buy Direct-Sold College Savings Plans rather than buying a Broker-Sold College Savings Plan. Buying directly from the state can save you commission and sales fees owed a broker. When you go it alone, however, you should make sure the total return of your investment will offset the added expense of a broker’s commissions; otherwise the broker is worth his/her salt.
- Research all fees and expenses and carefully compare the state plans. Look for a plan with a lower expense ratio. An expense ratio is an annual operating fee and should be no more than 1% a year. Also find out how the plan has performed historically over a 3 to 5 year time period.
- Know the specific tax benefits (state and/or federal) on contributions to any college savings plan(s) you are considering.
- Consider the plan’s investment options. Make sure you choose a plan that offers a variety of investment options so that you have the opportunity to match your needs, objectives, and comfort level in investing.
- Visit Morningstar.com (Search for “529.”) This Website compares the eighty plus 529 plans, rating them based on fees and quality of the investment mix. Most recently Colorado, Maryland, Nebraska, Utah, and Virginia were judged the best options.
- Get further information from these two good resources: 529 College Savings Plan : The Smart Way to Fund Highter Education and The 529 College Savings Plan Made Simple
Once you have made an educated choice about which 529 college savings plan is best for you, all you need to do is buy the plan and let the investment tool do its work while you sit back and watch your contributions grow. It will feel like putting your college investment on cruise control!