College is expensive. Here are three things to remember when planning for you little (or not so little) ones.
Save early and often. The sooner you start saving for college, the more you may have available when those first tuition, room and board bills come. Einstein famously claimed that the most powerful force in the universe was compounding — the snowball effect — so make this work for you, even if you start with just $50 when your baby is born.
1. How should I save?
Lots of choices, but making the right choice is pretty easy. 529 College Savings Plans are a really popular way to save for college. Some states offer 529 Prepaid Tuition Plans that allow you to prepay the cost of tuition for a semester up to all four years, though some restrictions apply. There are other types of accounts available for saving for college, but 529 Plans may offer the best combination: reducing your state taxes when you contribute (check with your state or tax advisor), tax-free growth, tax-free withdrawals when used for eligible educational expenses (check with your state or tax advisor) and the opportunity to invest in a low cost, diversified account.
What probably doesn’t make sense: Life insurance. Seriously? You’ve seen the commercials…but life insurance is really not designed for college savings, and it’s expensive.
2. What kind of 529 account is right for me?
Not all 529 Savings Plans are created equal! While most states sponsor a 529 College Savings Plan and 35 states offer a tax benefit for contributions (check with your state or tax advisor). But, there are plans you buy through a stock broker/registered representative/financial advisor and plans you purchase direct from the state. The problem with “broker sold” plans is that they generally carry added costs, including commissions and ongoing costs called “12b-1 fees” in order to pay the broker selling the product. Why pay more when you don’t have to?
We like 529 plans you can purchase directly from a state’s 529 program. They are generally lower cost and offer the same or more benefits than those sold through a middle man. CollegeAmerica is sold by brokers who can choose between no and high commission versions of the exact same investments, and Virginia Invest529 which is purchased directly on the Virginia 529 website.
3. Do my kids have to go to college in the state offering their plan?
We are asked this question all the time. For 529 College Savings Plans, no. These accounts allow you to withdraw money from the account for any eligible educational expense (this now includes up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools). Eligible expenses include tuition, room, board, books and certain fees and supplies. So, if you live in Virginia and have been saving into the Virginia 529Invest plan for 18 years, and your daughter decides that a college in California is perfect for her, you can withdraw from the account tax-free to cover those California tuition, room, board and other eligible expenses.
Prepaid 529 Plans work differently. First, they only cover tuition. Generally, if your child attends an in-state public college or university, the tuition bill is covered for the semesters you prepaid. The amount the account will cover goes down if your child attends an in-state private school or goes out of state. It’s important to check with the program sponsor to understand what costs it does and does not cover.