Look at Bennett, he look so studious and focused! LOL!!!
Before we start, here are my quick disclaimers: I am not a financial advisor so please seek out a financial advisor to find out which is the right saving plan for you and your family. This is merely a brief summary based on my convo with a rep from Ameritrade and I just want to explain what I have learned and my thoughts on college saving plans. Secondly, the links here are not affiliated links, meaning: if you click it, I receive no commission what so ever.
Although there are many saving plans out there for college, there are the most popular ones:
-The 529 Plan: Basically named after Section 529 of the Internal Revenue Code, this is an education savings plan. It is to be use exactly for —EDUCATIONAL purposes (i.e. college tuition, cooks—I meant books). Maximum amount you can contribute here is $70,000 ($140,000 per married couple) per year to avoid the federal gift tax. Withdrawals from a 529 account can be taken at any time for for the sole purpose of college education expenses otherwise you will be penalized a federal tax of 10% and possibly state tax as well, and who wants that?
-529 Prepaid Plan: We all know college tuition is rising and will continue to do so, whether we like it or not. So this is a popular plan for those of you who want to lock in the price and avoid the tuition hike. Like the 529 savings, the purpose of this plan is exclusively for school expenses, otherwise tax will be imposed.
-Trusts: These are assets invested on you’r child’s behalf drafted by an attorney. There is no maximum or minimum amount that you can contribute to. Once s/he reaches the “age of trust termination” then s/he can withdraw from the account. Unlike the 529, your child can do whatever s/he wish: use it for school expenses or max it out on friends and European trips. .
-Custodial Accounts (UGMA/UTMA): Similar to a trust, without the hassle of the attorney fees. Once your child reaches the age of 21, s/he is entitled to the money, and can choose to do as s/he wishes with it, which can be a good/bad thing. There is a tax (sometimes at a child’s tax rate) imposed on this type of savings which is dependent on the amount you have in your account.
I would highly encourage you and your spouse to talk it over in length and seek a financial advisor. Some of the things you may want to considered are:
1.) Will your child go to college? What will happen to the fund if s/he choose not to go to college? If not, your child may benefit from a custodial saving account instead, s/he may end using the fund to start a new business? Who knows, s/he might be the next Mark Zuckerberg!!! Or it can flip 360, your child blows it off in a few month and be back at home camping on your couch, let’s hope it’s not the latter.
2.) Consider your particular situation and income. How much can you afford to set aside for your child’s education without eating on rice and beans? Be realistic!
Hey starting a college saving account for your child can be done! Instead of doing it alone, you can get your family/friends on board as well. It’s easy: instead of cool toys, or trendy outfits for birthday/Christmas that your child will outgrow, why not ask your family/friends to contribute into his/her savings account!?! Plus, as your child gets older, you can get him/her to contribute to it too! There are many platforms (such as Fidelity) that allow family/friends to make direct deposit into your child/ren’s fund- how cool is that?!?
Whatever your case, my advice is to start early for more leverage (secret here: allow the power of compound interest to do its magic!). Before you open any random 529, consider your own state plan as it may have additional benefits- click here to compare the 529 plans in state/out of state.
This is all very new to me, and if you already started a savings account for your child, please share!