College savings plans a good option for defraying tuition costs
(COLUMBUS, December 9, 2009) — If you plan to send your children to college, don’t wait until they are in high school to begin saving. One way to make a degree more affordable is to invest in a 529 savings plan while your child is young. These plans, typically operated by a state or educational institution, allow you to save tax-free and use the money later for qualifying education expenses.
The Ohio Society of CPAs offers tips on how to make the best choices when investing in a 529 savings plan.
529 Plan Basics
With a 529 plan, you make after-tax contributions and your savings grow tax-free. Then when your child is ready for college, you can withdraw money to pay for qualifying educational costs and won’t pay any federal tax on the distributions.
While individual states offer 529 plans, a mutual fund company generally handles the investment side. There are many ways to allocate your money so as an investor, it is important to know your choices. Since stocks have the risk of declining in investment value, it is a good idea to choose investments with higher earning potential while your children are young. That way, there is time to earn back your potential market losses and move funds into more stable investments before you child is ready for college.
Potential risks
A popular investment plan is one that offers an age-based approach. It bases the investment amount on your child’s age and allows for more conservative investments as your child gets closer to college. However, when choosing this plan, it is important to find out how much of your money will be invested in stocks. The economy has faced steep losses in the stock market over the past year, so it is wise not to invest in a 529 plan that allocates more than 25 percent of your investment in stocks if your child only has a few years of high school remaining.
Timing is everything
The recent market issues have triggered some states to offer 529 savings plan with low risk investments. Beware though that your savings return is also likely to be lower with these plans. If your child is one or two years away from college, a reliable small return with minimal risks may be the right choice for you. But if your child is more than five years away from college it may be wise to invest in a plan with a high percentage of stock investment because of the greater earning potential.
For more tips on managing your money, visit http://www.financialfitness.com/.
The Ohio Society of CPAs, established in 1908, represents more than 23,000 CPAs in business, education, government and public accounting. OSCPA members not only meet statutory and regulatory requirements as CPAs, but also embrace the highest standards of professional and ethical performance. This is achieved through ongoing professional education, comprehensive quality review and compliance with a strict Code of Professional Conduct.
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LAST UPDATED 12/9/2009