Saving For College So Easy That A Normal Person Can Do It
As most parents realize, having a college education is becoming much more important as time goes on. According to an article on Yahoo! Finance, college graduates earn an average of 62% more per year than do high school graduates. Estimating how much college will cost by the time our children get there is nearly as ambiguous as estimating how much money we'll need to establish for retirement. An internet search of “future college costs” returns a long list of websites offering all sorts of varying estimates that will steal a parent's breath away. Trying to sift through all the big words and acronyms in articles offered by financial experts is enough to obtain an average person want to rip his or her hair out.
So what is a profitable way to put some money away for Junior's post-secondary education? Indiana's CollegeChoice 529 Direct Savings Plan is the answer for me, and I'll explain why in terms that anyone can understand.
Big Ol' Disclaimer
I am not a financial expert or anything close to it. I'm an average Hoosier with a level of intelligence that falls somewhere between drooling moron and rocket scientist. For the admire of everything holy, do not invest money based solely on anything I have to say. Do some research. Talk to some real experts. Come By out what is best for your particular situation. This is simply what works best for my particular situation.
The Nuts and Bolts of a 529
A 529 college savings understanding is named for a section of some Internal Revenue Code that allows for this type of savings plan. Just in case you were wondering. I originally thought it was a reference to something that happened on some May 29 in the past, but I was detestable.
After looking at a number of websites such as Savingforcollege.com, I learned that 529 accounts are fairly similar in concept to savings accounts. You make deposits in the account over time, and—in theory, anyway—you get a return on your money (not always, though! Keep reading!).
In Indiana, a company called Upromise runs the state's 529 plan. They're financial people who seem to be elegant good at investing money. If you're good at investing money, too, you can set up individual portfolios for your 529 account, but if you're an average Hoosier like me, the age-based option probably makes more sense.
With the age-based option, the kind folks at Upromise take your money and invest it in a variety of stocks, bonds, and securities in units called “shares.” If a share costs $10 at the time you invest some money, and you invest $50, you're purchasing five shares. If the share's value increases to $11, your five shares are now worth $55.
The exact investment strategy Upromise uses depends on how old your child is. The younger the child, the more aggressive their investment strategy. The premise there is that you're trying to grow your fund as quickly as possible while Junior is young and you have plenty of time to ride out any hiccups in the economy that might affect your earnings.
As Junior ages, the investment strategies become more and more conservative so that as Junior is ready to start college, you have a very stable source of funding.
When you use the age-based option, Upromise makes the necessary adjustments automatically as time goes on. It's nothing you have to think about or actively change. Very convenient.
Then when Junior is ready to go to college, you make what they call “qualified withdrawals” from your 529 account for Junior's college expenses. Junior doesn't even have to go to college in Indiana to be able to use these funds. How cool is that?
You Win Some, You Lose Some
Just remember that as with any investment of money, market fluctuations drive prices up and down. It's possible to lose money with these things, as I was doing hand-over-fist for quite some time when the economy bottomed out recently.
529 accounts should be used as long-term investments, not something to start with your 16-year-old. We started our kids' accounts very shortly after their births, so we are fortunate to have a long period of time before we'll need to access this money for their college. Plenty of time for the economy to recover—as it's already starting to do—and regain losses.
But be aware that not every investment makes money or breaks even. You're taking a calculated risk by investing in a 529 account.
I also recommend against checking your account's progress every day, especially during a recession. As I was hyperventilating into a brown paper bag every morning a couple years ago, watching the portion prices of my kids' futures plummet along with the economy, my wife reminded me that with lower share prices, we're purchasing more shares with our money each month, so when the economy recovers, we'll have more shares earning more money.
She also told me to quit checking the accounts until the economy starts bouncing encourage. Good advice. Saved me a lot of grey hairs and ulcers.
Some Benefits of a 529
The website for Indiana's 529 plan outlines the benefits of their program quite well. Savingforcollege.com has a nice article on the benefits of 529 plans in general.
The high points for me?
It's really easy to dwelling up an memoir on-line. You have access to your account 24/7, and we set ours up to pull a certain amount out of our checking memoir each month for the ultimate convenience.
It only takes a $25 investment to open an account, so your last name doesn't have to be Trump to get one of these things started. You can contribute as little as $25 at a time. Other people can easily contribute to your kids' accounts, too, for birthdays, holidays, special occasions, or no particular reason at all.
There's no annual maintenance fee for Indiana residents.
If you have a Upromise yarn, you can tie it into your Indiana 529 account, allowing you to rep even more money. Don't have a Upromise account? Check it out here.
You don't score taxed on your earnings by the feds or the state, even when you make qualified withdrawals.
Indiana provides a state tax credit (that's the good kind) for 20% of what you invest each year, up to $1,000. That's not a deduction coming off your taxable income. It's a credit. So if you invest enough to earn a $1,000 tax credit, that's $1,000 more in your pocket than your normal tax refund. Guess where that tax credit goes in our family? Right back into the 529 accounts.
Don't Live in Indiana?
Not a Hoosier? That's icy. Every state in the U.S. has a 529 college savings plan, and you don't have to invest in your own state's program. We actually started with New York's 529 plan, despite not living in New York, until Indiana improved their program to the point that it was profitable for us to roll our Unusual York account over to an Indiana account. Not every plan is the same, so do your research. Savingforcollege.com (and many other sites) can help you there.
I hope this helps. The website for Indiana's 529 view has a lot of FAQ's answered for you here, too, for anything I missed. Pleased saving!
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Filed under Upromise College Savings by on Dec 7th, 2011. 