Pretty much from the second you start thinking about having a child you need to start thinking about how you are going to afford college for that child. Forget diapers, the orthodontist, and the prom. College is the biggest expense that comes along for parents, and it's one that you'll want to start thinking about early. Enter the 529 plan - the savings plan designed to help parents with kids of any age start setting aside money for college.
What is a 529 plan?
Essentially, it is a a college savings plan. There are tons of 529 plans out there, some are operated by states while others are run by specific colleges and universities. State sponsored plans usually offer state tax incentives to residents. The biggest benefit of a 529 plan is that it is "tax-advantaged,' meaning that you can withdraw money from the account - tax-free - for qualified college expenses such as tuition, books, equipment, room and board, and other fees. The plan gets its name from the section of IRS code - 529 - that lays out the tax guidelines for these types of plans.
Do you need one?
If you have kids, it's a good idea to start setting some money aside for higher education. Even if your child decides not to go to a traditional four-year college, she can use the funds for trade school, tech programs, or a two-year degree associate degree. And 529 plans aren't just for the kiddos. If you are thinking about going back to school in a few years - say once the kids are out of the house - you can set up a plan for yourself too.
Which 529 plan should you choose?
That is the big question and the decision is not for the faint of heart. Each state has its own 529 plan and some have several from which to choose. The benefits and rules vary between each plan, so you'll want to look closely to see which plan will work best for you and your kids. But most states let you invest regardless of whether or not you are a resident of that state. And many - but not all - plans let you use the funds at any eligible higher education institution. This means that you could live in Pennsylvania, invest in a 529 plan in California and use the funds for your child to go to the University of Alabama.
How do you invest in a 529 plan?
Investment options and regulations vary from state to state and even from plan to plan. Your best bet is to start with the 529 plan in your home state and note the resident benefit options that are available. You can also take a look at the best 529 plans for 2013 as determined by financial analysts at Morningstar - an independent investment research firm - to see where your state, and other states, fall on that ranking.
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