Our daughter was born in early 2007. Knowing what I know about the power of compounding interest, I knew it was important to start a college savings fund early with something, even if it wasn’t much. We definitely subscribe to the belief that saving for retirement and debt reduction come first in the savings plan and that college savings has to take a back seat to these higher priority expenses. Still, it’s difficult to be a parent and not try to put something away for your kids.
With that in mind, we opened a 529 savings account for our daughter when she was almost a year old. A 529 plan is very much like a Roth IRA — except it’s for kids and their family and friends who are saving for their future college expenses. Money put into a 529 plan grows tax free, and withdrawals are tax free as well. 529 plans are administered by individual states, and some states also offer an income tax exemption on contributions made to your home state’s 529 plan. It’s interesting to note that many states now offer more than one plan.
With so many plans available, opening a 529 plan can be a daunting task. Luckily the folks over at SavingforCollege.com have made the task a bit more manageable with a search function to find the characteristics of a 529 plan that you want. We started with this list of wants:
- low fees — no point in having high fees eat up a large portion of the gains
- a variety of investment options — age based, index funds, etc.
- low startup costs — we wanted to be able to contribute small amounts at irregular intervals
- state tax exemption — your gains only get better if you can deduct the contributions on your state taxes
Another great resource at the time we set up the account was Nickel who did a lot of the homework for us. My search did seem to concur with his assessment. We got 3 out of 4 of our wishes in this search. Unfortunately our state does not have any kind of income tax exemption for contributions made to 529 plans.
We decided on the Ohio College Advantage Plan to get started. This plan offers very low contribution amounts at $15 per contribution. It offers a range of investment options including portfolio blends, index funds, CDs, age based funds, etc. Most of the fees for these options are low. The Vanguard options, for example, start with an expense ratio of 0.23%, and there are no other management fees of any kind.
One nice feature of 529 plans, however, is that you can generally switch from one plan to another with little trouble (the one great exception being after you just got a state tax exemption…). So it’s not only possible, but probably quite likely, that you may pick a plan today but change to a different plan at sometime in the future.
It took until nearly her first birthday, but we finally managed to open an account with $1,100 that we had saved over the course of her first year. Most of this was her money in the form of gifts that she had received. We have since made a couple of additional contributions. Our plan for the near term is to use the cash back from our Chase Freedom Card, as well as any additional birthday, Christmas, or any other kinds of gifts she receives (at least until she’s old enough to understand money…) to fund this account. We don’t expect it to grow like gangbusters, but we expect that every little bit that we are able to save will help. If we get to a point where we are saving 20% or more of our income for our retirement, then we will consider contributing more towards this 529 plan as a savings plan item.
For Part II of this article, we’ll look at Pre-Paid Tuition plans.
The cost of education is already scary, and it feels good to be contributing something to help our daughter’s future, even if it eventually amounts to just a drop in the bucket. Are you saving for your kids’ education(s)? How are you doing with it?