If you're like most parents, saving for your children's college education is a priority and a big challenge. Tuition and related costs at both public and private universities have been rising at 5% per year or more, far exceeding the rate of inflation. Financing these costs for one or more children is going to take planning and, most importantly, disciplined savings.
If you're like most parents, saving for your children's college education is a priority and a big challenge. Tuition and related costs at both public and private universities have been rising at 5% per year or more, far exceeding the rate of inflation. To put that into perspective, a child born in 2006 should plan on $110,000 in total expenses for four years at the average in-state public college; $300,000 for four years at a private university.
Financing these costs for one or more children is going to take planning and, most importantly, disciplined savings. Tax-advantaged "529" College Savings plans are the savings vehicle of choice and offer important advantages over other options. A $3,000 annual contribution, beginning at birth, to a growth-oriented 529 plan should pay for one child’s in-state public education, and a $7,500 annual contribution for a four-year private education. A later start means higher annual contribution amounts.
529 Plan Advantages
• Large Tax-Free Contributions: Parents, grandparents, other relatives and even friends can contribute up to $12,000 per year per child, tax-free, to a 529 plan.
• Tax-Free Earnings and Distributions: All earnings in a 529 plan are tax-free. Distributions are free from all federal income and most state income taxes when used for tuition or other qualified college expenses. This makes 529 plans as powerful as Roth IRAs for long-term savings.
• Donors (parents, grandparents, etc.) "own" the 529 assets: Unlike a custodial account that typically becomes the minor’s property at age 18, 529 plan assets are always under the control of the donor.
• 529 plan assets are more advantageous for financial aid considerations: Plan assets are counted at a 5.5% rate by college financial aid offices, compared to the 35% rate used for custodial account assets.
• Unused funds in a 529 can be rolled over to another child’s benefit.
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