How to Open a College Savings Account for Your Child
The cost of a university education continues to rise, outpacing inflation by at least twice the rate. Affording college is a big concern for parents, especially mothers and fathers of young children, as they wonder how they will afford hefty higher education-related expenses 15 to 20 years out. College scholarships, grants and loans quite frankly may not be enough.
Fortunately, there is a tax-free way that families can save money on their higher education. Under the Internal Revenue Code a savings plan that is regulated by the states can help families. So-called 529 plans were added to the tax code in 1996, modified in 1997 and modified again as part of the Economic Growth and Tax Relief Reconciliation Act of 2001.
Under a 529 plan, parents can set up these accounts even before a child is born. Or conceived for that matter. Think about it: if you are getting married this year, some of the money you receive as gifts could be placed in a college savings account even if you are several years away from starting a family. You will need to name your spouse as a beneficiary initially, renaming the account for the child once he or she is born.
Such accounts are controlled by the people that open them, in this case a parent. If a child chooses not to go to college, those funds can be moved to an account for another child or adult. Of course, you are also building an incentive for your children to pursue their education beyond high school and a well-funded 529 plan can provide the impetus your child needs.
For taxpayers, a 529 plan grows tax free and those funds are not taxable when later withdrawn to pay for a child’s education. You get tax deferred growth and enjoy the benefit of never having a penny paid to the government for money you save toward your child’s education. Such plans also do not have age or income restrictions, barriers that could impede many families.
To open a 529 plan account, visit the College Savings Plans Network that is affiliated with the National Association of State Treasurers. All 50 states and the District of Columbia offer at least one plan. You can compare between plans and states; you can also sign up for another state’s plan even if you have no connection to that state.
Lastly, if the grandparents want to open a 529 plan for your children they can do so as well. Some plans accept third-party contributors, a terrific option for grandparents and others that prefer not to manage accounts of their own.