You want the very best for your child. You want to give them the opportunity to attend college after high school, but you don't want to saddle them with student loans from high college costs.
If you read the news, education expenses are skyrocketing and it can seem impossible to have enough in your college savings plan! However, the amount you need to save for your child's journey may not be as much as you thought.
How do you determine how much you need to save for your child's education? Let's take a closer look at how much money you should contribute to a 529 plan.
Wait, before you leave, hear me out. You want to only invest in a 529 plan if your own retirement savings accounts are in order.
What this means is that you want to make sure you're investing everything you can into retirement. You also want to make sure that you're not drowning in debt. If your retirement account is on track, and you're debt-free, you can then start thinking about investing in your child's education.
The Math For What You Should Invest
If you do have extra money to put into a college savings account, you first need to consider how much college tuition will cost for a community college or university. Will they go to a state school in their home state or one out of state? Do they want to attend a private college or a public college?
Once you have the total number for college expenses, you need to consider the age of your child and the fact that the cost of tuition increases 4% per year (or more!). Yes, this is a lot of math and can result in a very large number.
You should also plan how much you want to contribute to your child's education. Some families may only want to save 25% of their child's college education while others may want to contribute more. You can see a great example of the math over at The College Investor or the Fidelity College Savings Calculator.
With the Savings Calculator, you just plug in the age of your child, the approximate cost of 1 year of college today, the % of the cost of college you plan to help with from savings (vs. paying cash out of your pocket), how much you already have saved, and how much you're currently saving.
The calculator will let you know if you're on track with your 529 savings. You can adjust the monthly contribution to see how it would affect your savings.
What You Should Know About Taxes
Each state is different. If you plan to contribute a lot of money into a 529 plan, you need to speak with a tax advisor on how it will affect your taxes and your financial aid and scholarship funds.
A 529 plan is a great way to save for your child's college over the years because of its tax benefits. Depending on your state, there can be some state tax advantages. If you contribute to your home state plan, you can often get a state tax deduction for the amount you invest each year.
Plus, your money inside the 529 plan can grow federal income tax free as long as you use the money for qualified education expenses for the beneficiary. The account owner can even transfer the money for use by another family member.
Be sure to pick a plan with lots of investment options that will meet your investment objectives. Many plans offer mutual funds or you can choose a plan based on the child's graduation year.
You will also need to speak with an attorney on how it will affect your estate. For most parents, this won't be a concern. Still, it's worth mentioning.
A 529 plan can be a wonderful tool to help you save for your child's education. However, you must remember that your finances need to be in order before you start thinking about your child's.
If your finances are in order, you should consider how much tuition is going to cost and how much of a percentage you want to pay for your child's education.
Lastly, don't forget to consider the tax and estate issues that can arise from contributing large amounts.