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Saving for College
A 529: An Account Specifically Made For College Savings Having children changes everything. Suddenly you’re focused on their future as well as yours. Most families want to do everything to help their children succeed, and one way is to pay for some or all of college. Let’s explore one way to save for college:
Prerequisite: Like taking a 100 level course before the 300 level course, there is a prerequisite to hit before saving for college. First, take care of yourself get comfortable with your emergency and retirement savings. After all, your child can take loans for college, you can’t take a loan for retirement. Also, most would rather pay off student loans than pay for you in your old age (trust us, we see both circumstances). If you aren’t comfortable with your retirement savings yet, review our previous article for Evanston Woman.
529 Plans College Savings Plans: If you believe you are ready to save for college, the best option is a 529 college savings plan. Why? Because any yearly investment growth is not taxed; additionally, the growth isn’t taxed if you withdraw it to use for education. That’s right, you never pay taxes on the investment growth if used for education. Another advantage of 529 College Savings Plans: if you live in Illinois, you can get an Illinois income
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tax deduction for contributions of up to $10,000 per year ($20,000 per couple) to one of the Illinois sponsored plans. The Illinois Bright Start plan has solid investments and low costs. It is a good option for most people in Illinois. That said, each state has a 529 plan, and they don’t limit your student’s college choices. So you could, for example, live in Illinois contribute to a plan in Nevada (you would not get an Illinois tax deduction) and pay for college in Delaware. With these plans, you open an account as the owner and contribute money for a beneficiary (your child). You then invest your contributions from several choices offered within the plan. One way to approach this decision is using the age-based mutual funds offered in all plans. They have funds for children of various ages (e.g. funds for children aged 0-2 or 3-5), which are great, simple options if you don’t feel comfortable making complex investment decisions.
529 FAQs:
Extra money – If you have extra money in a 529 (a good problem), you have options: You can change the beneficiary of the account to a relative (normally from one child to another). You can save it for a child’s graduate
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school. You can withdraw the money, but you will pay taxes on investment growth AND a 10% penalty. Scholarships – You can withdraw the amount of a scholarship without penalty (you still pay taxes on the investment growth). Or you can use the money for room and board and other qualified expenses. Financial Aid – Yes, a 529 plan reduces your child’s aid eligibility. However, when the assets are in your name, it reduces aid only by a maximum of 5.64% of the account value.
What else should I know?
There are two types of 529 plans: prepaid tuition plans and college savings plans. We find prepaid tuition plans restrictive and normally recommend savings plans (which we described earlier). If you have questions, feel free to contact us through our website. Otherwise, we’ll talk to you again soon with an upcoming article about teaching your children how to manage money responsibly.
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