A private college education could cost more than $400,000 in 18 years. 529 plans are federal tax-free savings funds specifically designed to help you save for your kids’ college expenses. Some parents open a 529 plan when their child is born. If you’re prenatal, you can open a 529 plan, assign another beneficiary, and change it later. The 529 can be used to pay for public or private colleges and can also be used for room, board and books. With so many 529 plans to choose from, we recommend working with a financial advisor or broker to make a selection. Just be wary of fees. A commission-based financial advisor can mean losing up to 5% of your investment. Try to go “no load” (no commission) if you can find a worthwhile plan. Consider building a 529 plan after you’ve maxed out your retirement savings options. Remember: You can borrow money to send your child to college, but you can’t borrow money to fund your retirement.
For grandparents thinking about setting up a 529 fund for their grandchildren, some states (keyword here is some) offer inducements such as reductions in your state income tax. If you don’t live in that state, you can send your 529 checks to your children on behalf of your grandchildren (they make the deposit). For example, one DailyWorth reader, Cynthia, has grandchildren in New York and California. New York offers a state income tax break for 529 contributions, so the annual birthday check for the 529 plan is sent to Cynthia’s daughter, who then deposits it into the 529 plan set up for her grandchild. For Cynthia’s California grandchildren, she can make a birthday gift contribution directly to a plan she set up. Bottom line: Do your homework based on the state in which your grandchildren live.
Cynthia does her homework on www.savingforcollege.com.