We try to do everything right for our kids. We want to give them the best of everything. If we can afford it we send them to private schools, throw them birthday parties every year, pay for music lessons, and provide financial support for college.
College. It’s the most expensive gift we ever give anyone. Average tuition and fees for a private four-year college now runs close to $24,000 a year, according to the College Board. That’s almost $100,000 to save in 18 years. This can be a daunting task even for the most disciplined savers. That’s why a lot of smart, diligent parents turn to 529 plans to help them meet the high costs of sending their children to college.
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A 529 Plan is an education savings plan designed to help families set aside funds for future college costs. They work much like a 401(k) or IRA in that contributions by parents are invested to facilitate monetary growth. 529 plans are great because they can take a huge bite out of future college expenses. Contributing just $1,000 into a 529 plan for a newborn will grow the account to $4,000 if they average 7% annual returns when he or she is ready to head off to college.
Every state has at least one 529 plan available. Most of them are not affected by what school your child or grandchild chooses to go to. You can live in California, invest in a 529 plan from the state of Vermont and still send your child to college in North Carolina.
There are many benefits to putting your cash into a 529 plan as opposed to other education saving accounts. Many states offer tax breaks to the donors. And while there is no federal income tax deduction for 529 plan contributions, your withdrawals can be taken out tax free if you follow the plans rules.
Though there is one big secret; just like your 401(k) or IRA your investment can lose money. Over the last several months a lot of investments HAVE lost money. The market has been extremely volatile. The actual numbers for third quarter performance of 529 plans haven’t been released yet but most financial experts are telling parents to expect loses on their statements.
In the past declining investment returns have caused many parents to stop contributing and pull out of completely. When the market crashed a few years ago this is exactly the scenario that happened. Contributions to 529 plans dropped 63% from 2007 to 2008 according to the Financial Research Corp.
And while it may just be curious timing (third quarter performance statements go out in the next few weeks) a number of states have recently overhauled their 529 plans or added new investment options in hopes of limiting investor losses.
Despite these states efforts to control loses for its investors there is no guarantee that loses won’t occur again in the future. That’s the nature of investing your money, sometimes you make money and sometimes you lose money.
What I think is the problem here though is parents are forgetting about using sound and safe investment strategies. Especially as you get close to your child’s high school graduation date. The same is true for investing in your retirement. You don’t want to be 100% in risky stocks if you’re close to needing the money.
Investing in any market should be for the long-term. Very few of us have the skills to make money as day traders. When you buy stocks, mutual funds and the like it should be with the intent to hold it for as many years as possible, even a decade or two. That way any volatility the market experiences will have time to recoup its losses and once again become profitable.
For those of you that need to withdraw your money now, even if you’ve lost some of your investment, you need to face a harsh reality. You may not be able to help your children out entirely with college costs.
You do your children no good if you pay for their college, but then must spend the rest of your lives depending on them financially. Let your child make up the rest through scholarships, low-interest loans, and part-time work. Student loans are some of the best interest loans people can attain now-a-days. Paying for college expenses is not an all or nothing type deal. In the future if all goes well for you, you can consider helping to pay off your child’s loans later on.
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