College costs are rising. If you have kids and want to help them pay for college, the earlier you start a 529 Savings Plan, the more it will grow.
Kathryn Flynn from Saving For College will explain the fine points.
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A 529 Plan is like a retirement account for college. You contribute with after tax dollars and are not taxed when the money is withdrawn as long as it is spent on educational expenses. You do have to name a beneficiary but can change it once a year.
There are two types. Pre-paid which is more restrictive. You are locking in current prices. The more common type is the college savings plan. You can invest in any state’s plan.
If your kid forgoes college for the starving artist route, you can change the beneficiary, use the money to fund your own education or make a non-qualified withdraw. You will pay income tax and a 10% penalty on earnings.
You can control the level of risk of the investment with an aged based investment option. The closer your kid is to college, the less risk you want to take and can weight the investment appropriately.
Kathryn’s site has a cool planner. You input some information and it will generate how much you need to save for college.
You can buy 529 Plans direct or through an adviser. You can use 529 money to pay for lots of different types of education, community college, a four year college, trade schools and some study abroad plans.
If you want to start even before you have a kid, you can designate yourself as beneficiary and then change it to the child once they have a social security number.
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While funding your kid’s education is important, it is not more important than your retirement. Always fund retirement first.
College isn’t getting any cheaper so start saving now.
Saving For College: Kathryn’s guide to 529 plans.
Betterment: The easy way to invest.