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Thursday, November 1, 2012

How Should I Save for College?

One of the biggest expenses you’ll face (after retirement and buying a house) is the cost of college for your kids. Many people have different philosophies on how much (if anything) they’ll contribute to their children’s higher education costs, but most want to try to help out at least a little bit. If you’re starting to think about saving for college, here are some things you should know about one of the best ways to go about it — the 529 plan.

What is a 529 Plan? 
It is simply a tax-advantaged savings accounts designed to encourage you to save for college. Here are some things to know about it:
  • The accounts can be transferred from one person to another

    • If your son decides not to go to college, you can move the funds to your daughter.
  • Depending on your state, you may get a state income tax deduction on your contributions.
    • This is a great way to get grandparents, aunts and uncles to contribute for birthday gifts! They can either contribute to the plan you’ve opened, or if they live in a different state and want to get the tax deduction, they can open a plan in their own state.
    • You can usually contribute to a plan that is not in your state but you won’t get the contribution tax benefit from it.
  • Your investment choices are limited to those that your plan offers, but you’ll be able to decide how conservative or aggressive you want your investments to be.
  • Any contributions grow tax-free.
  • The funds must be used only for higher education expenses.
    • Otherwise, you will pay a 10 percent penalty on any earnings and pay income taxes on the withdrawal as well.
    • This is something to keep in mind in case you think your kids might decide not go to college.
The 529 is a great way to get your college savings started. Most importantly, it will keep college funds separate from general savings, ensuring that you’re keeping something tucked away specifically for education. 

LincolnParkAnnie is a freelance writer focused on how to live large on a little living. She writes financial savings tips for the short term loans company, QuickQuid, and enjoys finding new ways to have fun on the cheap in her native Chicago.

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