 |
|
|
 |
|
|
|
|
 |
529’S: INVESTING IN YOUR BABY’S FUTURE
Once retirement funds are set, these plans offer a great option for college savings.
By Emma Johnson
Denise Steigerwald was 36 when she became pregnant with her first son. Keeping with financial advice of most experts, Steigerwald and her husband continued contributing to their respective companies’ 401(k) retirement plans. A few years ago, they also opened 529 college savings plans for both their sons, now ages three and five. But since then, it has been “catch as catch can” when it comes to funding the accounts, even though the funds have been growing steadily, says Steigerwald, now a freelance journalist in Huntington, N.Y.
“Sometimes I think we should contribute $200 each month for each of them, but retirement is more important,” she says. “They’re going to have more options when they’re older than we will in our retirement.”
The older the parent, the tougher choices one has to make when it comes to saving for college. Which is more pressing, retirement or higher education? And when you do contribute to college funds, the pressure seems greater to make the right decisions.
“It’s especially critical for older parents to coordinate retirement planning with college planning,” says Joe Hurley, CEO of SavingforCollege.com and a leading expert on 529 college saving plans. If funds are stretched tight, retirement must come first, he says. “There are other ways, but there are no loans for retirement.”
Once a parent decides to start saving for college, Hurley, like scores of accountants and financial planners, champions 529 plans—state-sponsored educational savings funds that offer tax breaks. First introduced in 1997, there are now 85 plans available. And while there are other college investment programs, 529 savings plans stand out in that they:
• Offer the best tax breaks. All 529s grow tax-deferred and with tax-free distribution. Most states also offer state income tax deductions on funds invested in their own sponsored 529 plans.
• Handle big bucks. 529 plans accommodate contributions of more than $250,000.
• Give the investor lots of control. The person managing the account can choose the fund, transfer from one to another, transfer from one family member to another, and withdraw funds at anytime (penalties and taxes apply).
• Are accessible. 529 plans have no age, income or time limits.
• Are easy. Set up an automatic monthly deposit in a chosen fund and forget about it until graduation time arrives, if you want.
• Are affordable. Hurley says 529 plans charge fees that average 25 basis points, or one quarter of one percent of the fund’s balance. A fund with a $10,000 balance with a 25 basis point fee would cost just $25 per year. Many funds require a minimum monthly contribution of just $25.
• Are safe. Like with any investment, there are no guarantees, but Hurley says that states tend to replace the fund managers of unpopular or underperforming plans.
Once you decide to set up a 529 plan, the process is relatively simple. Hurley offers a few tips:
1. Look to your own state first. While all 85 funds offer every participant the benefits of federal and state tax-deferred contributions and tax-free distributions, state income tax breaks apply only for certain in-state plans.
2. If you don’t feel comfortable scrutinizing one plan against the next, consider an age-based option, which asks you to plug in the estimated date your child will use the funds, then manages the funds accordingly.
3. Some investors may choose to contribute to a 529 plan outside of their state if they have strong preferences about actively managed mutual versus index funds, or if they are loyal to certain fund managers.
|
|
|
 |
|
|
 |
|
|
 |
|
 |
|
|
|
|
|
|
|
 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
