One of my lucky readers just got $5,000 from a family member — not for her, but for her young daughter’s college education. Her question: what to do with it? My answer: Put it in a 529 Plan.
A 529 Plan is a state-sponsored college savings program. In my opinion, these are hands-down the single best way to save for a college education.
Here’s how a 529 plan works. You basically put money into the plan and it’s invested in mutual funds. The mutual funds are managed by professional investment advisers who are selected by the state. A 529 plan is offered by every state in the country, and you can pick any one; it doesn’t have to be a 529 plan from the state in which you live. For example, in our case, we live in NJ, but we picked the New York plan for our 3 children because we think it’s a very good one.
Some highlights to know:
- The money you put into a 529 plan grows tax-free
- All the money comes out tax-free as long as it’s later used for higher education (i.e. tuition, room/board, lab fees, books, supplies, etc).
- Money in a 529 plan is portable — meaning your daughter can take it with her and use it any any college in the country (it doesn’t have to be a college in her state, or in the state in which the 529 plan was set up)
- Money in a 529 plan is transferable. Let’s say your daughter decides not to go to college (fingers crossed; that won’t happen!). But assume she doesn’t for whatever reason. If you have another child, you can transfer the money in the 529 plan to him, so that he can use it for college. Even if you or your husband decide to go back to school, you could use the money to pay for your expenses.
With a 529 plan, the money is controlled by you (the donor), and is counted (for financial aid purposes and tax purposes) as an asset in your name; your daughter is listed as the beneficiary. This can help in three ways:
- First of all, because you control the money, she can’t just have it when she’s 18 or 21 (the legal “age of majority” in most states). With some funds, like trusts, when a young person turns 18 or 21, they can essentially tell mom & dad “I want a new car” or “I want to travel and find myself” and then proceed to blow their college savings on those things… and there’s nothing the parent can do, because legally the money belongs to the child. That’s not the case with 529 plans.
- Also, since the asset is in your name, that can help with student financial aid down the line when your daughter does go to college. All schools look at your families finances, and determine something called your EFC, or Expected Family Contribution. In the simplest terms, that’s the amount of money they expect you/your family to put toward paying for college. (Then the school offers other aid, like scholarships, grants, work study, loans, etc.). Well, in determining your EFC, many colleges will count 20% of an asset owned by a child/student in the calculation for the EFC. However, only 12% of an asset owned by the parent counts toward the EFC. Again, each school is different. But this is a general guideline.
- Thirdly, many states offer a tax break to you, as the donor, for making a 529 contribution. Same deal applies for grandparents and others who contribute.Tax benefits vary, of course, based on factors such as amount contributed, income, age, and marital status.
For more info on 529 plans, visit this website: http://www.savingforcollege.com/
And remember, if you have a child: it’s never too early to start saving for college!
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