I know Ryan is only 1, but Steve and I have actually been discussing starting a college fund for him since before I pregnant! I’m sure other parents can relate. It’s kinda one of those cliché conversations that all parents have that loses priority after the baby is born. Everyone said to open up a 529 savings plan, but didn’t have a lot of information about them. Steve and I never actually did open an account until after his first birthday. Steve’s grandma and a family friend of ours each gave us $25 checks made out to Ryan with “Ryan’s college fund” written on the memo line. Steve and I decided it was time and we would start up Ryan’s account.
First, we wanted to learn about the 529 plan
- What is a 529 plan? 529 plans are accounts for the purpose of paying for college for a specific child. Accounts are now available in all states and are transferable from state to state without penalty.
- How does it work? Just like the 401k plan you might have through work (if you’re lucky) or the Roth IRA you contribute to at the end of the year.
- Is it risky? The money is invested into bonds and mutual funds that generally average a 6 – 7% return over a ten year period. Hey that’s better than the bank or under the mattress where your money loses value due to inflation. With a steady return the earlier you start the fund and make regular contributions the better off you’re going to be. You have control over you’re money so you can be risky at the start (more money in stocks/mutual funds) and safer when your child is getting close to heading to college (more money in bonds).
- What are the benefits? Tax deductible! That’s quickly becoming my favorite phrase. Steve and I are obsessed with taking advantage of every tax break possible. There’s a little more to it than that though. With a 401k or a Roth, eventually you take money out of the plans that are taxed down the road…with a 529 plan the money you put in is deducted from your income for that year and when you take money out to pay for school you aren’t taxed either. Also taking advantage of financial aid, such as University of Phoenix financial aid plans, the savings will definitely stack up.
- What’s the catch? If you need to make a withdrawal for emergencies, not education you pay taxes on the withdrawal plus a 10% penalty. 401ks and Roth IRAs are the same way. It’s all about planning and not contributing more than you can afford.
What is our plan?
Steve usually takes care of the research about money and then shares it with me as long as I can stay awake. It’s not that I don’t care, I just trust Steve as he’s really good with money and planning (he just lost his job and we’re not worried at all). Because the money isn’t taxed when added or taken out of the 529 (as long as it’s paying for education), we will not contribute to a Roth or 401k plan (unless there’s a match of at least 25%) until we meet the $12,000 contribution limit to the 529 account. Why $12,000? Contributions are considered a gift from you to your child and you can deduct $12,000 of gifts per year from your taxes. Once we are satisfied with the amount of money in the account we will go back to contributing to a 401k plan or Roth IRA.
How will we do it?
Recently we found a brand new website called “GiftofCollege.com” that makes it easy for family and loved ones to contribute money directly to your child’s college fund! Now…rewind back to Ryan’s birthday party. If this service had been available back then, we (Steve would’ve forced me!) to put a link to GiftofCollege.com on our invitations, so our friends and family could contribute to Ryan’s college fun rather than have to head to the store and buy a bunch of gifts for Ryan. This would’ve saved our friends and family the hassle of running out to get gifts for Ryan, saved us the hassle of returning gifts we already had and made a meaningful contribution to Ryan’s future.
How does GiftofCollege.com work?
First, it’s important to understand how contributions to a 529 plan worked before GiftofCollege came along. If you wanted to make a contribution to say a friend’s kid, niece, nephew, etc you would have to permanently link your own checking account to that friend or fill out a mountain of paperwork every single time you wanted to make a contribution. That may not seem like that big of a deal, but imagine if you want to make contributions to your 10 nieces and nephews and 10 of your friend’s children’s savings account. You then would have to fill out 20 sets of paperwork each Christmas (or at all their birthdays) or link your checking account information to 20 separate accounts just to donate to each of them!
With the GiftofCollege.com all that nonsense goes away and all parties still take advantage of all of the tax deductions with less paperwork and less hassle. As parents, we registered our information with GiftofCollege.com and now we just sit back and wait for the money to roll in! Next year at Ryan’s birthday party we will let everyone know that we have a 529 savings plan and we would love more than anything for them to help us invest in Ryan’s future. We will direct them to our account with Gift of College to save them time and hassle and watch the tax deductible money pile up!
*Disclaimer: while I received compensation for this post, I am an active member of the GiftofCollege.com service and have registered my 529 savings plan there where you can donate to Ryan’s college fund. No, seriously, go donate now!