Saving For Your Children’s College Is Easier Than You Think
Saving for your children’s college as an enlisted Soldier can be tough, but with some help, you can raise a sufficient amount of money without sacrificing your current lifestyle. If your primary goal of saving is for education, then you should consider a 529 plan.
A 529 plan, named after article 529 of the federal tax code, allows you to place your money into a tax-deferred investment account that grows tax-free as long as the money is used for education purposes only. The beneficiary can be anyone you chose including yourself. You may change the beneficiary at any time as well. Almost every state has its own plan but you do not have to sign up with your state. However, your state’s plan may offer tax benefits to you as a contributor if you chose to go with your home states program. Also, note that a family member can give up to a certain amount without paying taxes. The IRS defines the gift exclusions as:
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift.
Many plans allow you to invest the money in different ways and usually include a target date mutual fund that does the work for you. Experts say “never have your eggs in one basket” well the target-date mutual fund places your money into many different investments such as stocks and bonds. The further from the target date of withdrawal the choices in investments will be riskier and more volatile and the closer it gets the target date than the more conservative or safer the investing becomes. Check out what your state offers and compare it with others. Keep in mind that going with your home state may be beneficial for yearly tax purposes. Also, look at management costs. You want the lowest costs for managing your money.
For a list of the current 529 plans check out SavingForCollege.com
Assume you invest $100 a month for your child’s education. That’s $1200 a year for 18 years earning 8% at a 25% tax bracket. After 18 years you will have raised $48,536 before taxes and if it is not protected in a 529 plan you will pay out $9,224 in taxes leaving you with $39,312 for education expenses. Therefore your total savings are $9,224.