Ask Money

So, what about a 529 college savings plan

Chris Farrell Jun 28, 2011

Question: My husband and I have two young girls- one who is two and another who is three months old. The only debt we have is for our house. We have life insurance policies and also savings, investment and retirement accounts. I feel like we are doing a lot of things right but we are really confused about what to do about saving for college. The question I have is whether we need to create 529 plans for the girls or if we should continue with our current investment and savings accounts. And how do you know how much to save each month in the different accounts? And which 529 plans do you recommend? We live in Tennessee. Thank you! Barbara, Nashville, TN

Answer: You’re doing a lot of things right with your finances. You don’t really need to set money aside in a special account for your children’s college education. You could simply draw on your general savings to help pay for the college tuition tab when the time comes. The reason more and more and more people are turning to 529 college savings plans is that 1) it’s a way of segregating savings for college and 2) the tax advantages that come with the 529.

Specifically, you don’t pay any tax on any investment gain in the 529 so long as the money goes toward qualified educational expenses.

My approach is to recommend that parents take care of household savings first, from retirement plans to emergency funds. If there is still some money left over a 529 can be a nice college savings foundation. The typical 529 has a minimum deposit of $25 to $35 and anyone can contribute to it (a nice gift for the holidays). I would just put into it every year what is reasonable considering your income and other demands on your money, from a few hundred dollars to a few thousand.

You can open up a 529 in any state and the money is good for college in any state. A good resource for figuring out the right plan for you is Joseph Hurley’s savingforcollege.com. He has also recently updated his book, The Best Way to Save for College. Check it out.

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