When you become a parent, you provide for, care for and nurture your children hoping to ensure they’re ready to handle the challenges life will toss their way when they become adults.
One step toward entering the world as an adult is getting an education – and figuring out how to pay for it.
If you plan to assist your child with financing his education, you may be interested in looking into a 529 college savings plan. These plans are operated by each state as a savings account specifically designated for paying college tuition
College tuition right now averages about $9,000 a year for a four-year state college and around $35,000 a year for a private university, according to the College Board. And in the past decade, public schools have seen an average yearly tuition increase of 5.6 percent, 2.6 percent higher than private institutions according to MyBankTracker. This means you’re going to need a good sized savings account to help your son pay his tuition.
It may be in your best interest to start saving for college early, because time will help you build a better account. Every state has at least one 529 college savings plan, but each plan differs in what it offers. Every plan must meet the federal requirements that money invested in the plans grows tax-deferred, and money taken out of the plan to pay for the beneficiary’s college tuition is not taxed. Some states also offer tax benefits as well, and you are not limited to investing in the plans offered by your state of residence.
There are generally two types of 529 plans. One allows you to save money for many years (like an individual retirement account) so you can pay the tuition bills as they arrive in your mailbox by making withdrawals. The other type allows you to prepay the tuition at a state school at today’s costs so that much – or even all – of the bill is paid before your son even arrives at school as a freshman.
No matter what plan you choose, the beneficiary (your son or daughter) doesn’t have control of the money. So if she decided to take the money and go backpacking through Europe – instead of pursuing a degree at college – she wouldn’t be able to get the money without your approval. And, because the plans are designed to specifically go toward college expenses, you’d have to pay a tax on the deduction if you did decide to approve the trip to Europe.
The earlier in your daughter’s life you start saving for her college tuition, the easier it may be to build a nice college fund. But even if your daughter is in her late teens, it’s never too late to get started right away with a 529 plan.