529 College Savings Plan:

Saving for college can be a daunting task for parents, especially if they get started to late in their childs life. The key to having enough money to fund your childs college tuition is to start early. A 529 college savings plan is the perfect solution to this problem and you can find one in your home state to get started. My children are age 8 and 4 and both have 529 plans in place for them and hopefully I can save enough money along with my wife to provide them a good college education. Why all the hype behind the 529 plans? The benefits are huge with tax free growth which means all the money you contribute to the plan grows tax free over the years until your child reaches college age. Having a federal tax free account is what sets the 529 plans apart from regular investing methods in saving for college. When you do withdraw money from the plan, it needs to go to "qualified higher education expenses" in order for it to be tax free. As recent as 2010, the addition of expenses such as computer technology, equipment, or Internet access was also included in what is considered a qualified expense. No matter how you look at it, 529 plans for college are a great investment and well worth the savings.

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With college costs increasing at roughly 6% annually, it's a good time to get some kind of savings started for your child. Just this last year we read that the UC system in California is going to increase tuition by almost 20% which means parents will have to buckle down even more if they want to provide enough funding for their child to go to college. The 529 contribution limits in our plan is $310,000 and that is more than enough for most colleges. 529 plans are designed to help parents with saving for college expenses. It's easy to contribute - monthly, yearly, whatever works for your budget. The plans are investment in portfolios often based on your childs age. For example, many are setup based on "Years to College" which means initially when your child is young (say 2 or 3) the portfolio is aggressive and takes on more risk. As the child gets closer to college age, the money is switched to another less risky portfolio so that there is less chance for loss in the stock markets. With the recent crash in the markets (2008-2009), the Oppenheimer fund that was supposed to be the least risky of all in Oregon actually had one of the biggest drops in revenue which left some parents asking - How did that happen? The state sued Oppenheimer and retrieved $20 million, but still it was a good example of how even the most "safe" investment can turn bad. The money invested in 529 plans is controlled by the owner of the account and most states let you make 2 changes per year to the allocation of the investments. We have choices for portfolios that are aggressive, moderate, balanced, conservative, ultra conservation, 100% equity, money market, stock market index, bond market index, International stock index, and balanced index. Ultimately, the fund manager chooses the stocks or bonds in the portfolio you go with. Some people don't like this aspect of the 529 plans and they want more control. They want the ability to invest in individual stocks or mutual funds. As most money managers will tell you, the key is to invest evenly over time and start when your child is as young as possible. That way the money can grow tax free for years and really turn into a good sized sum as they enter college. If you were to contribute $5000 initially and then just $100 month until your child was 18 you would end up with roughly $46,700 (based on a 5% annual rate of return). Even if you start saving when the child is 5 or older, the overall value can still add up and give them hope of paying for most of their college expenses via the 529 savings plan.

Opening a 529 for College:

All states have at least one 529 plan available and you are not forced to invest in the plan offered by your state if you don't want to. Many parents do a 529 plan comparison between states to see which ones offer the best benefits and returns. The only drawback I can see in investing in an out of state plan (529) is that you may not get a deduction on your state income tax if your plan is from another state. Here in Oregon I can deduct up to $4000 (since I'm married) in contributions from state taxable income. Also, if you happen to deposit more than $4000 in any given year, the deduction carries forward and you can get it on your next years return (or several years going forward for that matter). Most plans require an initial deposit of a few hundred dollars. I've seen the minimum at $25 if you are willing to have an automatic monthly transfer into the 529 account from your bank account. It's kind of like a 401K where the money gets invested every month without you having to do anything about it. Opening a 529 for college is easy - we suggest getting started at Savingforcollege.com. Choose the state you live in and then see a list of 529 plans available in your area. Feel free to check out other states as some offer better investment choices. I went to the Oppenheimer website to do my Oregon 529 plan and filled out an online form - they sent the paperwork and I mailed in the initial deposit to fund the account. You get to pick the beneficiary (you can almost always transfer the account funds from one child to another if you have to without penalty), choose the investment risk you want to take on, and follow the plan online to see how it's doing. My Oregon college savings account sends me a quarterly report on how things are coming along. I usually send them a check once a year to continually add to the plan for both my kids.

College Savings Calculator:

Saving large amounts of money is always overwhelming at first since it seems like you will never reach your desired goal. The best place to start is with a college savings calculator to determine just how much money you need to save. We found a good 529 calculator online at http://www.savingforcollege.com/tools_calculators/ - just type in the age of your child and put in some variables like current cost of college they wish to attend, years until college, how many years they will attend higher education, how much of the total you want to save for, predicted monthly contributions, and so on. The 529 plan calculator will spit out a number (in dollars) that you can aspire to save for. You can play with the variables a bit and see what you can afford in order to get the college savings dealt with. Many parents are surprised at how little they need to contribute each month in order to make a huge different 10 or 15 years down the road. College is only getting more expensive in America so helping your kids cover some of their tuition and other expenses is a big help.

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