Is a 529 College Savings Plan Right for your Child?

These days, it can be tough to even think about trying to scrape together enough money for college, particularly since tuition is so high and budgets are so tight. If you really want to give your child a head start in life, though, it really is in your and your child's best interest to begin saving as soon as is possible. Fortunately, there are a number of tax-advantaged savings vehicles offered today that can help to offset the skyrocketing cost of tuition, and ensure that your child has the best possible chance for success. 

The 529 college savings plan is just such a vehicle, and as savings accounts go, it's one of the best values going. After all, with a standard savings account, not only do you only earn the laughable savings interest rates a available today, but you also have to pay taxes on the earnings that your savings produces, further dwindling your ability to help your child get into the school of their choice. (That is, if they'll even be able to get into school on that kind of savings.) he way it works is fairly simple. You start the account with just about any amount you choose. Then, you decide how the investment will be invested. With most companies that offer 529 savings plans, you have a few choices. Let's go over three that you're likely to find anywhere.

The first is going to be a higher risk category, and this option is going to be the one you might want to consider if you're setting the account up before your child is about seven years old. It invests in stocks and stock funds so that the money you invest has the greatest ability to grow while at the same time spreading out the risk incurred by the investment. The second option is a safer option, and is generally suited to children who are between seven and fifteen years old. This option still uses stocks to build the value of the account, but where the first option may use a lot of volatile stocks and funds, the second option will purchase much more proven stocks and funds - mostly with companies that you've likely heard of. The third, and safest option, is one that will likely use bonds and maybe a few super-safe stocks to maintain the value of the account and ensure that the value doesn't drop below a certain level. These are a good option for students who have entered high school, and will soon be looking for colleges. If this all sounds familiar to you, it should. The idea is very similar to how your 401-k works.

The tax advantages are probably the most significantly different aspect of the two plans. Where a 401-k retirement plan defers the tax until you retire, a 529 plan has you making after- tax contributions, and then avoiding the tax on the proceeds as long as it's spent on qualified educational expenses. This serves as a great incentive for your kids to get through college. After all, who doesn’t want to avoid taxes if they can?

Some of the things that can be purchased with the proceeds of a plan such as this include tuition, room and board, books, computers, and other qualified educational expenses such as are allowed. No, that new car to go to college with isn’t covered! If you’re interested in a great college savings program, then check out the benefits of a 529 college savings plan at your local bank or brokerage, and remember, the sooner you get started saving up for your child’s college, the less damage that first year of Ivy-league will be!