If you believe that both college and saving money are important, then you will want to understand how you can save for college by opening a 529 account.
The United States has gotten quite good at coming up with national Holidays. There are dozens of odd ones out there. There is actually a Penguin Awareness Day in January and Clean Your Refrigerator Day in November. That is good because we usually only clean our refrigerator out about once per year.
What a lot of people do not know is that May 29 (5/29) has been dubbed National 529 College Savings Plan Awareness Day, named by states and educational organizations as a way to shed light on ways that families can get started on college savings.
The 529 Savings Plan was introduced 20 years ago and is one of the most popular college saving vehicles available to those that plan to send their children to college.
A Wall Street Journal article written by Chana Schoenberger on June 6, 2016 indicates that there are 12 million 529 savings accounts totaling in excess of $250 billion in assets to help parents and families pay for college.
The College Board informs that by 2030 students will need over $130,000 to cover four years of tuition at a public university.
So with the door of opportunity swung wide open on the topic of college savings this article will focus specifically on using a 529 Plan as the savings vehicle for college. Not the most exciting of topics in the world but if you can power through it you may be much better off for doing so.
There are multiple approaches to funding college and most use a combination of them:
- Save. This is the cheapest alternative because you can use tax advantages and time value of money.
- Pay as you go. This is an alternative where you pay the cost of college each year.
- Borrow. This is the most expensive alternative because of loan fees and interest paid over time.
Using an investment calculator at John Hancock Investments demonstrates the stark differences between these three options.
Saving is the cheapest alternative by a long shot.
The amount of saving required is largely dependent on the total savings needed and when.
“The key to saving is starting and not stopping.” – Hired Graduate
Time horizon plays a major factor and is based on how many years until your child is 18 and ready to head off to college.
The monthly amount required for saving for a newborn starting your states public university in eighteen years would be $346 per month.
If your child was already 8 today and only ten years from college then you would require $614 per month.
If your child is 13 today and only five years from college then you would require $1,262 per month to have the full four years of tuition saved.
See Assumptions to derive these monthly payments at bottom of article.
What Is A 529 Saving Plan?
- Tax-Deferred Growth: If your $25,000 invested grows to $50,000 then you do not get taxed on any of those gains if they are used for higher education
- Tax Deductible: Many states offer a tax benefit or deduction in the years you have made contributions to a 529 Plan. You have to check with your financial advisor and accountant for your situation and state rules. According to Allison Kade in an article from 2013 titled 9 Mistakes Not To Make with 529 Plans, there were 34 states, as well as the District of Columbia, that offer a state income-tax deduction or credit for residents who contribute to their state’s 529 savings plan. Five states—Arizona, Kansas, Maine, Missouri and Pennsylvania—provide a state income-tax break if you contribute to any state’s 529 plan
- Flexibility: You can use the funds for any type of higher education or training to improve skills. This covers room and board, tuition, books and fees. This education can be received at a local community college, junior college, two or four-year university, trade school, masters or professional school
- Ownership Control: The owners of the account maintain control and distribution and can ensure funds are properly used and go toward college costs and not a new car or spring break trip to Mexico
- Accessibility: The funds can be used whenever they are needed and simple distribution rules can be followed
- Transferable: The funds can be transferred to others within the family of the beneficiary. If the beneficiary either does not go to college, or does not need the funds due, then the funds can be transferred to relatives such as parents, siblings, cousins, aunts or uncles, nieces or nephews or any family member related through birth or adoption
It is important to note that there are 529 Savings Plans and 529 Prepaid Plans. You are more than likely to be interested in the Savings Plan, which functions much like a 401k or an IRA account. These are by far the most popular and have the most benefits. The Prepaid Plans are funds earmarked for a particular college.
There are two types of 529 Savings Plans available on the market today:
- Direct Sold Savings Programs. The Direct Sold Savings Programs has no sales charges associated with the funds but the caveat is you have to rely on your own research to pick your investment options or pay a fee-based financial advisor to assist you.
- Broker Sold Savings Programs. If you already have a relationship with a broker or financial advisor and want to pay a fee for their guidance in helping you select a 529 Plan, then they can certainly provide full service in educating and selecting proper investments in a Broker Sold Savings Program.
You should not feel overwhelmed about having to open and start a 529 Plan. It is simple and can be completed with a little bit of research and guidance from a trusted advisor if you choose. All you need to do is Find the 529 Plan, Open a 529 Plan Account, and Invest in the 529 Plan Account.
Finding a 529 Plan
There are a few ways to find a 529 Plan:
- Do the Work Yourself. If you want to do your own analysis, there are many sites out there that can assist you such as the Saving For College web site. It has a wealth of knowledge about 529 Plans and even allows you to compare state plans evaluating multiple criteria on a 5-Cap Rating Scale. The different Rating criteria are Performance, Costs, Features, and Reliability. It is a good level setter to compare the different 529 State Funds available to you.
- Find a Fee-based Financial Advisor. A fee based financial planner charges by the hour and will help you select a less expensive Direct Sold 529 Savings Program. If you are intimated by the idea of having to open an account and pick the right 529 plan, then you can choose to pay $50-$150 an hour for a professional who is qualified and happy to help you. If you do not currently know a Financial Advisor you should consider finding a local advisor that is well qualified to assist you. Look for advisors with credentials such as CFP or CFA (Certified Financial Planner, Chartered Financial Analysts), are referred highly by someone you know, or you can search the National Association of Personal Financial Advisors (NAPFA) web site. If you are curious what the difference is between fee-based financial planners and brokers then you can read a 2012 article in Forbes titled Fee-Only Financial Planner: What’s the Difference? by David John Marotta.
- Find a Broker. You may already have an existing relationship with a broker and would prefer to leverage this relationship to do the research and open a 529 Account. If you prefer to use a Broker to start this 529 Plan then they will direct you to a Broker Sold Savings Program. Just remember that may carry higher fees that ultimately erode the earning power of your investments over time. This can amount to thousands of dollars. For example, assuming you have 7 years until Junior is ready for college. An additional 1% in fees to the broker would mean you have to pay $36 per month extra for 7 years. That is 84 months times $36 per month, for a total additional out of pocket investment of $3,024.
Regardless of whether you choose to do the work yourself (which I did) or seek the guidance from a financial professional you should know some of the basics.
Fees vary by 529 Plan and an hour of research is well worth the time to determine the State 529 plans that make the most sense to you. As mentioned, if your state offers tax benefits for contributions to the 529 Plan(s) in your state of residency it may make a difference in whether you look at your states qualifying 529 Programs or if you will be looking at 529 Programs across the country. Residents can pick from any state that offers a 529 Plan. It is not a requirement to pick your State’s 529 Fund.
If you live in NC, invest in a plan for SC, you can still send a student to college in VA using your SC 529 Fund.” – Hired Graduate
Other states may offer better all around features so if you determine that there is no tax break offered for in-state investors then it is completely acceptable to pick the State 529 Fund that you like the best.
It is also important to note that you can send the student to a college in any state and the 529 Fund will pay for those college costs.
The Saving For College web site is one of the best online resources for researching 529 plans and has a 529 Comparison Tool and a State By State Fund Selector to see fund details by state.
Don’t freeze here at the finding a 529 fund step, make a decision and move on. We want to avoid Paralysis by Analysis. Some people may see 112 plans available at this site and freeze up like a deer in headlights.
You could also look at the Top Ten 529 Plans or look at the Plans in your state. If you want to take advantage of the 529 Plan Calculator it will serve up the 529 State Plans that may be the best fit for you.
Open The 529 Plan Account
Once you have found the 529 Plan then you are ready to open your 529 Plan. All you will need is an online profile at the 529 Plan Administrator’s web site.
You will then need to supply basic information about the account owner (First Name, Last Name, Social Security Number, Date of Birth), beneficiary info (First Name, Last Name, Social Security Number, Date of Birth), and a funding method (Bank Name, Account Number, Bank Routing Number).
Invest In The 529 Plan Account
You have identified the 529 Plan you want, you have opened the 529 Plan account, and now you are prepared to invest.
If you think about investing as mandatory and send a part of every paycheck to this 529 Plan then you will be improving the odds your children will be able to go to college one day.
The research shows that families that have 529 Plans are far more likely to attend college than those that do not have one. I think that statistic is a bit funny as I liken it to going to a restaurant with your family and saying “Well, since we are here why don’t we go ahead and eat now.” Regardless, saving money for college is an enabler and puts you on path for affording college one day – and that is significant.
Just $30 per month for 18 years would wield a total savings of $12,826 at an 8% average annual return. Not bad considering the out of pocket investment was just $6,480. Increase the savings to a reasonable $100 per month and you would have nearly $43,000. Even if you do not have all of the money to pay for college that is a sizable amount of money you would be proud to offer up for your child’s future.
Automatic investing the same amount every pay check or every month is technically called dollar cost averaging and is a way to protect against down swings in the market.
Just Get Started
- Start (Don’t freeze or get analysis paralysis)
- Keep going (don’t stop, automate it and pay yourself first)
- Increase the investment amount over time (if get pay raise perhaps up contribution accordingly)
Stop waiting. Stop being lazy. Get started now. For your kids sake.
You can check out the podcast episode we did with Paul Curley on the topic of 529 College Savings Plans
Information is for illustrative purposes only and is not intended as investment advice. Please consult a financial advisor and accountant for advice specific to your financial situation. Hired Graduate does not provide financial services and any information shared should be verified with a financial advisor and/or accountant.