College is a big enough expense as it is without the need for any other types of financial problems or mistakes. With that in mind we put together a blog with some of the most common College 529 saving plan mistakes that people make so that you can hopefully avoid them with your own kids. Enjoy.
That you can earn and accumulate money tax-free is the biggest advantage of the 529 plan (much like a 401(k) or IRA). What that means is simply this; start that plan as soon as possible. If you start when your child is an infant and save $461 a month, or start when they are 10 and save $657., you’ll have approximately $200,000 by the time they turn 18. Even better, as long as your child uses the money for approved college expenses, you’ll never pay taxes on your gains.
Another mistake that many people make is assuming that their home state is the best place to get their 529 plan. Indeed, most state plans are more flexible than consumers realize. “Some investors think they have to invest in their state plan,” said Maria Bruno, senior investment analyst, Vanguard Group. “I can invest in any state plan.”
For example, if you happen to live in Arizona, Kansas, Pennsylvania, Missouri or Maine, no matter which 529 plan you use your estate income tax break even if it’s not in that state.
Other consumers make their investments too complicated. By simply putting your money into an age-based plan it will automatically adjust to cash as your child’s high school graduation approaches. Keep in mind that if you’re interested in being more of an “active investor” you’re only allowed to buy and sell within your 529 plan once a year.
Some folks just don’t understand how much broker fees will cost them and, in some states, brokers sell the 529 plans and charge commissions of 4 to 5%. In some cases the company you might be working for will be able to establish the 529 plan without paying commissions or, you can also form an LLC of your own to do so.
Finally there is the mistake of overestimating on what student expenses will cost. In many cases some of the expenses you plan for simply don’t materialize. For example, your child might decide to live off campus and so it will be harder to prove that those expenses went towards college, something that might trigger alarms at the IRS. Your best bet in this case is to wait until you actually have college related bills and hand and then write out a check with the students name on them. (Making sure that they actually pay the bills as well.)
One last thing to keep in mind is that, for federal financial aid purposes, the money in your 529 plan isn’t considered to be your child’s money and so it can be changed to a different beneficiary if need be.
If you’re going to be paying for college some day you need to keep these mistakes in mind, follow the rules above and, of course, make sure that they don’t party too much. Ahem.