Raising children is perhaps one of the greatest and most rewarding achievement you’ll do in life, but kids come with an expensive price tag. According to CNN Money
, it costs an average of $245,000 over 18 years to raise one child. That number could start to increase to close to $1 million for newer parents. And that number doesn’t even include the high costs of college!
Every year the price of tuition increases and more students graduate with significant amount of student loan debt. The average in-state public college tuition
for the 2014-2015 academic year was $23,410 and the average for a private college was $46,272. Multiply that average by 4 years and you’re easily looking at a six figure college tuition bill for your child. The average 2014 college graduate
graduated with $33,000 in student loan debt, which is almost double what students paid 20 years ago.
Most colleges and universities offer students’ financial aid packages that help them afford their higher educations, but there is still a good chance that you will have to foot some of the bill. If you can afford it, it’s best to start saving now for your child’s future.
One of the best ways to save for your child’s future is through a 529 Plan. A 529 plan is a tax-advantaged investment plan similar to a retirement account that encourages you to save money for higher education expenses of your child or even grandchild. All withdrawals from the account that are used for qualifies education expenses, like tuition and books, will remain free from federal income tax. Additionally, states may offer similar or enhanced benefits to 529 plans.
There are two types of 529 plans: a savings plan and a prepaid plan. Savings plans are very similar to your 401k or IRA retirement savings account
. You grow your savings over time by investing your contributions in mutual funds. Prepaid plans are very different. These plans, which are often offered by specific educational institutions, allow you to pre-pay all or parts of the costs of an in-state public college education. These plans can be converted to use for private and out-of-state schools too.
529 plans have several important benefits. The first is that while your contributions are taxed and not deductible on your federal tax return, your investments grow tax-deferred. As long as you use the money for qualified educational expenses, the distributions are federally tax-free. Each state also has their own tax rules regarding 529 plans. Some states mirror the federal tax law advantages or even have additional benefits. You can also invest in a plan outside of your state. For example, you may live in Illinois, but choose to invest in a Nevada 529 plan. Do your research to see what state’s plan is best for you.
A second major benefit of 529 plans are that they are low maintenance and you retain control of the funds. Once you have enrolled in a 529 plan and set up your contributions, you can sit back and relax. Plan assets are professionally managed by either your state treasurer’s office or by an outside investment firm. Additionally you don’t have to worry that once your child turns 18, he won’t take his college fund to buy a new car. You, as the donor, stay in control of the account at all times. You get to decide when withdrawals are taken and for what purpose. If your child decides later not to pursue a college education, you can reclaim your money for yourself. However, those withdrawals will be subject to income tax and an additional 10% tax penalty.
Many people question how much they should contribute to their child’s 529 plan. That’s a tough question to answer because it really depends on your unique circumstances. You should always invest in yourself first (i.e., invest in your retirement account) before your children. As a parent you probably always put your children first before you, but funding your child’s college education should not hinder your retirement dreams. As the college tuition continues to rise at rapid rates, it’s almost nearly impossible to afford to pay 100% of the bill for your child. Financial experts
suggest aiming for 25% of the total projected cost. For example, your child is thinking about attending an in-state public college that has an average yearly cost of $20,000. You should aim to save $20,000 in your account. Over 18 years, that’s about $100 a month. Of course, if your child chooses a private college, you’re looking at a significantly higher price tag. However, private colleges may also offer more financial aid in the form of grants and scholarships.
A college education in America does not come with a cheap price tag. Millions of Americans are head over heels in student loan debt. We all want our children to have the best and that means you probably want to help them with their future educational expenses. 529 plans are one of the best savings vehicles to help your child start their adult life on the right foot.
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