Sunday, January 20, 2013
529 College Savings Plan
What is a 529 College Savings Plan?
I like to think of a 529 College Savings Plan as being very similar to a Roth IRA account, with the difference that you are saving for your children's college instead of retirement. They both have the tax advantage of all your earnings being federally TAX FREE. Of course you can't use a retirement account to pay for your children's college, so if you want to help pay for college, a 529 College Savings Account is a great way to do that.
So let's take my situation as an example. I have a 2 year old girl and more children on the way. If I put $100 into an 529 account that money can grow for 15+ years TAX FREE until my kids are going to college. Let's say that $100 earns a conservative 5% annually. After 15 years it will be worth about $200 and the $100 of earnings is tax free. The savings could be much more if you had a greater annual return and if you leave it in longer.
Here are a few key points
-Earnings (not contributions) grow tax free
-In many states your contributions ARE tax deductible and some even have other incentives. State Tax Calculator
-You are in control of who gets the money and you can change the beneficiary. Funds can be used for multiple children, cousins, nephews, nieces, yourself, spouse, and others.
-Money can be used for tuition, room and board, books, computers, and other school related expenses. If money is used on other expenses, you will have to pay tax on the earnings and a 10% penalty.
CollegeSavings.org is a good resource with many other FAQ's
Maybe the complicated part is choosing a plan. These plans are run by states, but you don't have to be a resident to join most plans. If your state offers a state tax deduction, then you might want to join one from your state. If you move, you can always roll over your funds to a different plan. Otherwise you can join almost any plan from any state. Here is a helpful site to compare plans:
529 College Savings Plan Comparision
What if you are young and aren't making much money to contribute? Well, you can always just open/start a plan and make contributions later when you are making more money. There are many plans that don't require a monthly contribution.
Starting Up: For the next 2 days, you can purchase a $50 start to your fund for $24 on LivingSocial.com. But it get's even better. Here's how to get start your $50 account for FREE!
UPDATE: The below promotion has EXPIRED. Sorry, gotta act fast. I have an extra, so email me if you wanted this deal. You can still get the above $24 for $50 promotion for another day, which is still a good deal. You can try entering Ford30 in the promotion code on checkout.
Go to: FORD FUSION PROMOTION
Follow the "SHOP NOW" button to create your living social account. The $30 discount will automatically show when you checkout. Although you can get anything on living social with the discount, I recommend getting the Gradsave deal. You'll have to scroll down a little bit until you find the offer on their site.
So $24-$30= FREE
Your spouse or anyone else in your household can do this too! Just make sure you sign out of your livingsocial account first. NOTE: You can only use $50 per child. You can do it for a child you are planning on having until 2014 I believe.
What plan am I going to do? I'm going to open a Arizona Fidelity Account. Not just because I'm in Arizona, but because Fidelity offers a visa credit card that will give you 2% cash back towards your 529 or any other fidelity account you have. Because I'm a student this 2% cash back will help me make contributions to the account without putting my own money into it. In later posts I'll talk about credit cards and how to charge your card without spending money!
Hope this at least gives you something to think about.
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