One of the investment accounts I’m glad I have is a 529 account set up with my son as the beneficiary, as this type of account represent an simple way to save up for his post-secondary education. What I save up for him isn’t likely to completely cover his costs, but the funds will definitely help out. (My son already expects to cover his tuition, using scholarships and loans, so what we can do to help with living expenses and books can be eased with this account.)
However, it is important to watch out for common mistakes made when saving for your kids. JJ Montanaro from USAA offers insights on mistakes that you should avoid with a 529:
Do You Have a Plan for Your 529?
According to Montanaro, you can’t just open a 529 and have it turn into a success. You need to have a savings plan in place. Figure out how much you need to put in the plan to succeed, according to your goals. Since we plan to pay for living expenses and books, we have a different goal amount than if we were trying to pay for tuition as well. Decide what your goals are, and base your savings plan on what you expect.
Who’s the Account Owner?
It’s important to make a distinction between the owner of the account and the beneficiary of the account. This is a big deal when determining financial aid. You could reduce your child’s ability to qualify if they own the account (and the assets). Montanaro points out that this can also be an issue for grandparents who want to help out. “Grandparents are well-intentioned when opening a 529 for their grandchild, but this approach could have a negative impact on the amount of financial aid your child qualifies for,” he says. “Parents and grandparents should understand all the implications of how a 529 is set up.”
Is It a Backup Emergency Fund?
It can be tempting to raid a 529 when you run into some financial difficulty. However, your child’s 529 shouldn’t be used as an emergency fund. Montanaro says that there are tax penalties that come with withdrawing the money for non-qualified education expenses. As a result, you could end up in bigger trouble. Plus, now you’ve reduced the amount of money available for your child to use at college, and you can’t replace the missed opportunity of the interest that the capital isn’t earning.
Should You Quit When Your Child Starts College?
Finally, Montanaro warns against quitting when your child starts college. You can still make contributions to your child’s 529 throughout college. “Parents can earn tax-free money that can be used for future education expenses like textbooks and tuition,” he says. Plus, if your plan and state allow it, you might even be able to receive a tax deduction for continued contributions (there is no federal tax deduction for 529 contributions). For those who uses up everything they saved in a 529 plan before their children graduates, the benefits beats the pants off even the highest yielding savings accounts.
Make it a point to learn the ropes of the 529 plan. You might be surprised to discover how effective it can be at allowing you to build up a college fund that can benefit your child (and maybe even you) down the road.
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