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. The sooner you get started, the longer your account has to potentially grow.
What else rocks about a 529? Grandparents and other family members can also contribute to a 529 savings plan. Tip: instead of having relatives send gift cards or toys for your little one’s birthday, let them know that you have a 529 savings plan that they can contribute to.
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.
What’s the deal about being tax free? I’m no financial expert, but T. Rowe Price explained it this way: Contributions are taxable. However, any earnings gained are tax-deferred so we don’t pay taxes on any growth while the money is invested. Any withdrawals used to pay qualified higher education expenses are free of federal income tax and might be state tax-free as well, since some states offer a state income tax deduction for contributions.
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.
— Heather Flett, Rookie Moms
The T. Rowe Price College Savings Plan is offered by the Education Trust of Alaska. You should compare this Plan with any 529 college savings plan offered by your home state or your beneficiary’s home state and consider, before investing, any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in the home state’s plan. Please read the Plan’s Disclosure Document, which includes investment objectives, risks, fees, charges and expenses, and other information you should consider carefully before investing. T. Rowe Price Investment Services, Inc., Distributor/Underwriter.