Money! We all need it — now and in the future. The far off future in which your child packs up his car and drives away from your house…
Here’s some financial math for you: to reach a college savings goal of $100,000 requires contributions of about $250 a month if you start when your child is a newborn. Waiting eight years to start saving means you will need to contribute $600 a month to reach the same savings goal. So, don’t wait.
We sat down with Heather Flett from Rookie Moms, the co-author of Stuff Every Mom Should Know & The Rookie Mom’s Handbook, for her tips on college savings.
How are you saving for college? Glad you asked, have a seat. I’ll tell you everything about saving for college as long as you don’t ask whether I have a will or custody plan, ok? Adulting is hard, but saving tiny bits of money over time doesn’t have to be.
When my rookie baby was still a baby — he’s twelve now, more than half-way to college age! — my husband and I started a 529 College Savings Plan using an online application like this one. It is super easy to set up the plan (hint: do it NOW before the next birthday or holiday).
What’s a 529 plan? Oh right, I skipped ahead. A 529 Savings Plan is a fund for saving specifically for college tuition and expenses that offers tax savings, too. The funds can be used tax-free to cover tuition, room and board, books, supplies, computer technology, and equipment related to attending a qualified education institution. We automagically donate a bit to it every month. We also rigged up our credit card to make periodic donations based on shopping habits and eating at restaurants. Since then, I hardly think about it and our little savings account keeps growing. So, it is super easy to set it and forget it.
Do I have to do this 529 thingie already? College may seem far away, but opening a 529 plan as soon as possible can put the power of earning over time on your side. (Note that compounding returns potential can help your investments grow exponentially over time.) The sooner you get started, the longer your account has to take advantage of compounding.
What else rocks about a 529? If you are bold enough to ask your parents to help you save for college, they can deposit right to most 529 accounts.
What does a 529 Savings Plan cover? The money in the plan can be used at nearly every private or public college, university, graduate school, or vocational school in the U.S. It covers qualified expenses such as tuition, fees, room and board, books, supplies, computer technology, and equipment. Pretty much everything but beer money*
What’s the deal about being tax free? I’m no financial expert, but T. Rowe Price explained it this way: The account gains interest over time on a tax-deferred basis. We don’t pay taxes on the growth while the money is invested. Any withdrawals used to pay qualified higher education expenses are free of federal income tax and may be state tax-free as well. Some states offer additional tax benefits including a state income tax deduction for your contribution.
Note: College savings plans have a low impact on financial aid. When it comes time to apply for financial aid, only a small percentage of the account’s value (currently 5.64% or less) is factored in when determining your expected family contribution. Typically, 529 plans can be used in conjunction with other federal education incentives, such as Education Savings Accounts (ESAs), the Hope Scholarship, and Lifetime Learning Credits.
* Please don’t quote me on that, I am only assuming beer money is not included.
— Heather Flett, Rookie Moms
A T. Rowe Price 529 plan can help you reach your college savings goals while offering tax savings options. Your investment can be used tax-free to cover tuition, room and board, books, supplies, computer technology, and equipment related to attending a qualified education institution. Find out more.