KUSA — It's no secret that college is expensive.
And it's important to start saving as early as possible for your child's education -- one way to do that might be through a 529 Savings plan.
Those plans work by allowing people to deposit funds into an account without having to pay taxes on the earnings now, or potentially ever, as long as those funds are used for qualified post-secondary education expenses.
"Part of it is the discipline ... because you can set up a 529 so it’s a direct deposit out of your bank account," said Fran Coet, a certified financial planner and certified public accountant with Coet and Coet in Westminster. "Make it more like a bill, where you set up a debit out of your bank account to go out of your checking account and into the 529. It’s as if you’re paying an obligation."
For the 2015-2016 academic year, the average annual cost for undergraduate tuition, fees, room and board was estimated to be $16,757 at public institutions, $43,065 at private nonprofit institutions, and $23,776 at private for-profit institutions, according to the National Center for Education Statistics. If your child attends four years, that's roughly $67,000 on the low end. If trends continue, those costs will likely go up.
"The answer for any kind of financial planning is: Earlier is always better," Coet said. "So the very earliest that you can begin to save is the time to do that."
In Colorado, people interested in using a 529 Savings plan can set up an automatic debit out of their account for as little as $25 a month. Funds within the plan are also invested so plan participants can earn money on their savings.
"When I do tax returns for clients who have invested in 529 over time, it is not extraordinary for me to see 40 percent of what they’re taking out for college is earnings within the funds," Coet said.
Of course, it can be tricky to find the money to start saving. Coet suggested using the diaper fund as a starting point.
"When you no longer have to buy the Pampers, Pull-Ups or whatever, you had that in your budget and maybe that was running you $50 a month, when you don’t have to buy diapers anymore, take that $50 a month and start to build into the 529," she said.
You can add even more when your child or children no longer need daycare.
"In some cases, I see $3,000 a month for two children for daycare," Coet said. "I don’t think you need to be putting away $3,000 a month, but I think if you, at that point, expanded to $250 per month per child, that’s pretty powerful."
Money within the plan is invested aggressively or conservatively depending on needs. The option that's best for someone might depend on the age of the child.
"If you want to go on autopilot, they have something called aged based investment," Coet said.
In general, the portfolios for younger beneficiaries are more heavily weighted in stock funds to maximize returns and capitalize on the longer investment time frame. As time passes and they approach entering college, the account assets are automatically adjusted from stock funds to bonds and/or money market funds to minimize risk and preserve capital.
"If you know you've got 18 years to invest because the child is a newborn, I am all for you being more risk-oriented because you’ve got a lot of time for markets to correct," Coet said.
Coet suggested taking a more conservative route for people who have procrastinated on saving.
"You’ve got the option of First Bank. Those funds are federally insured up to $250,000, but you're going to accept that you're going to make far less potentially than you could if the investment was made in stocks," Coet said.
Another benefit of the 529 Saving Plan is that the parent is the account owner and the child is the beneficiary. If your child chooses not to attend college or earns a scholarship, the funds can be transferred to another beneficiary, such as a niece, nephew or grandchild. You could even use it yourself, as long as it's used for post-secondary educational expenses.
"If it is not used for educational purposes, then there will be a tax consequence," Coet said. "There will be a penalty because the goal of the 529 is to provide for the post-secondary educational expenses that it was intended for."
The money can be used for tuition and related expenses for two or four-year colleges, vocational schools and even cosmetology school.
Here are some benefits of 529 Savings plan:
- Tax-free as long as funds are used for qualified post-secondary education. This can include tuition and fees for colleges, vocational schools or cosmetology.
- Parent is the owner of the account. If a child doesn't attend school, a new beneficiary, such as a niece, nephew or grandchild can be designated.
- There's potential for significant earnings over traditional savings accounts with low interest rates.
- Direct deposit can be set up for as little as $25 a month.