529: The Most Important Number for Paying for College
How a 529 account can help you pay your future college graduate's tuition
$261,277. That’s the projected cost to for a college graduate in roughly 16 years—and that’s just for an in-state public college. For a private college, you are looking at $598,063. Do you have that money laying around? Probably not—I sure know I don’t. So what are some methods and investment vehicles you can start using to save now?
529 Plan
529 Plans are relatively new but provide a number of advantages depending on the plan utilized. That’s because there are two different plans: the 529 Prepaid Tuition Plan and 529 Savings Plan.
529 Prepaid Tuition Plan
This plan allows families to pay for tuition now for specific colleges or college systems at current rates, even if their child will not go to school for years. Not all states have this plan. For those who do the prepaid tuition plan usually requires the parent(s) and future student to be a resident of that state and attend an in-state school. Costs of the plan depend on the state, age, and grade level of the student beneficiary.
Payments can be made in three different methods:
Lump sum payment at the beginning
Five-year payment program
In fixed monthly payments
529 Saving Plan
This plan allows you to invest college savings into mutual funds, bonds, and ETFs. Like IRAs, 529 plans are after-tax meaning while taxes are taken out initially, any investment grows tax free. There are 2 types of 529 plans:
Direct-sold 529
A Direct-sold 529 plan is usually setup through a financial advisor in your state. The advantage of Direct-sold 529 plans versus other 529 plans is they have lower fees then other types of 529 plans. Direct sold plans involve an individual or a financial advisor buying into a plan setup by a fund company.
Advisor Sold 529 Plan
Advisor-sold 529 plans involve a financial advisor selecting the investments in your 529 plan. This plan has more fees than a direct-sold 529 plan due to the commissions earned by financial advisors. However, some individuals may see the fees as worth the cost if the financial advisor is able to realize larger returns (including the extra fees) than a direct-sold 529 fund.
Other Ways to Save for College
A 529 account is not the only way to save for college and likely you will employ multiple strategies. One important and lesser known way to pay for college is a withdrawal exception from your IRA. Many expenses related to higher education for yourself, spouse, or child are tax exempt. These include tuition, fees, books, room and board, and supplies for students enrolled at least half-time. The rules here are a little gray so it is best to check with a tax professional before withdrawing.
Disclaimer: This is not professional and/or financial advice. This content is for informational purposes only. Before making any financial decisions you should do your own research, evaluate your financial situation, and/or consult a financial professional.