The amount of money it costs to get a college degree has increased by 6.5 percent each year over the last decade, according to the U.S. Department of Education.
Experts estimate that by 2030, the cost of a 4-year degree will be more than $205,000 which means; it’s never too early to start saving for college!
But where do you start? One popular method is by opening and managing a 529 plan.
These investment accounts offer both federal and state tax advantages and great potential for tax-deferred growth over time. But these tax-free funds must be used for qualifying educational expenses when you decide to draw on it.
First, you’ll need to decide what kind of 529 plan you want to open. There are two different kinds of 529 plans: savings plans and prepaid tuition plans — the latter of which has been declining in popularity over the last decade.
Prepaid tuition plans let you lock in current tuition rates by prepaying part or all of the anticipated tuition costs for public education at in-state colleges and universities. They can be converted into private or out-of-state funds, but the potential for growth is not an investment plan.
College savings 529 plans are similar to a Roth IRA in that your after-tax contributions are often invested in mutual funds which fluctuate with the market. If you choose this option, check out the 529 plans for multiple states to see which averages the best returns. Be sure to check out your own state, though, as more than half of them offer some sort of tax break or other incentive for keeping your money close to home.
If you want to maximize your returns, do your homework and find out about fees included in different plans before you pick one. Some plans include enrollment fees, while others include account management, annual or percentage-based fees. Read up on whichever state’s plan you choose to opt into because there may be ways to eliminate certain fees by doing simple things like auto-contributing, maintaining a certain balance or investing in your own state’s plan.
Some states provide financial aid incentives for investing in and attending college in that state for a period of time. This may not work for everyone, but it’s worth looking into the financial aid benefits of investing in your state’s plan and weighing it against the fees and tax incentives to see if it’s worth your while.
Finally, consider your overall investment strategy when choosing the best 529 plan for your family. You’ll want to take into account things like your budget, number of children, the amount of risk you’re willing to take and your child(ren)’s age(s). Different states cap your maximum contributions, so if you think there is a chance you will want to change the beneficiary to use up extra funds, this is something you should be looking out for in your research. Decide whether you’re looking for a passive investment account or if you want to actively manage your account in an effort to increase your earning potential. Some plans offer age-based asset allocation which will adjust the stocks and bonds — often managing risk — based on how close your child is to starting college.
While it may seem like there’s a lot to take into account when choosing a 529 plan, the good news is, the IRS allows for one tax-free rollover each year — so you’re not stuck with what you choose forever. With educated decisions and consistent contributions, you’ll be able to ease the burden when the time comes to pay the piper.