Better Than Barbie: Saving for Your Child’s Future Education
Despite a weakened economy, the roadways near the shopping malls were absolutely packed on Black Friday 2008. Children should have a few gifts to open this holiday season, but I've discovered a new way to give gifts that is way better than giving the latest Barbie, Elmo or Monster Truck toy… it's the gift of education.
With two children under the age of six - I have many years to think about their college education. But as we all know, the first rule of saving is to save as much as you can, and start as early as you can. I used to think saving for college was a bad idea in general - because the amount of savings you or the child has directly affects the amount of financial aid you are eligible for through the college you select. In other words, if you have $110,000 saved by the time he or she reaches college age - the school will consider 100% of it as your contribution to the child's education and chances are, having a sizeable amount of cash saved will make you ineligible for all need-based financial aid. Even if half of that savings was supposed to be going toward your retirement, or the downpayment for a new house you've been saving for.
If you save money in a 529 plan, however, only about 6% of the total savings are used when calculating a child's eligibility for need-based financial aid. The money also earns interest on a tax-free basis. Each state has it's own policies regarding how 529 plans work, but you can expect that the plans not only earn on a federal tax exempt basis, but withdrawals used for qualified education expenses are also tax-free. Some states waive state taxes for residents, other states allow deductions on contributions - check with your particular state for the specifics. The 529 plans offer generous maximum contribution limits, and other family and friends can contribute to a 529 plan for a child (and the money is not considered part of their estate).
If your child grows up and decides not to go to college, you have a few options. You can switch the 529 plan beneficiary to a child in your family who IS going to college (a brother, sister, cousin) or you can switch it to an adult family member who is going to continue their education. If there is no one else to switch the 529 fund to; or you want the child to receive the money despite not going to school, you can withdraw the money for non educational purposes, but you will pay a 10% penalty and the money will become taxed as income at that point.
Note: Each 529 plan has its own set of rules and restrictions, which are subject to change. Make sure to request the most recent plan details from plan administrators.
My favorite part of the 529 plans is that you can set them up and allow other family and friends to contribute to them. Every year as the holidays and birthdays of my children approach, our family begins asking me for ideas for what gifts to give them. Now, instead of spending their entire gift budget on toys the children will outgrow in the blink of an eye, I ask them to contribute some of their gift into my child's 529 account. To make this as easy as buying something online, we enrolled in FreshmanFund.com. It works like a gift registry - my children have registries and people can come and contribute with credit card or bank transfers. The money is held in an account managed by FreshmanFund.com until I transfer it to the child's connected 529 plan.
Giving the gift of education couldn't be easier - and it's a gift that will grow with the child until he or she is ready to use it!