Recently over on YouTube, I shared about the progress of our 529 plan we set up for our daughter’s college fund.
What is a 529 plan?
There are many ways to save for college but the best in my opinion is the 529 plan. You can save for a child’s education in a tax-free savings plan called a 529 plan. These plans allow you (along with relatives and friends) to put money into a special account to invest for your child’s college education. The money is specifically used for education (as of recent changes it can be used either for college or tuition at private schools too).
Money in 529 plan accounts grows tax-free and is spent tax-free on education expenses like tuition and books. Each state sets up it’s own plans but residents of most states can use the plan in any state. Some states even offer multiple 529 plan options. There are endless ways to save for college even within the 529 plan framework.
These handy guide from Clark.com shows you the best plans in each state:
Tip: You can find your state plan through a simple Google search and I recommend checking out Clark Howard’s guide to determine if it is worth using or not.
Why We Set Up A 529 Account
Setting up a college fund was super easy and I was able to open a 529 plan in Tennessee in less than 10 minutes. I knew that I wanted to start saving for college pretty early so that it wouldn’t be a burden on anyone in the family. After paying off student loans for more than a decade, I know I don’t want to burden any children with that responsibility.
The state of Tennessee was also offering a matching $25 donation for accounts that started with at least $25, so it was a great time to start. Our plan also was a great option for us as in-state residents offering other special incentives as residents.
Tip: check to see if your state offers any special incentives or matching plans! If there is a special matching offer it may be worth starting one!
How Much We’ve Saved In One Year
We’re not killing it saving for college yet but we have started a 529 plan and contribute every month! After one year of savings we have accumulated $445.31!
Our current savings plan has $25 a month going into the account and then we will be depositing all birthday and christmas money our child receives.
It feels great to know we have put money away for our baby’s college education 17 years from now. Whether she ends up needing it or not, I’m happy to know that her future education expenses will be covered and it won’t be a source of concern.
What happens if you don’t need the 529 money?
When I opened the 529 plan to save for college, I wondered about what would happen if we didn’t need the money in the 529 account. What if my child gets scholarships? What if my child goes to a free community college? What if my child saved up her own money? What if my child doesn’t go to college at all? There are a number of reasons why your child might not need the money saved in a 529 plan account.
If any of these happen, then the money in a 529 plan can be transferred to any eligible child who has educational expenses and spent tax-free. If a child gets a full scholarship to attend college and you don’t need to transfer to another child, then you can withdraw 529 funds and use it for anything after paying tax on the earning. And if they decide not to go to college at all you can take the money out, pay the tax on the earnings, and a 10% penalty.
Since the future is uncertain we won’t be saving super aggressively into the 529 plan until we have our retirement funding more secured and are situated in a better school system. There are quite a few priorities in front of loading up the 529 plan we opened, but it is still great to have a headstart!