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As parents of a teenager, if you’re thinking you have plenty of time to save for his or her college fund, you might want to give it a second thought.
Years of soccer games, birthday parties, and PTO meetings quickly speed by. And before you know it, you’ll be attending your teen’s high school graduation. Wondering how to start saving right now for their future? You’ll be relieved to know it’s not only possible but also easy and manageable with a 529 savings plan.
Here’s what you need to know about saving for your child’s college fund:
What is a State-Sponsored 529 Fund?
Established in 1996, the 529 college savings plan was named for Section 529 of the Internal Revenue Code, which created the savings plans. These tax-advantaged savings plans are designed to help families set aside money for future education costs and make saving money easier.
While the 529 plan was initially limited to pay for post-secondary education, it was extended in 2017 to cover K-12 education and apprenticeship program costs in 2019. There are two types of 529 plans in which you can invest:
- Savings plans
- Prepaid tuition plans
Your savings will grow tax-deferred, and withdrawals are always tax-free — as long as you use the withdrawals for qualified education expenses. Another advantage of prepaid tuition plans is the lock-in feature that allows the account owner to pay tuition costs in advance, thereby locking in the cost of tuition at today’s rates. Of course, you’ll want to research designated colleges and universities that offer prepaid tuition plans.
Qualified Expenses for Using Your 529 Savings Plan
As parents or legal guardians of a college-bound teen, you’ll enjoy a multitude of advantages with a 529 savings plan that includes a variety of qualified expenses. In fact, you can use these savings plans for the following:
- Tuition and enrollment fees at an eligible college or university
- Up to $10,000 per year for K-12 school tuition (This includes parochial and religious schools.)
- Up to a $10,000 lifetime limit in student loan repayment
Other college expenses that count as qualified expenses include:
- Room and board (Students must be enrolled on a minimum half-time basis; this also includes off-campus living.)
- Study abroad room and board (This must be approved by the college or university.)
- Computer, software, and internet access
- Books and supplies
- Lab fees
How to Start Your 529 Plan Today
The 529 savings plan makes saving for college achievable, with some states offering a minimum contribution of just $25. There are many ways to go about setting up a 529 savings plan. For example, you can contact a financial advisor who offers 529 plans. And while most 529 savings plans don’t charge an initial setup fee, you’ll be expected to make a deposit when you establish your fund.
Don’t worry about how much you decide to invest into these funds initially. Instead, set aside something small if you can’t dump a significant amount of money into your fund. Indeed, taking the first step toward establishing a 529 savings plan will help pave the road to your child’s college savings fund.
Plan Now and Enjoy Future Peace of Mind
It shouldn’t go without saying, the sooner you can get started with your 529 savings plan, the better. By establishing your 529 savings plan early on, your money will have more time to grow. Additionally, prepaid tuition plans should be locked in as soon as possible since many schools may have annual tuition rate hikes. Plan now to create a future that fosters better peace of mind as you make important decisions about your child’s college path.
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