Getting Started With a 529 College Savings Plan
If setting up a college savings account is on your to-do list, here are some tips for getting going.
If you're like many parents and grandparents, college savings is probably on your to-do list. Here are some tips on how to get started and keep saving in a 529 planso you can count yourself among the successful resolution-makers.
Why Save in a 529?
These accounts have become popular vehicles for college savings because they allow savers to sock away a significant amount of money, and they have money-saving tax advantages--including state tax breaks on contributions and tax-free compounding and withdrawals for qualified higher-education expenses. In addition, 529 plans reduce the financial-aid impact compared with money held in the student's name.
According to the College Savings Plan Network, children whose families have money saved in a dedicated college savings account are six times more likely to attend a four-year college compared with children with no dedicated college savings account.
In addition, compound interest is a great thing on the asset side, but it's not such a great thing on the liability side. People with 529s can use interest, dividends, and tax advantages to build their savings--which is an incredible advantage. So starting to save as soon as you can, and saving as much as you can, will lessen the amount students will need to borrow.
If you didn't start early, though, the best time to start is today.
"Inertia is a powerful force. If you're not doing something right now, open the account, put something in there. Make regular deposits," said Young Boozer, state treasurer of Alabama and the chair of the College Savings Plan Network.
Tips for Getting Started
The first step is to select a 529 plan. Morningstar can help with due diligence, as we assign Medalist ratings and write in-depth analyses on the 62 largest 529 plans.
After you've chosen a plan, it's fairly easy to set it up. There are no income restrictions on either the account owner or the beneficiary. In addition, most plans have very low initial contribution requirements, making them attractive to families, regardless of income level. Some plans have minimums as low as $15, according to CSPN.
There are a few ways to set up a 529 plan. In many cases, you can read about a plan on its website, open the account, manage the account, and add to the account online. For those who are comfortable setting up accounts and transferring funds online, this can be a very convenient option.
If you would prefer not to transact online, however, you can call the administrators of a plan's program for details. You could request printed materials and an application, and speak with or meet someone who can further explain features or answer specific questions. (Collegesavings.org provides links to 529 plans' websites.)
Finally, there is the advisor-sold 529 plan option. A financial advisor can do everything you need--open the account and set up initial and recurring investments. An advisor can also look at your financial situation holistically and help determine a savings rate that makes sense considering your college-savings goals and what your budget allows. The advisor should also be able to assess various 529 plans, including any tax benefits associated with your home state's plan, and help you decide which 529 to invest in. (Of course, you'd also want to cross-reference your advisor's recommendations with the 529 analyst reports on Morningstar.com. Also, note that advisor-sold 529 plans can have higher fees associated with them.)
Tips for Keeping It Up
The best way to stay on course with your college savings is to pick an amount you feel comfortable setting aside from your budget, and set up automatic withdrawals from your checking account. Revisit the amount if you get a pay raise or a yearly bonus, and see if you can afford to increase the amount you contribute.
You could also see if your employer offers an automatic (aftertax) 529 payroll deduction, or even a 529 contribution match. Though not terribly common, a few states, such as Illinois and Nevada, offer businesses a tax credit for matching employees' 529 contributions. (Make sure you do some due diligence on the employer-promoted plan, however; not only could it be a subpar plan, but if the plan is not in your state of residence, you could be forgoing some in-state tax benefits by contributing to it.)
Looking at data from the Alabama College Counts 529 plan, Boozer said nearly 40% of direct-sold plans (and about a fourth of advisor-sold plans) have automatic payment set up. Of that total, the average automatic investment is $170 for direct, and $157 for advisor-sold, per month. That adds up: A college-saver who keeps up a $170 a month contribution rate, assuming it compounds at a (very hypothetical) 6% annual rate, will amass more than $66,000 in 18 years.
"Encourage your family and friends to put money in; that's a big plus, too," Boozer said.
Most plans will accept direct contributions by a third party via a check sent to the plan administrator, which requires noting the account number on the check, and perhaps submitting a contribution form. Some state plans have gift cards available, and there is also the option of gift card companies such as Leaf College Savings or GiftofCollege.com (which charge the gift-giver a fee but can be redeemed for free). Note that gift cards are generally not tax-deductible for the gift-giver.
"Overcome the inertia, open the account, and get something in it. If you can afford to get something in there on a monthly basis, do it. If not, do it quarterly," said Boozer. "Birthdays, Christmas, special days--any time you would anticipate giving a child a present, take the money that you would put into a hot new toy, and put it into a 529 plan. No one can take a college education away, and it doesn't go out of style."