Sep 14, 2022
The cost of college is already sky-high and it’s only going higher.
For the class of 2020, that meant when they accepted their diplomas, they also received a bill for an average of $28,400 for their student loans, according to analysis from LendingTree.
Advertisement
A 529 plan offers a way to head off college debt by giving families a tax-advantaged way to save and invest for college, or even pay some costs in advance.
You have lots of 529 choices. Here's what you need to know to pick the right plan.
Savings vs. prepaid tuition
When shopping for a 529 account, you'll need to make a couple of big decisions. The first is whether to go with an education savings plan or a prepaid tuition plan.
Education savings plans allow family members to put money away for a future student's tuition, fees, room and board, textbooks and other qualified higher education expenses.
You grow the money by selecting a portfolio of mutual funds and other investments. The earnings are usually tax-free, but you'll want to see what a plan's disclosures say about fees, because those can reduce your savings by 10% or more.
With prepaid tuition plans, you make payments toward future tuition and fees at participating colleges and universities — at today's prices. The savings can be huge.
But if the kid ultimately decides to go to some other school, you might lose part of your investment. So, some experts suggest using prepaid plans only when children are old enough to know which schools they're likely to attend.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
- Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
In-state vs. out-of-state plan
The other big choice is where to open your 529 plan.
Advertisement
All 50 states and the District of Columbia offer 529 college plans. You're allowed to choose an out-of-state plan, though you'll miss out on any special tax breaks that may be available from a 529 plan in your own state.
For example, you might get a deduction off your state income tax for the amounts of money you contribute to the plan. (Of course, that's only if your state has an income tax; some states do not.)
Review the tax benefits in your state to determine whether they’re a strong enough incentive to go with an in-state plan. Other states may have more attractive 529 options with lower costs and more investment choices.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- This 20-year-old lotto winner refused $1M in cash and chose $1,000/week for life. Now she’s getting slammed for it. Which option would you pick?
- Warren Buffett used these 8 repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Doug Whiteman was formerly the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."
Mortgages • Apr 17
What is a home equity line of credit (HELOC)?
Mortgages • Mar 19
-1741291165.png)
-1697727014.jpg)
