Trust me when I tell you that college is expensive. I’m sure many of you already know that because, like me, you are still paying on your dreaded student loans. Now that I am a father, one of my highest goals in life is for my daughters to graduate from college debt free (that is if they decide to go to college). I am big on education, so as of now I am planning for them to go that route as well.
Once you start looking at your options, you will find that one of the more common tools these days for college tuition planning is a 529 College Savings Account. There are a few different variations of a 529, but essentially this is an investment account that will grow tax free. The earlier you start one of these accounts, the easier it will be to accumulate enough funds to cover college. We have had a 529 account for my 5 year old daughter since she was about 2 years old, and we have had one for my 3 year old daughter since she was born. They are currently averaging around a 10% annual growth rate in addition to our contributions!
A very nice feature of the 529 account is that anyone can contribute to it. Our family often utilizes this feature to put money into our accounts for birthday or Christmas gifts. It obviously lacks the thrill of giving the girls a fun toy to play with, but they will certainly appreciate it later on! I believe the current contribution limit without penalty is $14,000 annually. It is unlikely you would hit this amount unless you got started late in the game and are trying to max out contributions during the last few years of high school.
Another perk to this program is that the funds are not limited to college. The money in your 529 account may be used for elementary, middle school, or high school as well, including related expenses. The maximum amount on this without incurring tax penalties is $10,000 annually which can go toward tuition, books, or other expenses necessary while enrolled in school. Unfortunately, there is a downfall that comes along with the 529 as well. If the funds are not used for school or educational expenses, they will be heavily taxed when pulled out from the account. Fortunately, if one child does not end up going to college, you are able to transfer the beneficiary to another child if you choose to do so. They can then use it towards their schooling.
Finally, it is important to limit the funds in your 529 account to only what is needed for schooling. Like I mentioned previously, any funds that are not used toward school will be penalized. That includes additional funding that was not needed for school. Before accumulating a significant balance in your account, be sure to evaluate the amount needed to pay for you or your child’s education. Consider tuition cost (be sure to include inflation), living expenses, books, etc. It would be a good idea to re-evaluate this annually. While you’re at it, you can take a look at your growth rate to determine if there needs to be some adjustments made regarding the investment funds.
Depending on the plan you follow, saving for college might not be the top item on your financial to-do list. However, I can tell you that it is incredibly important if you are hoping that your children will someday earn a college degree. It is never too early to open an account, even if you are only going to use it for small contributions on occasion or have family contribute rather than buying gifts on occasion.