How to start saving for your kids to go to college, in 3 steps
- With the costs of attending college higher than ever, it's important to start saving fpr college as early as possible.
- Erika Safran, certified financial planner and principal at Safran Wealth Advisors, says anyone saving for college should invest in a 529 plan, set up automatic contributions, and ask friends and family to donate.
- 529 plans are state-sponsored, tax-advantaged investment accounts that anyone can open and contribute to.
- Annual contribution limits are high for 529 plans, and the money grows completely tax-free and can be withdrawn tax-free at any point, so long as it's used to cover college tuition, housing, fees, books, and supplies.
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College has never been so expensive. As with most things, the earlier you start saving for a college-bound kid, the better.
The annual cost of a private college education has nearly doubled in the last 30 years to an average of $48,500 for tuition, fees, and room and board, according to College Board data. Annual costs for a four-year public university have risen over 220% to $21,370.The high cost of a degree coupled with growing enrollment figures has left tens of millions of student loan borrowers owing a collective $1.56 trillion in student loan debt.
Fortunately, one of the smartest ways to get ahead of the game and reduce the debt load post-college is available to anyone: Invest in a 529 college savings plan.
That's according to Erika Safran, a CFP and principal at Safran Wealth Advisors, who told Business Insider that a 529 plan is "by far the ideal method to build up college funds."
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Step 1: Enroll in a 529 plan
529 plans are state-sponsored, tax-advantaged investment accounts that have been around since 1996, but have only recently seemed to gain mass appeal.
While most parents still squirrel away money for college in a general savings account, 29% of families save in 529s, according to Sallie Mae's 2018 "How America Saves for College" report. What's more, a full 30% of college savings dollars are now held in 529s, compared to 22% of total dollars saved in traditional savings accounts.529s are valuable in part for their flexibility. A parent, grandparent, godparent, or anyone else can open an account and start contributing after-tax dollars before a child is even born. Once the child is born and has a Social Security number, they can change the beneficiary from themselves to the future student.
The money in a 529 grows completely tax-free and can be withdrawn tax-free at any point, so long as it's used to cover college tuition, housing, fees, books, and supplies.
Since the plans are state-sponsored, each state runs one or more of their own, and savers are allowed to choose which they prefer. At savingforcollege.com, there are 110 options, and each one has a slightly different investment structure - the site lets you compare investment options, fees, and various tax benefits of each plan. The best option for the average person is typically an age-based portfolio, which will reduce risk as the child approaches college.
Plus, more than 30 states offer a tax deduction or credit for 529 plan contributions.
Step 2: Set up automatic monthly contributions
Most plans have a minimum initial contribution, some as low as $25, but the key to growing the balance, if you're not front-loading the account, is contributing regularly.
"Save consistently via automatic monthly contributions from your bank account to the 529 plan," Safran said. "Being consistent with contributions has huge rewards."
Each plan has a different investment structure, but Safran said assuming a 6% return rate and 5.5% inflation, a family would need to make monthly contributions of $1,200 to the account from when the child is born until age 18 to have enough to fund a $50,000-a-year, four-year college education.
Annual contribution limits for most 529 plans are high, starting at $235,000 in some states, though any contribution above $15,000 will incur a gift tax.
Step 3: Ask friends and family to contribute to the account in lieu of giftsContributions to 529s are considered "gifts" by the IRS, no matter who they come from, so savers looking to avoid paying gift tax in 2019 are limited to the annual maximum gift of $15,000 for each child (married couples can give $30,000 for each child). Or, an individual can front-load the account and avoid the gift tax by giving up to five years' worth of contributions at once totaling $75,000, but they won't be able to contribute for another five years.
While the adult who opens the 529 plan is the owner, anyone can contribute.
"Have friends and family commemorate special occasions by contributing to the account," Safran said. Birthdays, holidays, and graduations are a great time to request contributions to your child's 529 in lieu of gifts or cash.
The beneficiary is the student who receives the money, but it can be changed. If one child decides not to go to college, goes to a cheaper school than expected, gets a full scholarship, or for some other reason doesn't use all of the money, you can simply change the beneficiary on the account and give those funds to another child … or even to the parent, if they choose to go back to school.
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