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Before you start adding to your child’s college fund, there are a few things that you should learn in order to get the most out of your 529.
When you’ve recently had a baby, there are a lot of financial considerations you need to take into account. You will need affordable term life insurance, health insurance, and more to protect your child as they grow up. In addition to getting the right kind of insurance, it is also important that you begin saving for college.
Since the cost of higher education is so exceptionally high—and only getting higher by the year—it is important to start saving for your child’s college education as soon as possible. Luckily, there are 529 college savings plans that are available to help you get started—and there are easy ways that you can get started right from your smartphone. So, before you open up a 529 account, make sure to read through these top tips you need to know about saving for college with a 529.
What is a 529 College Savings Plan Exactly?
Before you can get started, make sure you have all of the facts about 529 college saving plans
If you don’t know what a 529 is, now is the time to learn.
A 529 plan is an investment account that is specifically designed to help parents save for their child’s college education. These state-sponsored plans are appealing for many parents because they have lower minimum contribution amounts—meaning you can start small if you don’t currently have a lot of income for investment purposes.
It is also important to mention that many 529 plans will allow parents to withdraw money for eligible expenses beyond tuition. These types of expenses often include books, room & board, and other necessary educational expenses that are incurred by attending a college or university.
1. How to Shop for the Right 529 Plan for You
If you don’t do your research, you could end up making mistakes as you start your 529 plan
You don’t need to go with your first option—make sure that you are choosing the right plan for your family.
When you begin researching 529 plans, you will notice that every state offers a 529 plan. While it is most often beneficial to take out a 529 plan within your own state, you should look at a few others to make sure that your state is the best fit for you. There is nothing preventing you from starting a 529 plan in a state that differs from your current residence.
However, there is a specific type of 529 that does require you to start a plan from the state where you reside. This is called a state-sponsored prepaid 529 plan, These plans are designed to combat inflation by prepaying for in-state tuition. They also tend to have strict sets of rules on how the money invested can and cannot be spent. While the prepaid option works for some families, it is not for everyone.
When you choose a regular 529 (non-state-sponsored) plan within your state, there are tax benefits that you can take advantage of. When you invest in an in-state plan, you will get a break on the state taxes from your 529.
You should also take time to consider the different investment options that are offered by each institution. When you invest in a 529, your money will be placed in the hands of the institution and your plan manager. If their investments don’t align with your savings goals, then you may want to look elsewhere. Every institution is not the same, so you want to choose one that you trust to make smart investment decisions with your growing college fund.
2. How to Start a 529 Savings Plan
Getting a 529 plan is easier than you might expect—just make sure to do your research first!
Some institutions allow users to start 529s right from their smartphone.
There are a few different ways that you can open up a 529 college savings plan and begin contributing to your child’s college savings. All you need to do is select a financial institution and open up your 529 investment account.
There are even applications that can guide you through the whole process. For example, using the Fabric by Gerber Life app you can set up everything you need to start saving as a new parent. That includes securing a cheap life insurance policy, starting a rainy day fund, will writing services, and the ability to open up a 529 account. Of course, there are unlimited financial institutions to choose from when it comes to opening a 529. However, Fabric is a one-stop shop for new parents who need some guidance on how to start saving as a family.
So, while you’re opening a 529, you can also get an instant cheap term life insurance quote to protect your family in the future. Using Fabric or another similar application, you can take care of all of your financial concerns quickly using one app on your smartphone.
3. How Financial Aid is Affected by a 529
Your 529 will affect your child’s ability to get additional financial aid—find out how!
Keep in mind that your child can’t access maximum funds from 529 and equivalent student aid.
In order to keep a level playing field when it comes to paying for college, many kids who have 529 plans will be limited in the amount of financial aid they can receive. Any amount of money held in a 529 either in the student or parent’s name will be counted toward the parental income on the FAFSA (Free Application for Federal Student Aid). The more money that is credited to the parents, the less financial aid a child will be able to receive.
If the 529 is held in the name of another family member—like an aunt, uncle, or grandparent—that money will be counted as cash support for the student. This affects the reported student income and will also affect the amount of financial aid available to the student. Luckily for new parents, this policy is expected to be phased out by the 2024-2025 school year.
4. Know the Qualified Expenses Before You Start Your 529
Qualified expenses determine what you can and cannot spend your tax-free savings from a 529 account
529 funds can be used for college essentials—like books!
When you invest money in a 529 plan, you are essentially investing money toward the “qualified expenses” that are determined by the financial institution. These rules determine how the students are able to spend the money accumulated in the 529. Here are a few of the most common qualified expenses for college students:
- Tuition
- Room & board (must be at least enrolled half-time)
- Books
- Necessary electronics, like a laptop
If money from the 529 is spent on these college expenses, then they are not taxed. However, if money is withdrawn from the 529 to pay for other types of expenses, it will be taxed. Things that are not included in qualified expenses for a 529 plan include:
Any money that is additionally withdrawn, but isn’t used for the qualified expenses is also taxed. For example, a parent may accidentally overpay for a semester of tuition. The difference between the payment and the actual cost will be taxed.
Making the right decisions for your child’s college savings is a big deal—but it doesn’t have to be difficult. There are services like Fabric out there that can help you find the best 529 plan for your budget and your state. You may also be able to get an affordable term life insurance policy using an app like Fabric!
Just make sure that you do your research before you make your final decision. It may even be beneficial to consult with a financial advisor to guide you through the process. No matter the exact path you take, know that you are taking the right steps to give your child a head start when it comes to higher education.
Photo by Andre Taissin on Unsplash