To kick off our month of Women, Work & Money, here’s some great advice from CPA Bette Hochberger about starting a college savings plan for your kids.
Dreams of your little one becoming a doctor or lawyer one day might be dashed when you look at the high price of college and graduate school tuition. There are a number of programs that let you start saving for college. Here I am going to discuss the popular 529 college savings plan.
The 529 savings plan is a great way to put away money for college for a number of reasons. The income generated, interest, and dividends, is tax free and many states offer tax breaks for contributions. The funds can be used for college or graduate school tuition, fees, books, supplies, room and board, and even computers. Tax-free contribution limits are high ($13,000 for 2012), and there are no age or income limitations.
There are numerous 529 savings plans available to choose from. The first place to look is at your own state’s plan, though you are not limited to investing in a plan offered by your state. 529 savings plans have not been around for a long time so their track records are short. You will want to stick with investment companies with successful records of managing mutual funds, such as Vanguard (I have my children’s 529 savings plans with them), Fidelity, and TIAA-CREF. Once you choose an investment manager, pick a portfolio or an allocation, similar to mutual funds, that meets your needs. You can then contribute money into the account. This is done in much the same way you put money into a bank account–deposit checks, electronic transfers, and even direct deposit from your paycheck. Here are some things to keep in mind when picking a plan:
· Low fees–The more fees you pay, the less money available for school. Find out how much you will pay in enrollment fees, transfer fees, annual fees, commissions, etc.
· Tax breaks or other incentives for state residents.
· Minimum investment amounts–Check the minimum amount needed to open and contribute to the account. In some cases it can be as low as $25 (but watch for low balance fees)!
What if Junior doesn’t go to college or gets a full scholarship? Be relieved to know that the 529 savings plan is always under your control, so your child can’t take the money and start a rock band instead of going to college. The unused money you smartly put aside can still be used by transferring it to other children or family members. Keep in mind, if you need to take the money out of the account for reasons other than education, you will have to pay taxes on the income and a 10% penalty.
Anyone can contribute to your child’s 529 savings plan (hint–ask Grandma and Grandpa!). One neat feature of 529 savings plan is the ability to front load five years worth of tax-free contributions at once. For 2012 that is $65,000 ($130,000 for married couples filing jointly) per child!
The best time to start saving for college is, well, yesterday. The sooner you start to save the more time your investments will have to grow. Once you have a social security number for your child you can set up a 529 plan, but even if your child is already in college you can still reap some of the plan benefits.
Want to get a head start? Set up a 529 savings plan for yourself before you even have children and then transfer the plan to your newborn!
Some helpful links to get you started:
College Savings Pans Network – State comparison tool. This neat tool will allow you to compare multiple states and plans to see the different features.
New York State 529 Program information – Great information for New York state 529 plans, including the New York state tax deduction, fees, and other information.
Disclaimer: The articles presented on this blog are general in nature and should not be assumed to be applicable to your situation. In addition, tax law changes daily and the articles on this blog are not updated to reflect these changes. Anyone receiving any part of the information on this blog should not rely on or act or refrain from acting on the basis of any matter or information contained in this blog without seeking appropriate tax, legal or other professional advice. The transmission and receipt of information contained on this blog does not form or constitute a client relationship. Nothing in this blog constitutes legal advice. Opinions rendered by tax professionals are not authority. You agree to hold Bette Hochberger, CPA, its affiliates, principals, employees, representatives, and agents forever harmless from any liability for your use or failure to use the information, advice, referrals, or suggestions provided by this blog at any time. IRS Circular 230 Disclosure: Please be advised that the tax advice contained herein (including any attachments) is not intended or written by the practitioner to be used and cannot be used by the taxpayer for the purpose of avoiding any U.S. tax-related penalties that may be imposed on the taxpayer.