Paul’s Thoughts on Saving for College with 529 Plans

Filed in ceo, dividend, earnings, Gold Investment by on August 25, 2010 0 Comments

Fidelity Investments published an interesting today on estimating how much money parents should invest each month as part of a child’s college savings plan. The study focuses on 529 plans, and it is not surprising that Fidelity would want to delve deeper into this area, since they sell them as a product. Not that there’s anything wrong with that — far too many parents are ill-prepared for the eventual college tuition bill, and 529 plans are a great idea for many families. Let’s take a look at the lowest household income category in the report, which was $55K. In that case, the study estimated parents would need to set aside $160 per month from the first year a child was born (or 3.5% of annual salary) to be able to pay for a public education. This estimate includes a 5.4% annual rise in the cost of college. Each state has its own version of 529 plans, so parents should explore the options available in their locale. There are some solid advantages to 529 plans, including paying no taxes on the account’s earnings. The child also has no control of the money, and if he or she decides not to go to college, you can use the money for someone else (proceeds of a 529 plan can be used only for education, though you can transfer the account to another member of the family if the original recipient doesn’t use it). While you can also get a full refund for withdrawal of the money, you must pay taxes plus a 10% penalty on your investment earnings. Other relatives can also contribute to the plan (hello grandma and grandpa!). These are just some of the pros of 529 plans. The downside to the plans is that the investment options are limited, and you give up control on where the money will be invested. Check your state’s plan guidelines to see if and how they guarantee your money, and also investigate performance, benefits, and costs. If you have the money, you can also save more for college in another account, such as a Coverdell ESA or and Roth IRA, which can be used college savings as well. Roth IRAs have certain tax advantages, and you can avoid early withdrawal penalties if you use the funds to pay for your child’s tuition, but they aren’t truly intended for use as college savings plans. Still, Roth IRAs can be a good way to hedge your bet against underperformance in a 529 plan, as long as you invest in high-quality dividend-paying stocks. Clearly, saving for a child’s college tuition is a smart investment — the key is knowing when and where to invest your money. Paul Rubillo is the founder and CEO of Be sure to visit our complete recommended list of the Best Dividend Stocks , as well as a detailed explanation of our ratings system here .

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Paul’s Thoughts on Saving for College with 529 Plans

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