When their children are initially born, many parents do not plan for them to attend college. Unfortunately, that is precisely the time when they should have begun putting money away. To coin a phrase from the old Fram Oil commercial, when it comes to college tuition, you can pay them now or pay them later.
For most parents looking for a way to save for their child’s college education, a 529 college savings plan is a wise choice. That’s because the money you invest in one of these accounts grows tax free if you use the funds toward eligible education expenses.
Even so, just finding the best option for your child or relative can be daunting. Every state has its own individual 529 savings plan, and they are a number of variables in each. How do you pick the best 529 plan for your kid when there are so many to choose from?
“A low- and moderate-income child who has school savings of $1 to $499 … is about four times more likely to graduate from college.”
Who Needs a College Fund?
Saying that college is important for a young adult’s earning future, should go without saying. According to the National Center For Education Statistics (NCES), the typical annual pay for a college graduate is $66,000 more than the median annual salary for a high school graduate or someone with a General Equivalency Diploma (GED).
It’s a good thing college graduates make more because it should be no secret that a higher education costs more than it ever has.
A larger percentrage of Americans are saving for their children's college education than in years past, according to data compiled by Sallie Mae and published in “How America Saves for College”. Also, the average amount of money set aside for higher education is about $16,000. Yet another study found that at least 40% of parents and guardians do not have a college savings plan for their children.
If you're serious about your future, you shouldn't ignore the fact that the bare minimum expense of a four-year public college education is roughly $18,000 (source: National Center for Education Statistics)!
A 529 Plan and Your Child’s Education Future
At least one kind of 529 savings plan is available in each of the 50 states and the District of Columbia. A 529 plan is quite similar to a Roth IRA, except that the money in it can only be used for higher education.
After paying taxes, the funds can be contributed to the plan.
The annual contribution limit for a 529 plan is $14,000. The 529 plan money can then be placed in mutual funds where they will grow without incurring any further taxes. Taxes are not due on withdrawals made for qualified educational expenses, which can include much more than just tuition.
The 10 Best College Funds for a Child
Iconic industry analyst Morningstar has recognized my529 as a top 529 college savings plan for 12 consecutive years. Utah's 529 plan has received national acclaim for its investment diversity, responsible management, and reasonable costs. Only two 529 plans in the whole country, including my529.com, have earned the coveted Gold Analyst RatingTM from Morningstar.
- Anyone at least 18 who has a valid U.S. Social Security or Taxpayer Identification number and a physical address can open a my529 account. Corporations, partnerships, and trusts, can also be account owners.
- A Utah taxpayer, including a Utah trust, can take a Utah state income tax credit on donations up to specific restrictions if the recipient was less than 19 when the account was founded.
- A $25 minimum contribution is allowed, with a maximum allowable balance of up to $540,000 per beneficiary.
The Ohio 529 plan offers similar benefits reviewed here, such as a tax break for Ohio residents, a diverse selection of investment alternatives, and low fees. While it's better than nothing, the deduction is not as significant as what's offered in other states, especially for married couples. There is also a minimum investment required to initiate the plan and for subsequent investments. However, many plan members should be able to handle the $25 fee.
- The account owner must be a U.S. citizen or permanent resident.
- Funds can be used at any higher education institution that takes part in federal student aid programs.
- A $25 minimum contribution is allowed, with a maximum allowable balance of up to $482,000 per beneficiary.
- For Ohio taxpayers only, up to $4,000 annual state tax deduction are allowed for both individuals and married couples filing jointly.
- No enrollment, application, or maintenance fees or required.
- There is a 0.13% program management fee plus 0.02% state fee.
The state of Illinois has a 529 college savings plan with features that make it competitive with similar plans in other states. Similarl to the other plans we've shown, this one has relatively modest fees and may be used at any accredited institution or university, not just those in Illinois. Most significantly, depending on their tax situation, Illinois citizens can deduct up to $20,000 annually in state taxes.
- The account owner must be a U.S. citizen or a legal resident
- Funds can be used at any higher education institution that takes part in federal student aid programs
- There is no minimum contribution and a maximum balance of $450,000 is allowed per beneficiary.
- For Illinois taxpayers only, a tax benefit of up to $10,000 annual deduction for individuals or 20,000 for married couples filing jointly, is allowed.
- There are no enrollment, application, or maintenance fees.
- A program management fee of 0.105% (including 0.03% state administrative fee) is accessed.
A Managed Education Savings Plan (MESP) provides a plethora of investment options, all of which are overseen by professionals; some of these options even rebalance on their own as the recipient draws nearer to college. You can tailor an investment strategy to fit your risk tolerance, time horizon, and other considerations by choosing from a variety of investment options, including multi-fund, single-fund, and principal-plus-interest portfolios.
- A minimum of $25 per investment option is required to start an account. That or a payroll direct deposit of $15 per pay week.
- There are no application, sales, or maintenance fees.
- A MESP may qualify for an annual gift tax exclusion of $16,000 per year for single filers and $32,000 a year for couples.
- A MESP allows you to give up to 5 years’ worth of gifts at one time — for a maximum of $80,000 for a single filer and $160,000 for couples.
Investment alternatives from TIAA-CREF, T. Rowe Price, Vanguard, and others are available through ScholarShare 529, which is accessible to those living in any state. For certain people at least, this scheme will deliver a large boost to their savings due to its remarkable flexibility, appealing investments, and additional economic benefits (such as generous state tax credits).
- This program is open to all U.S. citizens and permanent residents over the age of 18. It's also open to emancipated minors, UGMA/UTMA custodians, and legal entities.
- A minimum contribution of any dollar amount and a maximum of $529,000 is allowed.
- There are no application or enrollment fees.
- The state of California offers no tax deductions on college savings plans.
A minimal annual program management charge of 0.13 percent of the account balance is all that's required of 529 plan members in New York. New York State allows participants to deduct up to $5,000 annually in taxable income if they file as an individual, or $10,000 if they file jointly.
- A U.S. citizen or permanent resident of any age can open an education savings account and utilize the money for postsecondary education at any accredited two-year or four-year college, university, or trade school in the country.
- No minimum required for contributions balances of up to $520,000 per beneficiary are permitted.
- New York state residents can deduct up to $5,000 per year as an individual ($10,000 per year as a married couple filing jointly).
- Membership, application, and renewal are free of charge
- The program management fee of 0.13% of assets includes costs related to the investment funds
Fidelity manages the U.Fund College Investing Plan, which is provided by the Massachusetts Educational Financing Authority. The plan has minimal costs but also has one of the lower maximum contribution amounts. For Massachusetts residents, the state tax deduction may be helpful despite being less generous than those offered by other states' schemes.
- The owner of the account must be a U.S. citizen or a permanent resident.
- The money in the account can be used at any accredited U.S. school.
- There is no set minimum for contributions, and the maximum balance per recipient is $522,000.
- There are no out-of-pocket expenses for enrolling, applying, or maintaining your account.
- The Program management fee ranges from 0.09% to 0.20% of your total investment amount per year (not counting state costs).
There is a lot of leeway and options for investment in Oregon's 529 plan. The minimum initial investment is $25, however, following contributions can be as little as $5. There are greater fees than with certain other plans. The tax benefits are also modest. However, they are not in the form of a deduction but rather a dollar-for-dollar credit.
One of the plan's distinguishing features is a program match that provides financial aid to enroll in select public universities in Oregon for participants of the Oregon College Savings Plan.
An account owner must be a U.S. citizen or legal resident.
Funds can be used at any qualifying higher education institution.
Contributions are limited to $25 at initial contribution, and then at least $5 per contribution per investment portfolio. A maximum allowable balance of $400,000 per beneficiary is allowed.
For Oregon taxpayers only, there is a $150 annual tax credit for single filers and $300 for joint filers. These prices depend on annual plan contribution and income.
There are no enrollment, application, or maintenance fees.
A .25% state administrative fee, plus investment fees for funds chosen is accessed.
Morningstar has recognized the Florida 529 Savings Plan with a bronze medal for its low costs. They are among the lowest in the country. Up to $10,000 per year can be used to cover tuition and required costs. These are costs related with enrollment or attendance at an elementary or secondary public, private, or religious school.
- The child or his/her parent or legal guardian must have been a Florida resident for the past 12 months before enrolling.
- You can enroll any Florida resident who has a avalid Social Security number and is a U.S. citizen or resident alien.
- There are no fees of any kind to enroll.
The Texas College Savings Plan (TCSP) is a tax-advantaged 529 college savings plan. It's created to assist those in setting aside money for eligible higher education expenses. A Texas College Savings Plan account can be opened and funded by any U.S. citizen or permanent resident immigrant who is at least 18 years old.
- When you start an account, you'll need to put in at least $25. The Plan's automated investment plan (AIP) allows you to set up periodic deposits of $15 or more. 1 Alternatively, payroll deduction may be an available choice at your firm.
- The total cost of the portfolios falls between 0.31% and 0.5215%. Charges may evolve over time.
“For most parents looking for a way to save for their child’s college education, a 529 college savings plan is a wise choice. That’s because the money you invest in one of these accounts grows tax free if you use the funds toward eligible education expenses.”
Those who open a 529 plan can take advantage of federal and state tax deductions. Also the flexibility to save for a variety of educational expenses. While starting a 529 plan to save for college is simple, you should always check the requirements for state tax benefits to ensure they apply to you. Check what constitutes an eligible education expense before taking withdrawals.
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Written by Liz Flynn
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