Save for college with a 529 plan.
With college costs skyrocketing, you may want to consider opening a 529 plan for your child. Unlike other investment accounts, 529 plans offer tax-free growth, which will save you a bundle in the long run. But which type of 529 plan is right for you? Here are some questions to help you make the right choice.
Prepaid plan or college savings plan?
“My opinion is that prepaid tuition plans are risky,” writes Barbara Friedberg, portfolio manager, author of “How to Get Rich; Wealth Building Guide for the Financially Illiterate” and U.S. News Smarter Investor blogger. Prepaid plans sell units to cover education costs at specified state (and some private) universities, Friedberg explains. But your child may not want to attend a state university. Friedberg says 529 college savings plans offer more options with greater flexibility.
Should you choose your state’s plan?
If you’re a New York resident, you would contribute to a New York state plan, right? Not always. Your state’s plan may or may not be right for you, Friedberg explains. “Start out by investigating the tax benefits of your state plan. If your state offers compelling tax benefits, then it will usually be a top contender,” she writes. “If not, definitely investigate other states’ plans. Without tax benefits, your state’s plan may not be the best one for you.”
Should you choose a direct-sold or advisor-sold plan?
If you favor passive (index) funds over actively managed funds, be aware that direct-sold plans offer more passive funds, while advisor-sold plans offer more active funds. In general, advisor-sold plans provide greater investment options.
Does your employer offer 529 consultation services?
Check your employee benefits to see if you can get a free consultation with a financial advisor or a 529 consultant. “You can also explore other ways to reduce fees, such as signing up for automatic contributions,” U.S. News contributor Joanne Cleaver writes.
What fees will I pay?
You can usually find a table featuring all portfolio fees and expenses in the 529 plan’s offering document. Search for “total asset-based annual fees” to get a full picture of how much the portfolio will cost. Also make sure to check out the minimum initial contribution, which usually runs $15 to $25, depending on whether you opt for automatic transfers.
How early should I start saving?
Start saving as early as possible. “We contributed to a 529 for our daughter when she was an infant, and along with her scholarship (who knew?), a small loan and summer job income, she graduated from college financially intact,” Friedberg writes. “And since we started contributing while our daughter was young and invested in a diversified portfolio of stocks and some cash, our money contributions to her 529 plan grew quite well during the 15-year compounding time.”
More from U.S. News
Explore Unusual 529 Plan Options
How to Balance College Costs With Retirement
Is There Such a Thing as Too Much Indexing?
6 Essential Questions to Ask Before Choosing a 529 Plan originally appeared on usnews.com
