Whether you want to send Johnny to an Ivy League school, a state school, a community college, or skip school entirely to become a professional blogger, you should consider setting up – AND CONTRIBUTING MONTHLY – to their 529 plan. Sorry to shout. But I think it’s a point worth emphasizing and bolding the font just doesn’t hit home the same.
First off, contributing to a 529 plan means setting one up to begin with – if you don’t already have one (good news: it’s free to do so). And second, this means reading my 529 Plan for Dummies Q&A below, liking the blog, and sending it to 10 friends . I’m not qualified to offer investment research. But I’ve worked in Finance for my career and if I’ve learned nothing else it’s this one, simple truth: it is impossible to start saving too early on in your life (people are always surprised by future value calculations).
Let’s dive in.
What is a 529 Plan? It’s a) an investment account that b) has tax benefits when c) the account is used for education expenses for your beneficiary. Very simple. Think 401(k) for my kids’ schooling.
Why do I need one? You don’t. But one of the biggest benefits is that it puts you in the right mindset to start contributing to future educational expenses. I think that benefit is as big or greater than the more tangible benefits of the tax savings. You should be training yourself to save monthly the same way you learned to brush your teeth every other day. Clockwork.
What does it cost to open a 529 account, and how do I do that? It’s free to open an account. Every state (and the District of Columbia) offer a plan. Google: “open a 529 plan in [your state]”. You’ll provide the essentials to get started which are a) Your Beneficiary (e.g., your child…most plans require you to only name a single beneficiary, but there’s nothing preventing you from having multiple plans, or for using the dollars from one account to pay for another beneficiary’s educational expenses), and b) the amount you want to fund it with.
Don’t you think BOTH Democrats and Republicans are equally to blame for the mismanagement of our educational system and the crushing weight that $1.8 trillion dollars in student loan debt has had on our economy? Sorry. Got carried away. Moving on.
Are there limitations on who can be named as a beneficiary? No. You can name anyone.
Are there limitations on how I can use the dollars? Yes. They need to be used for qualified educational purposes. This generally means tuition, books, room & board, etc. There are penalties imposed if the dollars are not used for educational purposes.
What’s the max I can give per year? The IRS updates this every year or so but it’s currently $15,000 per parent per child. Aha. So if you’re married with two kids, your household could give up to $60,000 per year.
What if I’m super rich and I tell people all the time on Instagram how sweet my life is; do I still need one? There’s no downside in my opinion to having one. Unless the other uses of those dollars that would otherwise go into your child’s educational account are so strong with such certain, positive returns, it’s never a bad idea to set up such an account and give to it regularly.
How do I manage my account? My biggest piece of advice here: choose a default, diversified long term plan (they’ll be offered by your state). i.e., set it and forget it. Yes, active portfolio management can be great and produce strong returns, but one, it comes at a cost. And two, I’m of the belief that – especially with the inflationary economy we’re in right now – that watching and managing your account daily/weekly/even monthly only adds to your stress levels. There’s nothing you can do about the global economy. Keep your head down, look up in 10 years, and give yourself a tip of the cap.
Can you use a really colorful, well-made chart in Excel to show me the power of setting up a 520 plan, that emphasizes the benefit of contributing both early and often to it? Great question! Yes!
Hopefully you found this helpful. Good luck and happy saving.
Anthony Guerreso