We have always just done a savings account for each girl. After reading that a lot of bees have special college funds- maybe we should go this route. What kind of fund do you have and tell a little about it? And what happens if they end up not going to college or an emergency comes up and you need the money ?
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We're still looking into this, too-- subscribing!
Although when we met with our accountant during tax season, he said there wasn't a huge difference between the benefits of a 529 plan vs. a custodial savings account. I guess 529 plans are for education only, and if you use the money for other things, you need to pay taxes on the earnings? And each state has its own 529 plan, but you can contribute to any state's, not just your own? And he mentioned that Utah had a good 529 plan... still need to do a lot of research!
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There are various types of college accounts. The one I'm most familiar with is a 529 (since that is what I have). For a 529, you incur penalties and are taxed on the withdrawal if it is not used for higher education expenses. If your LO decides not to go to college, you can roll it over to a younger sibling without being taxed or penalized.
I opted to do a 529 over a regular savings account b/c
1) Family members can directly contribute to the 529 - it's pretty easy.
2) The one I am with (the Utah plan) has investment options that are in line with his age. So since he is so young, the investment strategy is pretty aggressive. You can opt to do more conservative or more aggressive options depending on your appetite for risk.
3) Also, depending on where you live, you can get tax benefits for contributing to your state's 529. -
One thing to note on the 529 plans. They can't be used to pay off student loans. Major bummer!
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Subscribing! I know nothing about this and am hoping some bees have more info!
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@mrsmenow: If they end up not going to college you can roll the funds to another beneficiary. However if you need the money in an emergency, you will pay at 10% penalty tax to use the funds for anything other than higher education.
As @HabesBabe: said custodial investment accounts are another great option as the funds can be used for anything that is for the child's benefit. For instance we had a client who once had to pull up all the carpet in his home and install hardwood floors because his child had terrible dust allergies, and the money could be used for that. The big difference though is the 529 funds grow tax free whereas custodial accounts work like regular investment accounts and you'll pay capital gains taxes each year.
As @OCmama: said 529 plans have great age based investment options that allow you to essentially set it and forget it if you want to. The money manager allocates the money into more aggressive funds when the child is young, and shifts to a more and more conservative profile as the child gets closer to college age.
Some good plans to check out are John Hancock, Fidelity, CollegeCounts and Alliance Bernstein.
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We have 2 529 plans for LO. Some pp have already discussed the basics of how 529 plans work. You do not have to use the 529 plan for your state, you can use any state’s 529. Both our plans are managed by Fidelity and with both plans; we invest “aggressively” for (I think?) 10 years, then invest with “moderate” risk for like 5 years, and then low risk for the remainder of the time.
Unlike a regular savings account, a 529 plan should earn a much, much better rate of return, especially nowadays when savings rates are basically nothing.
I’m not really concerned about whether or not LO goes to college; frankly, it’s an unspoken expectation in both families and we will certainly expect LO to go to college. Since the average college tuition cost is estimated to be more than $300k in 18 years; the sooner and more aggressively we save now, the better!
ETA: p.s. in regards to if an emergency comes up and using the money: we view the 529 as “not our money”; it’s LO’s money, so we wouldn’t touch it/count it as savings that we could ever dip into.
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The big benefit from the 529s is what @MamaMoose mentioned - they grow tax free. This means that you put money into after your paycheck already takes taxes out, so you've already paid taxes on the money, but in the future when you withdraw from the account you DON'T have to pay taxes. This is a big deal because ideally right now you are at a lower tax rate than you will be in the future (you'll probably make more money in 20 years than you do now, so paying tax now is cheaper than paying taxes in the future).
Compare this to other savings accounts: you put money in after you pay taxes on your paycheck already (can't get around that) and then you ALSO pay taxes in the future on your capital gains. The 529 avoids the second tax.
On top of that - contributing to a 529 can ALSO save you on your taxes in the year you contribute. For instance, I contributed $100/month in 2012 to my 529, so I get a $1,200 deduction on my taxes for 2012. Deductions bring down your taxable income, so that's like paying your taxes on a smaller total income.
ALso, some states have additional bonuses like being able to sign up for a credit card and a certain % of spending will be "rewarded" as money into your 529 or if you spend money at "participating restaurants/stores,etc" you can get a % of money donated.
Also, I do not have a kid yet, but we already have a fund and I'm listed as the "beneficiary" - you can always change beneficiaries in the future.
As others mentioned, you do have to pay a penality if you use it for non-education, but you would be paying taxes to withdraw ANY capital gains in ANY non-tax-protected account, so it's not too huge of a difference
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Thanks all for chimimng in. This is something DH and I are going to have to sit down and look into. Neither one of us were helped with college and would really like to be able to help the girls at least a little. And 3 girls = 3 weddings so making smart decisions in investment/taxes/return is going to be important:)
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