Use 529 College Savings Plans
Higher education is becoming very expensive. That means if you have children and want to have money set aside for them to go to college you need to start saving now. There is a great program set up to help with saving for higher education. They are called 529 plans. These can be sponsored by states, state agencies or educational institutions.
Why a 529 college savings plan?
I believe that I am fiscally responsible and that I have done a good job saving, but I realized something about 9 years ago. I realized if I didn’t set something up automatically or create something I couldn’t touch, then it would either never happen or disappear. Let me explain what I mean. I have an emergency fund that I have in case I lose my employment. I used to have this in a simple savings account until I had a friend approach me about an investment. This was during the real estate boom and he needed some cash. I knew that at one point I might be tempted to use my emergency fund if I had complete access to that money. I decided at that point that I would put each month’s worth of bills into a separate CD. I laddered them so that one expires each month and they automatically renew. If I lose my job, I know that each month I will have that money, but I can’t touch it until it renews. This allowed me to create an emergency fund and not have it depleted by rash decisions. You need a fund that you can so the same with your kid’s education. If you leave it in your savings account it will eventually disappear. The other thing is that you are not investing that money in a savings account. In a 529 fund your money can be invested whichever way you want. You can also set up an automatic deposit from your paycheck each month. These are some of the reasons why I use the 529, but the biggest reason is that I want to help my children. I want to help contribute to whatever education they want to get.
Basics of 529 college savings plan
I found this great graph on www.finra.org. It does a great job of explaining the basics of the 529 college savings plan.
What are the tax benefits?
Each state will have different tax benefits and penalties if they are not used for educational purpose. You need to research the plans in your state, but I thought I would give you an excerpt from www.uesp.org.
“A nonprofit trust fund, UESP is the official and only 529 plan established and sponsored by the State of Utah. You do not have to be a Utah resident to participate in UESP. UESP is a direct-sold 529 plan, which means you can set up an account and make contributions by dealing directly with UESP…Earnings on investments in UESP accounts grow federal and Utah state income tax deferred. As long as the funds are used for qualified higher education expenses of the beneficiary at an eligible educational institution, withdrawals from an account are exempt from federal and Utah state income taxes. Utah residents who save with UESP can also qualify for a Utah state income tax credit.”
My purpose of this article was to educate you a little on the 529 college savings plan. You can go to http://www.sec.gov/investor/pubs/intro529.htm to get more information. You can also go to your state website for 529 plans sponsored in your state. What you need to do is make sure that you start and have the money in a place where it can’t be touched. The 529 college savings plan does that for you.
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