This guest post is from PT of PT Money: Real Personal Finance for a Life Without Limits! Check out PT’s latest series of interviews about making extra money online using freelance writing, an online store, and more.
Our first child was born last year. Along with all the excitement and new feelings that come from being a Dad for the first time, came the desire to be a little more prepared for future expenses. Two of the major financial goals I wanted to achieve were getting life insurance and start saving for college. Today I thought I’d share what I learned about opening up a 529 college savings plan.
What is a 529 Plan?
A 529 Plan is a state sponsored savings plan. It has certain tax advantages that encourage you to save for college expenses. A lot of parents are turning to the 529 to pay for at least some of their kid’s college expenses. The funds don’t have to be used for your child. You can typically change the beneficiary at any time to whomever you like.
Prepaid vs Savings Plan
It’s worth noting that the plans come in two main types: prepaid and savings. 529 plans can vary greatly from state to state, but in general it is worth noting that the prepaid type plans are less flexible than the savings plans. Savings plans typically allow you to use the money at any college or university, regardless of what state they are in. Some prepaid plans allow you to prepay tuition for your kids using today’s tuition rates. One of the drawbacks of prepaid plans is that you aret required to use the funds in your home State.
Know Your Home State Plan
It’s important to know your State plan, but it’s not critical that you use it. In fact, it may be more beneficial to you overall to use a different State plan. The factors that come into play are: your State’s taxes (you normally get a State tax break for using your State’s plan), variety of investments available, as well as, fees associated with the account and the funds. A great tool I’ve found to help you decide whether you need to use your own State’s plan is this State-by-State 529 Plan Guide from Kiplinger.
Deciding Which Plan is Best?
Once you’ve ruled out your own State’s plan, it’s a good idea to take inventory of the top plans available here in the US. This one is easy. Break open the latest issue of Kiplinger or Money Magazine. They usually have a Top 5 529 Plans that you can refer to. Look for plans with the lowest fees and the best investment options. Plans with Vanguard funds are always a plus for me.
Take Action Today
Probably the best advice I can give you about 529s and college savings is just to get started. The earlier the better. There are so many options out there it can be easy to stall out and not get anything started. Most people simply never start investing for their kid’s college. And it’s such an easy thing to set up. Commit to getting one of these opened up soon.
Visit a plan website, sign up, and begin making automatic direct deposits into the account. Even a small amount each month will help.