Start saving a little each year toward your children’s college bills, and you can watch your investment grow along with them. The federal government helps make college more affordable for families by allowing states to offer various tax-advantaged investment programs for a child or other family member.
These programs vary from state to state and are known as 529s for the section of the IRS code that governs them. Investment returns are generally not taxed when used for appropriate college expenses.
Anyone — typically a parent or grandparent — can open a 529 account and name a beneficiary. The programs can use investments to prepay locked-in tuition at particular schools or create funds for whatever college may cost when needed. The plans have different managers, each with their own fee structures.
Here are a few tips to get started:
• Look around. There are important differences among the programs. Where a child is likely to go to school, state tax rules, management fees and other details can mean a program that works for one family may not be right for another.
• Get started. Don’t be paralyzed by all the choices. You can periodically move your investments from one program to another. Even a mediocre plan tends to make money over time, so don’t delay your choice because you’re not absolutely certain which plan is best for you.
• Be patient. Don’t let the stock market’s gyrations change your investment plan from month to month. Figure out what you can realistically put away and use traditional guidelines to calculate what future costs and future returns should look like.
• Relax. College is already a daunting expense, and it will only seem more so in 10 or 15 years. Do your best, and don’t forget that time can be your best ally.
For basic information about 529 plans, visit sec.gov/investor/pubs/intro529.htm.