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322 MG How to Use a 529 Plan to Pay for College
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I'm Laura Adams, and you're listening to the Money Girl Podcast. Does the thought of paying for a child's college education make you want to scream? If you're struggling to pay down debt or safe a retirement, having enough to also fund a kid's college might seem like an impossible dream. The good news is that saving even small amounts on a regular basis while children or young can add up to a surprisingly healthy education fund. Today, you'll learn about my favorite place to set aside money for college, so it can grow like Jack's Beanstalk, a 529 plan. If you're waiting until your kids get accepted into college to figure out how to pay for it, you're procrastinating an important financial planning task. Although parents are under no obligation to pay for a child's college, I've rarely met any who don't want to contribute something. The best way parents can save for college is to use a nifty tax-advantaged account called a 529 plan. They're offered by states and eligible institutions like colleges, universities, or vocational schools that participate in federal student aid programs. You contribute money that can be used to pay for a student's qualified college expenses at an eligible school. Qualified expenses include tuition, books, fees, and equipment for coursework, plus reasonable room and board. The reason I love 529s is because the earnings on your contributions to these accounts are never subject to income tax. Although you can choose just about any 529 plan, you may also be eligible for additional benefits like exemption from state financial aid calculations if you choose a plan that's sponsored by your home state. Everyone can use a 529 plan because there are no restrictions on annual income. The maximum amount you can contribute each year varies on the plan you choose, but it could be over six figures per student. If you have the fortunate problem of contributing too much to a 529, you can change the student on the plan who is called the designated beneficiary. For instance, if your daughter decides to go to a less expensive school, you could change the beneficiary on the account to your son, or to another member of the family who can use the balance to attend college. However, keep in mind that if you withdraw money from a 529 and spend it on anything other than qualified education expenses, your earnings will be subject to tax and a 10% penalty. So be sure to calculate your student's potential total college costs as closely as possible. I'll give you some tips about how to do that in just a moment. So instead of delaying education savings until your children reach college age, start a simple plan now. This will reduce financial stress and make sure that your child doesn't have to miss college or begin their career with a mountain of student loan debt. Here are three simple steps to pay for college using a 529 plan. Step number one, calculate the cost. Since every financial goal begins with the end in mind, you've got to know what college will cost when your child is ready to attend. Obviously, there are many factors to consider, such as the school, the degree, inflation, and any scholarships or grants received. While it might seem like you need a fortune teller to come up with a realistic number, there are some handy tools that will help. I'll include links to three college cost calculators in the transcript for this show on the Money Girl page at quickandertietips.com. If you have specific schools in mind, contact their admission offices and ask for cost estimates based on your child's current age. Or consider the cost of a few different schools in various price ranges and take an average. You just need to come up with a target number for planning and can refine it later. Step number two, figure out your contribution. As I mentioned, there's no parenting rulebook that says you're required to pay 100% of a child's education. After you calculate what college could realistically cost, figure out what's reasonable for you. Maybe it's one half, a small percentage, or nothing, especially if your finances are in really bad shape right now. For instance, if you have a seven-year-old and figure that attending an in-state university will cost $15,000 per year in 10 years when she's ready to go, that's a total of $60,000 for a four-year program. If saving $60,000 over the next 10 years would prevent you from reaching your retirement goals, well, maybe you could create a plan to squirrel away $20,000 for college instead. I cover college savings in my award-winning book, Money Girl Smart Moves to Grow Rich. One option I suggest in the book is called the Plan of Thirds. Here's how it works. You save a third of the cost of college before college starts. You pay for a third of it during college, and then pay for the final third after graduation using student loans. It can be very helpful to use a financial advisor for college planning. He or she can put education savings in the context of the big picture of your finances. You can learn more in a recent podcast called How Do You Find a Financial Advisor, Part 1 and Part 2. Experience the performance of Lexus Racing, the thunderous V8 engine, the black and deglow yellow Lexus RCF GT3, a blur of speed and adrenaline, the sheer force of acceleration, the physics-defying grip of the tires, the intensity of every corner, the precision of each maneuver, the sound of victory. Visit licensed.com/motor sports to keep the thrill going. Now that we're in Q4, it's a good time to start thinking about making memories with the people you love most before the end of the year. 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Policy genius is the country's leading online insurance marketplace, and even if you already have life insurance through work, remember it may not protect all your family's needs or follow you if you leave your job. So save money and time on providing a financial safety net for your family. Head to policygenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's policygenius.com. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science, and social studies. Ixcel has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards, and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems, and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixcel.com/moneygirl. Visit ixcel.com/moneygirl to get the most effective learning program out there at the best price. Step number three, pick a savings vehicle. After you have a college cost estimate and know how much of it you can pay for, it's time to choose a 529 plan. There are two types, prepaid tuition plans, and savings plans. Here's the difference. A prepaid 529 plan allows you to pay for future tuition at today's rates and can be administered by states or institutions, but they aren't available in every state. The idea is that college costs rise year after year so locking in a rate now will save money in the future. On the other hand, a 529 savings plan is very different because your account balance is based on the performance of the underlying investments that you choose similar to a retirement account. These types of 529s can only be administered by states and are available in every one. You can choose a variety of investment options from low risk CDs to higher risk growth mutual funds. So don't think you have to be a high roller to opt for the 529 savings plan. Each 529 plan has different features and benefits, so always do your homework before enrolling in one. CollegeSavings.org and savingforcollege.com have tools to compare and shop for the best 529 plan for you. Saving for college has never been easier, so get started by making a plan to set aside regular contributions to a 529 plan. No matter if you contribute $10 a month or $1,000 a month, the sooner you get started, the easier it'll be for you and your family to pay for college. For more money tips and advice, be sure to follow me on Facebook, Twitter, or Google Plus. Also sign up for the free Money Girl newsletter. You'll find links to everything I've mentioned and see a transcript of this show on the Money Girl page at quickandertietips.com. Just look for episode number 322 called "How to Use a 529 Plan to Pay for College." I'm glad you're listening to CHING. That's all for now, courtesy of Money Girl, your guide to our richer life. Is it time to re-imagine your future? The right business skills may make a difference in your career. At Capelli University, we offer a relevant education that's designed to focus on what you need to know in the business world. 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