College Savings Accounts With Low Fees And High Tax Savings
Why Saving Money For College Is Important
With today's tuition rates, saving for college is a must. If you've never heard of a 529 plan, you will be pleasantly surprised with the benefits of opening one. I will show you a comparison of some of the best 529 college savings plans available.
If you don't already have a child in college, you may be shocked to find out the costs for tuition. I know I was. When our oldest daughter started applying, it was a real eye opener. We thought we had enough money saved but hadn't factored in the skyrocketing costs of tuition. I knew private colleges would be expensive with an average tuition price of $26,273 a year and when you add on housing, you are looking at something closer to the high thirties. However, I wasn't prepared for the costs at a public university.
Public universities may seem inexpensive in comparison but, with an average tuition of $7020 and a cost closer to $16,000 with housing, it is still very expensive. Multiply that by four years and you are looking at $64,000 for a college education. And, tuition continues to skyrocket. With the economy is such a bad shape, states aren't able to provide as much funding. Therefore, tuition increases for public colleges.
Also, there doesn't seem to be as much funding for grants and scholarships right now. Our daughter had a small scholarship from the state of Michigan that was pulled due to lack of funding.
Saving money early gives you the time to put away smaller monthly increments. The earlier you start, the less painful it will be. Having the money saved up is a much better alternative than being forced to acquire a student loan that will continue to hang over your heads way after the college education is complete.
You could simply put money away in a regular savings account in either your own name or your child's but there are some specific advantages to using a 529 plan that I will outline for you below.
529 College Savings Plans
Savings plans that are operated by the state are called 529 plans. These were first developed in 1996 and have many advantages to the investor. Investing your money in a 529 plan allows your earnings to grow tax-deferred, which is a great savings. You don't have to choose a 529 plan that is sponsored just in your state, you can pick one in any state that you want. It doesn't even have to be a state that your child will be attending college! Not all of them are equally effective, they vary in benefits, so picking the right plan is essential. There can be some advantages if you choose a plan in your own state, like state tax breaks, so I would start by checking there first. I have outlined a few of the plans, from various states, for you to look at.
The Vanguard 529 - sponsored by the state of Nevada
The Vanguard has some of the lowest expenses and fees among 529 plans. The popular age-based options have just been reduced in October, 2010 from .44% to .25%. The Vanguard also doesn't have any enrollment or transfer fees and no commissions.
Investing is easy when you pick their age-based option which adjusts automatically. You just pick the option that equals the age of your child at the start of the investment and your risk level. They will gradually move you to more conservative levels as college gets closer. You don't have to do a thing.
It is required that you invest a minimum of $3000 initially but then just a minimum of $50 additional investments thereafter with a total contribution limit of $370,000.
Fidelity - managed by Arizona, California, Delaware, Massachusetts, and New Hampshire
Fidelity has also recently cut their fees. If you choose an index fund, the fees now range between .25% and .35% while the managed fund fees are anywhere between .59% and 1%.
They have the age-based portfolio options as well as custom options and investors can choose whether they want to invest in index funds or actively managed funds.
You can contribute up to $65,000 or $130,000, for a married couple, a year without paying a federal gift tax.
Ohio CollegeAdvantage Savings Plan -
The minimum contribution is just $25 with a maximum per child of $345,000.
Ohio offers two different age based investment options and a total of twelve different static investment choices, including four multi-fund and eight individual fund options, with your choice of risk level.
The program management fees are .16 to .17% with no enrollment, application or account maintenance fees.
For Ohio residents, up to $2000 of contributions a year are tax deductible.
Utah Educational Savings Plan - lots of extra benefits for Utah residents
There is no minimum contribution and the maximum is $368,000 for one beneficiary.
Utah offers five age based options at different risk levels and seven static investment choices including, the State Treasurers investment fund, two equity index funds, your choice of multi-fund portfolios, an FDIC insured savings account, and a customized mix of investments.
There is no enrollment or application fee. There is an account maintenance fee of $3 for every $1000 of account balance up to $15 maximum per year, which is waived for Utah residents and for non-Utah residents who have their account statements delivered electronically.
The program management fee is between .15 and .22 percent. This is waived for The Public Treasurers Investment Fund for Utah residents only.
The program matches contributions of low income Utah participants.
Saving The Right Amount
Once you pick the right 529 plan for you, you will want to make sure that you are putting enough away to meet tuition needs at the time your child will be attending college.
There are two types of 529 plans:
1. Prepaid Plan - you can prepay for a year of tuition ahead of time, locking in the rate. If your child changes schools the money put away can still be applied to that schools tuition.
2. Investment Plan - there is more freedom with the investment plan. You can put money away but take some out for non-educational uses if a financial difficulty occurs. The only drawback is that there would be a ten percent penalty and the amount withdrawn would be taxed. If you happened to put more than what you needed, for your first child, into the account, the leftover funds can be passed down to the next child or anyone in the family for educational use.
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