I'm finally getting around to starting a college savings fund for my 5 year old. My main question is whether a state 529 or an Educational IRA is better. Any experts out there that can give me some advice? I want to try and make sure it doesn't affect my family income in the future when we go to apply for financial aid.
I hold monthly 529 seminars for my clients and prospects and absolutely know that the 529 plan is the better investment. This plan avoids the triple tax as long as the money is used for books, tuition, food..etc. You can even use it for living expenses such as utility bills and they are even considering transportation such as a car in the near future. Let's also say that your son or daughter gets a scholarship to a school..you can take the money equal to the scholarship and essentially put it in your pocket. Unlike a custodian account you actually own the assets in the plan, not your child. I've heard of many cases where parents have started custodian accounts and their child turns out to be a hellian and when he/she becomes an adult they take the money and run and its used for something other than school. If you have another child you can roll the unused money from the 529 plan of your oldest to the younger sibling and so on and so on. It can be rolled into grandkids, neices, nephew's 529 plans. I would suggest using a Franklin Templeton 529 plan that is aged based where it changes from more aggressive to conservative as your child progresses in age. Something like 1-7 (aggressive) 8-13 (moderate) 14-18 (conservative). I hope this helps..
Also an easy way to save for school is a MAP plan. Monthly Accumulation Plan where money comes out monthly, bi-monthly, semi-annually out of your checking account. Try $50, you won't even know its gone. Get family involved where maybe for birthdays and other holidays they can contribute and give your child a certificate saying that they have invested $100 to the 529. Instead of a video game maybe put $50 into it...you will definitely appreciate it when your child turns 18.
Ask a financial advisor to run an Education Cost Analysis where it tells you exactly how much you need to save each month or year for tuition room and board for any school you wish for the years your child will be in school.
Good Luck
Also an easy way to save for school is a MAP plan. Monthly Accumulation Plan where money comes out monthly, bi-monthly, semi-annually out of your checking account. Try $50, you won't even know its gone. Get family involved where maybe for birthdays and other holidays they can contribute and give your child a certificate saying that they have invested $100 to the 529. Instead of a video game maybe put $50 into it...you will definitely appreciate it when your child turns 18.
Ask a financial advisor to run an Education Cost Analysis where it tells you exactly how much you need to save each month or year for tuition room and board for any school you wish for the years your child will be in school.
Good Luck
Wow, thanks for the great info. I really appreciate it. I think you've sold me on the 529. Can you direct me to a website that lists the different plans? Also, does it matter which state's plan I sign up for? I am in Wisconsin but say if I don't like Wisconsin's plans, can I sign up for say Kansas or Texas? It doesn't matter where my child would go to college, right?
Notebook,
I would agree that the 529 plan is the better option than the educational IRA in most situations.
I would google "529 plans" for a site that list the different plan. There are many sites.
You can sign up for any state plan even if your child does not attend a school in that state.
You can roll the funds into another state plan if you should become dissatisfied with the orignal one you enroll in. There is no tax penalty to roll the money into another state's plan, and you can do it once every 12 months.
Depending on the size of the gift in any year, you may also need to file a gift tax return to elect to treat the funds as made over a 5 year period.
I would agree that the 529 plan is the better option than the educational IRA in most situations.
I would google "529 plans" for a site that list the different plan. There are many sites.
You can sign up for any state plan even if your child does not attend a school in that state.
You can roll the funds into another state plan if you should become dissatisfied with the orignal one you enroll in. There is no tax penalty to roll the money into another state's plan, and you can do it once every 12 months.
Depending on the size of the gift in any year, you may also need to file a gift tax return to elect to treat the funds as made over a 5 year period.
I agree that section 529 is better than the Educ. IRA. Just be careful about the fees...529 plans often have high fees which can erode your earnings over time. It might also affect your child's ability to get financial aid...but this will be the case with any savings you have.
Two sources that won't affect financial aid elligibility: life insurance and home equity. A life insurance plan can act as a savings vehicle, and so does increasing your home equity by paying down your existing mortgage with the money you intend to save for your child -- both are alternative ways to fund your child's education in the future without affecting her financial aid status.
All this can be discussed with a CFP or other qualified professional that can help you come up with a strategy that makes sense for your individual situation. Good luck!
Two sources that won't affect financial aid elligibility: life insurance and home equity. A life insurance plan can act as a savings vehicle, and so does increasing your home equity by paying down your existing mortgage with the money you intend to save for your child -- both are alternative ways to fund your child's education in the future without affecting her financial aid status.
All this can be discussed with a CFP or other qualified professional that can help you come up with a strategy that makes sense for your individual situation. Good luck!
