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Parent's guide to 529 college savings plans

Are you already thinking you want your children to go to college one day? With the cost of higher education continuing to soar, parents should be thinking about setting aside funds for college tuition. Whether your child is gearing up for college in the fall or you still have several years to save, you might want to consider a 529 savings plan to set aside, and perhaps even lock-in, the cost of a future college education today. 

 

What are the benefits of choosing 529 over a regular savings plan?

 

While all 529 plans involve federal tax advantages, each state has a different plan with various benefits like income tax reductions, credits, and matching contributions. Consider and compare the incentives for investing in your home state’s plan with the benefits of investing out of state.

 

What are the different types of 529 plans?

 

There are two types: a prepaid plan and a savings plan. A savings plan is similar to a 401(k) or an IRA in that you invest your savings in mutual funds or investments from a fixed selection. You can withdraw from this account tax-free, as long as you use the funds for qualified higher education.

 

Prepaid plans allow you to buy select amounts of tuition at a rate closer to today’s prices. These “units” are then cashed in once your child begins college. Almost all states offer the 529 savings plan, but only a few offer the prepaid option.

 

What are the risks and limitations?

 

Setting up a 529 savings plan involves some risk. When you invest in mutual funds or securities, there’s always the chance they could lose value. Because of this, it’s best to choose investments that fit your timing and willingness to take risks. Try to create a diverse portfolio to account for market upswings and to protect yourself from any significant losses.

 

How do you get a 529 plan?

 

Check out the options your state provides and choose your plan type. You can open a 529 account through a college savings program or a financial advisor. Broker-sold plans are often pricier, but you do receive the benefit of regular financial advice from a professional.

It’s never too early to start thinking about your child’s future. Choosing the best plan for your family may feel complex and daunting, but with a little preparation and knowledge, you’ll be on your way to a healthy college savings plan.

Tags: Student finances, Banking

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