Investment is such a boring, yet important task that we all need to learn and do no matter whether we like it or not. It takes a whole new level of importance when we need to invest for our kids education.
If you’re in US and looking for ways to save for your kids college education, 529 is a great option to explore. We have invested in 529 plan for both of our kids.
What is 529 Plan?
529 plan is a tax-advantaged savings plan for future college costs.There are 2 types of 529 plans. Pre-paid and savings plan. Pre-paid meaning, you’ll pay the money upfront and let it grow until your kid is ready for college. Savings plan is, contribution to the 529 plan. You can invest whenever you want. Also, you can decide the amount you invest as well. There is no set rule investment amount or minimum balance.There are no hard rules here. The maximum amount you can invest every year is $14,000 without any penalties.
529 withdrawals, without any taxes, can be used for tuition and related fees, room and board, books and supplies, and any school-related special needs services.
- Although the money you contribute is an after-tax income, earnings from 529 plan are tax-free when used for the above college expenses.
- 529 plans can be transferred among family members. Let’s say you have some leftover money from your first kid’s 529 plan, you can use that money for your 2nd kid’s college education without any penalty. It can also be used for your first kid’s masters, cousin’s education, your education etc
- Grand parents can contribute to their grandkids 529 plans
- Some states offer tax deductions when you contribute to 529 plans (if you’re currently paying state tax)
- If you kid decides to study abroad, some universities/colleges allow you to pay through 529 plan
- You can invest in any of the state offered 529 plans. It doesn’t have to be in your home state 529 plan
- you can transfer the money from one 529 plan to another without any penalties (allowed once a year)
- The money you invest in 529 plan can be used, without penalty, only for college education purposes
- We don’t know how much college will cost in another 10,20, or 30 years. So a balanced approach is necessary to avoid over-investing in 529 plan
- The money you contribute is just like regular investments and there is no promise on how much return you’ll earn (you get to choose your preferred investment options from the provided list)
How To Choose A 529 Plan:
As I mentioned, we invested in 529 plan for our kids college education. We don’t pay state tax for our incomes (Texas doesn’t have state tax). Based on my research, our final list of 529 plans are Utah, Ohio, New York, Florida, Alaska, and Lousiana. Below are the criteria we looked at when selecting the 529 plan.
- Expense ratio
- Age based investment options
- Static/individual options %
- Minimum initial contribution
- Enrollment fee (initial fee)
- Individual portfolios (do they let us invest in individual portfolios and if so, how many)
- Annual maintenance fee
- Residency required?
- Maximum fund amount allowed
- State tax deduction (adding this one for you in case if your state offers state tax deductions for 529 contributions)
How Much To Contribute?
As I mentioned earlier, there are no hard rules here. If you Google the question, you will get a quite a number of answers. Some plans don’t even have a minimum contribution and some start with $25.
Savings for college has some good explanation on how much to contribute. Check it out for more information. How much you need depends on the return on your investment as well. So, there are multiple factors that we don’t have control over.
Here are a couple of links where you can find more information about529 plans:
Added on 1/5/2018:
Here is one more strong reason to invest in 529 plans: the latest tax plan expanded the use of 529 plans. Now you can use 529 plan money to pay elementary and high school fees. Isn’t it awesome? You can withdraw upto $10,000 per year for the K-12 tuition fees.