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Finances in 55 Seconds: Looking for a 529 Plan

As you probably know, the cost of education is rising. I look at what I paid for undergraduate tuition and grad school, and what my husband paid in tuition increases to finish his Ph.D., and I realize that the cost for my son to attend college in another eight or nine years could very well be prohibitive. This is why we’re already saving up for college.

One of the tools you can use to save up for college is the 529 plan [3]. This college savings plan provides a way for you to use investing and the power of compound interest to build up enough for college. As long as withdrawals from the plan are used to pay for qualified education expenses, there are no taxes paid on the earnings from the plan. (You should be aware, though, that you contribute with your after-tax income, so there is no federal tax break for your contributions. Some states, though, offer you a break on state income taxes for your contributions to a 529.)

If you are interested in using a 529 to help your child save up for college, here is a guide to help you get started in 55 seconds or less:

  1. Look for plans that work in any state: Some 529 plans restrict your child’s college choices to what’s available in that particular state. If you are unsure that your child will go to a specific school in a specific state, you can look for 529 plans that will allow your child to attend any approved school. (25 seconds)
  2. Consider investment options: Look for a 529 plan with investment options that work for you. A variety of funds can be useful, and you can even find targeted funds, designed to automatically re-allocate as your child gets closer to attending college. (15 seconds)
  3. Consider fees: Remember that 529 plans usually require you to invest in funds. This means fees. Try to find plans that offer no-load funds, and low-fee funds. Many 529 plans now offer the chance to invest in index funds [4] and other funds with low fees. (15 seconds)

Once you have the basic criteria down, you need to do some serious research into plans. Choosing any investment should be an exercise that takes more than 55 seconds. However, if you are looking for a way to kickstart your efforts, you can use the above steps to help you set your criteria. This will make it easier for you to whittle down the options to three or four fairly quickly. Then, you can begin comparing the pros and cons of each 529 plan.

Two Things to Keep in Mind

As you look for 529 plans, there are two more things to keep in mind:

  1. The earlier you start, the better: Your child will be able to benefit more the earlier you start. You will have more time to save up if you begin while your child is younger. You can also encourage your child to contribute part of his or her earnings from allowance [5] or after school jobs to help out.
  2. There is a risk of loss: You also have to remember that there is a risk of loss whenever you invest. You are investing money, and a stock market setback could result in a decimated 529 plan. Make sure you are away of this, and plan accordingly. However, if you start early enough, and contribute enough, there is a chance that your 529 account will be large enough to be sufficient for a limited time.

(Photo: perfesser [6])