As a parent, you want to save for your child’s future education. One of the best ways to do that is through a 529 account. This type of account offers attractive tax advantages and can be used to pay for anything from tuition to books and even room and board.
But setting up a 529 account can be confusing, especially if you’re new to investing. That’s why we’re going to offer you a guide to setting up a successful 529 account.
Step One: Choose a Plan
The first step in setting up a 529 account is to choose a plan. Most states offer a 529 plan, but you don’t have to pick the one in your state. Look at the different plans available and compare their fees, investment options, and performance. You want to choose a plan that offers low fees and great investment options.
Step Two: Decide on a Contribution Amount
The second step is to decide how much you want to contribute to the account. You can start with as little as $25 per month, and you can contribute up to the gift tax exemption. The gift tax exemption is $15,000 in 2021. Keep in mind that you can always increase or decrease your contributions later.
Step Three: Consider Automatic Monthly Contributions
Once you have decided on a contribution amount, consider setting up automatic monthly contributions. Automatic contributions make it easy to save since the money is automatically deducted from your bank account each month.
Step Four: Choose Investment Options
The next step is to choose your investment options. Most 529 plans offer age-based portfolios, which means that the plan automatically adjusts your investments as your child gets closer to college age. You can also choose to invest in individual funds such as index funds or actively managed funds.
It’s important to remember that investing in a 529 plan is a long-term investment, so choose investments with long-term growth potential.
Step Five: Monitor the Account
Once you have set up your 529 plan, it’s important to monitor it regularly. You should be checking the account at least once a year to ensure that your investment choices are still appropriate for your child’s age and your financial goals.
You should also consider increasing your contributions as your income increases or if you receive a windfall such as an inheritance or bonus.
Step Six: Use the Funds Wisely
When it comes time to pay for college expenses, it’s important to use the funds wisely. Generally, you can use the funds to pay for tuition, room and board, books, and supplies. Keep in mind that there are penalties for using the funds for non-qualified expenses.
If your child chooses not to go to college, you have several options. You can transfer the funds to another child, use the funds for yourself, or withdraw the money and pay taxes and penalties on the earnings.
Setting up a 529 plan is an excellent way to save for your child’s future education. It offers tax advantages and can be used to pay for everything from tuition to books and supplies. By following these simple steps, you can ensure that your 529 account is successful and helping you reach your financial goals.