What is a 529 plan?
A 529 plan is a college savings plan with the following characteristics:
- Tax Advantaged – This means you can contribute to this account without paying state taxes on the amounts that you contribute. This can be a strategy to reduce your tax liability while providing money for your children when they need it for tuition. The earnings are not taxable at the federal level so you can grow a large fund without subjecting the earnings to taxation.
- State Sponsored – This means the state sets the rules and determines which funds you can invest in. These rules differ from state to state.
- Transferrable – If one child in your family does not use all of the funds, you can transfer the account to another child to use toward their education.
- Control – You, as the parent, maintain full control of the fund. Your child does not have any say in how the funds are used. You could have setup an account for child A and transfer it to child B because the first child did not follow the guidelines you may have established for his behavior.
- Choice – You do not have to invest in your state’s 529 plan. You may choose to open a 529 plan in another state if they offer a plan that fits your goals more precisely.
Where did the 529 come from?
The plan is called the 529 plan simply because it was taken from section 529 of the internal revenue code. Very creative, huh?
How much should you save for college?
There are really two things to think about when attempting to save for college. First, the earlier you begin, the less you will have to contribute on a monthly basis in order to cover the cost of education. The second idea is that there is a significant cost difference between private and public universities. Private universities can cost more than twice that of public institutions. Is the education level twice as good?
Another thing to think about as a parent is if you should be responsible for the entire bill. I would argue that you should not feel obligated to cover the entire tuition cost for your children. They should take responsibility of a portion of the bill in some way. Maybe they work a part-time job throughout the summer and apply this income to their tuition. Maybe you match the amount they save for college? Maybe you have another creative idea?
Should you save for college?
Remember, college is not for everyone. Many people are very successful to choosing to study at a trade school. Others are entrepreneurial and don’t need a college degree to be successful. Some just want to be stay at home parents or may want to live a simpler life that does not require a college degree. Before you shell our tens of thousands of dollars for a college degree, make sure you have a good idea on the kind of life you want to live.
Education is a must
Regardless of whether you go to college or not, education is a must. There are many ways to educate yourself for free in today’s age. If you have a connection to the internet, you have a connection to almost the entirety of human knowledge. Libraries provide tens of thousands of books for loan for free. Education is a must, a college degree is not.