Congratulations on becoming a parent! Before you empty that first box of diapers, it's time to start saving for college.
Scary, right? So is the cost of a college education.
A child born today can expect to pay in the ballpark of $312,000 for a college that costs $25,000 per year in today's dollars. For a college that costs $50,000 a year today, the tuition, fees and expenses will skyrocket to $624,000 over four years by the time your child is ready to attend. If you haven't already begun, now is the time to start planning for your little one's education.
Before you run out and enroll your infant in basketball clinics and science camps hoping for big scholarship dollars, relax and do your homework. One option is to set up a 529 college savings plan for your little one to get the ball rolling.
A 529 plan, named after Section 529 of the Internal Revenue Code, is a state-sponsored, tax-deferred investment plan. The plan is popular among young families beginning saving for college because it's easy to enroll and maintain. You may opt to make contributions whenever you like, or you can set up automatic deductions from your paycheck. Your assets will be professionally managed, so you can be as hands-off as you like.
Most states allow contributions of $200,000 or more. Your money will be invested in stock mutual funds, bond mutual funds and money market funds. You can have your savings invested conservatively, moderately or aggressively. Many plans have an age-based component, whereby your monies are invested more aggressively the closer your child gets to college age.
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It's a common misconception that 529 funds can only be used at state colleges and universities. While a 529 plan is managed by your state, the funds belong to you to be used at the college or university of your child's choosing. You won't be limited in your selection of a higher education institution.
529 plans are not just for your children. If you're planning on returning to school to further your education, consider setting up a savings plan for yourself. You'll enjoy the federal and state tax benefits that accompany a 529 plan. If your own goals change in the future, your plan can be transferred tax-free to a 529 plan for your child or your spouse.
Many families choose to forgo the 529 and set up investments in stocks and mutual funds as a means to begin saving for college. Depending on your family's financial status and earnings, these may be good options for you. There is no cap on investments to these stocks and funds, and you're free to invest as often as you like. Because these dollars are post-tax, you can access them with little to no penalty should unforeseen circumstances arise.
Remember that there are student and parent loan product options on the market for you and your child to take advantage of when the time comes. Low interest rates and tax deductions are attractive features of such loans.
There are many different plans available for you to choose from. Consider talking with a financial professional and get some advice that speaks directly to your family's budget and savings goals. He or she can help you navigate the costs and benefits of each plan. Spending a few dollars hiring an advisor is an investment worth considering.
Teach your child early about the value of money. Much like saving for college, it's never too early to start.
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