Saving for College – why a 529 Plan is the Way to Go #FamilyandFinance

Another quick post with some notes on my day at Vanguard last week.  Our last session was about Saving for College.  Here’s what I got from it:

529 Plan is the best vehicle for saving for college.  Why?

Depending on the state you live in, you can get a tax deduction for contributions you make into the plan

The assets in a 529 Plan grow tax free.  It’s like your 401k or retirement plan.  It’s huge. When the child goes to use the money for college, as long as the money is withdrawn for “qualified tuition expenses” (any secondary education) then the withdrawls are also tax free. (If you pull it out for something else, you’d have to pay the income tax and a 10% penalty.)

The money you give is tax free. A contribution to a 529 Plan is a “gift.”  Currently, you can give up to $14,000 to as many people if you want without any gift tax implications.

So what plan should you choose?

Look at the state you live in and the investment plan they offer.  (For example, I’m in PA – in PA you can invest in any 529 plan that’s sponsored by any state and get the income tax deductions.)  Look at the investment options that are available to you.

Investors in a 529 Plan can only change their lineup once a year. But there’s an age based option at Vanguard where the plan will shift automatically based on your child’s age.  There’s a 0-6 plan, a shift to more conservative from 6-15 then it shifts and gets even more conservative from 15+.  You still have the option to shift once a year but this way if you aren’t paying attention, you know things will automatically be changed to cover your investment.

Some states offer other plans – a pre-paid tuition plan.  It’s like a pension plan. You buy-in today, buying a certain amount of credits and you pay at today’s tuition rates and your child goes to matriculate and you can cash in at the rate of those credits in the future.

Disclosure:
Vanguard invited me to this event and provided me with educational materials, meals, and a gift card to offset travel and child-care expenses. The views and opinions in this post are my own.