529: It is never too early to start

this that and the mba, baby reading book, baby readsWith so many people I know having children, this question comes up a lot.  What is a smart investment that you can give a baby?  As a parent it is essential to start saving for your child at a very young age.  The power of compounding can work wonders!

Today more than ever people are entering college to pursue advanced degrees.  I think setting up a 529 plan for your child is a great decision for their future.  Who knows what the future holds but you can be certain that saving for an education for them is a safe bet.  So what does 529 mean or where did it derive its name?  529 refers to Section 529 of the Internal Revenue Code which has established the plans. 

Giving the parents a 529 in the parent’s name is the way to go; it will make it easier for others to contribute to the account.  Contributions to the 529 plan are made with after-tax dollars.  Meaning you have already paid taxes on it when your employer gave you the money in your check.

There are special tax circumstances if you use the money for qualified college educational expenses.  It will grow tax-deferred as long as you use the money for qualified educational expenses.  What I didn’t know and many do not know is that 529 plans are not a federal program, they are actually unique to each state.  Some states have added tax benefits for investing in the 529 of their state.     

The funds upon distribution do not have to be used at a college in the state that the 529 was set up, they can be used at any accredited public or private college within the United States.  The investment vehicles that the 529 plans invest in are generally conservative. 

The account owner is usually an adult and the child is named as the beneficiary.  An account owner can change the beneficiary at any time.  Like most investments there is a minimum initial investment to open the account.  There is up to a 10% penalty for using the funds for expenses that are not deemed qualified college educational expenses.

At juniors next birthday be sure to open him/her a 529, because as a parent of 2 little kids, I know I would certainly appreciate it for our kids!  Investing in an education is by far the best gift you could ever give!

PHOTO BY: jinglejammer
About Christopher

Comments

  1. My big question is, what if your kid decides not to go to college? What happens to all that money? Can you take it all out and just pay the 10% penalty for not using it on educational expenses or…? Can only junior take it out?

    • @ TB – You can transition the plan to another child. You can also withdraw the money but you will pay the 10% penalty and taxes on the earnings. You can also leave the money in the account for as long as possible incase the child decides to go to school at a later date after entering the workforce. If he/she receive a scholarship the plan will waive penalties on withdrawls up to the scholarship amount.

  2. With tuition rising so fast the earlier you start the better off you will be by the time they are 18 and ready for college.

    • @ Sean – I read an article the other day that education costs are outpacing inflation. Who knows how high tuition costs will be when my 3 and 1 year old are old enough to enter college. 100k a year?

  3. One thing to add. If the 529 plan is used for education, it is tax free, just like a roth.

  4. Let’s say you hit the jackpot and several people gifted you a 529 plan for your new baby… do you think you could you roll multiple 529 plans into a single account?

    • @ GB – They set up the account in their name and want to transfer it to you as the account owner? Or multiple people want to set up an account in their name and have your child as the beneficiary? You can transfer the beneficiary to another family member in the beneficiaries family, but you cannot transfer it outside of that. There are yearly max contributions per student. Be sure to check your own state plan as this may vary from state to state.

  5. I’ve had 529 plans for both of my kids ever since they were small. The simple act of contributing is putting us at a huge advantage for the future. I looked into other plans like Uniform Gift to Minors or Prepaid plans, but the 529 just seemed to have the most amount of flexibility and best options.

    • @ MyMoney – It is good that you set something up for your kids. They may not appreciate it while they are young, but they will be thanking you when they do not have to make a $500 a month student loan payment.

  6. I’m not an investment expert by any stretch of the imagination. But, I do know that if you want to save money for your children’s education, it’s best to start while they are still infants. Also, the 529 Plan is the best education savings plan that I’ve ever heard of.

    The part that I really like about about it is that it’s not your average plan where your child gets the money once he turns 18. The child is named as the beneficiary, and the money can only be used to cover education costs. However, if he decides not to go to college, and instead wants to do construction work, he does not automatically get the money. The funds remain under the complete control of the parent.

    • @ Anthony – and if he after a few years realizes that he doesnt like construction work, the money can stay in the account and he can use it at a later time rather than cashing out. All around win as I see it!

  7. A friend of mine is recently blessed with a baby girl. He has started investing for future right after she was born. Every month he sets aside a certain amount of money for his daughter’s future. Such planning is always helpful since there are always big surge in education spending as soon as a kid enter college.

    Thanks for sharing this Chris. We have some plans similar to 529 in our country. Your article reminds me to keep my eyes open for plans like these

  8. I think TIME is the most important investment that you can make with children. Having the TIME to be there to inspire, teach and learn with them. What good is a huge college fund if you did so much overtime that they weren’t interested?

    • @ Savvy – Interesting. Everyone talks about save save save for your child, but we always fail to mention how you got all the savings. I would agree that you need to balance the saving with spending time with your child. Your child will cherish the memories you spent together long after you are gone much more than the 80k you left them for college. Good point and thanks!!

  9. I love 592 plans and hopefully every parent will open one up for their children!

    I’ve encouraged friends/family to open one up for their kids. Instead of buying children gifts every bday/Christmas, why not have each family member contribute $20 to the 529 account? Paying for their college education will benefit them far more than any toy would help them.

    • @ Jason – I know the toy they will have forgotten after they open up the next one, but when they are 18 they will be very appreciative heading off to college with a little nest egg for educational expenses.

  10. I plan to open a 529 account when we have kids. Before then though, I need to increase my retirement savings! There aren’t any scholarships for retirement.

    • @ Ryan – that would be great if there was such a thing, Retirement Scholarships. I would hate to put all my eggs in one basket though hoping for the scholarship.

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