I am often asked the question, “What’s the best way to save for my child’s college education?” My answer is invariably the same, “Your best strategy is a 529 College Savings Plan.” Here’s why:
College funding costs a lot of money. If you plan to pay for college for your child, the costs can be staggering so one of your greatest allies is to start early. For a four-year-old who will attend private college, the average costs of tuition, books, transportation, room and board is about $400,000. At seven percent earnings, you’d need to save $1300 per month for the next fourteen years. If your child attends an in-state public college, you’ll cut those costs by about half but we’re still talking about a lot of money.
Federal tax benefits. While you don’t receive a tax deduction for contributions to a 529 plan, all earnings grow tax deferred and distributions that are used for qualified expenses are federally tax free.
You maintain control of the money. As the person funding the 529 plan, you can maintain both ownership and control of all the funds.
529 plans are highly flexible. So if you’ve overfunded one child but underfunded another, transferring funds is not a problem. Funds can also be to pay for graduate school expenses, even if those expenses are for you. You can even take back the money for your own use. However, any earnings will be taxed as ordinary income and a 10% federal penalty will be imposed.
Large contributions are allowed. Everyone is eligible to make contributions to a 529 plan without tax consequences or restriction up to the annual free gift amount…currently $13,000 per person per year. So parents could contribute up to $26,000 in any one year. But it gets even better than that. The law allows you to give up to five years of annual gifts. That means you could front-load college funding with up to $65,000 as an individual or $130,000 as a couple. Note that these ‘gifts’ use up your allowed annual gifts for the respective years.
Simple investing strategies. Most plans offer an ‘age-weighted’ investment strategy whereby the mutual fund manager automatically becomes more conservative as your child approaches college age. This takes a lot of the guesswork out of investing.
All states offer their own version of the 529 plan so how does the Alabama plan stack up against the competition? In August 2010, Alabama revamped their plan to make it one of the most competitive in the country. There are a number of investment options but I recommend that you stick with the low-cost Vanguard mutual funds which offer age-weighted investment strategies as described above. In addition to low fees, for Alabama residents, the Alabama plan allows a state income tax deduction for your contributions and waives the $12 administrative fee.
In prior years, many Alabamians invested in other states plans because they were more competitive. Well, now’s the time to bring that money back to Alabama. All plans allow you to transfer funds between plans once every twelve months. So come on folks, here’s an opportunity to fully support Alabama with pride! For more information on 529 plans go to the “Resource Tab” on my website www.GetRichOnPurpose.com