Adjusting your financial plan to provide for your child's education will make life much easier down the road.
Preparing for Their Future
by John Brummitt
Have you ever noticed how much financial planning is compared to birds and their nesting habits? “The early bird gets the worm,” your kids “leave the nest,” and you have to build a “nest egg” for retirement. While all of these must be considered for a solid financial plan, let’s focus on kids leaving the nest. Whether you have children now or plan to have them in the future, being prepared for them to leave home is a process you cannot start too early. Like building your “nest egg,” adjusting your financial plan to provide for your child’s secondary education will make life much easier down the road.
The Small Business Job Protection Act passed by Congress in 1996 established 529 provisions that had little to do with college savings. These laws have since been refined to create “qualified tuition programs,” one of the best ways to save for college. Governed by the Internal Revenue Code, section 529, they are commonly referred to as 529 Plans.
The plans fall into two categories, prepaid tuition plans and college savings plans. A prepaid tuition plan locks in the price of tuition at the college or university where the plan is purchased. The prepaid plan covers tuition and fees only, although excess funds can be used for qualified expenses. Prepaid plans place limits on the age and grade when the plans can be purchased and set limits for the duration of the enrollment period. Since prepaid plans are established through the university or college your child plans to attend, the control of the funds rests with the school. Still, many prepaid plans are backed or guaranteed by the state in which the school is located.
College savings plans allow more freedom. These funds can be used for any college tax-free as long as used for “qualified higher education expenses.” These expenses include anything needed for your child to go to college. College savings plans have no age limit or grade requirements like prepaid plans, but they have a contribution limit of $200,000. Since college savings plans are invested in the market they do carry a certain amount of risk, but their potential for growth is increased.
So which 529 Plan is right for you? One way to answer this question is to consider how much time you have before your little one will head off to college. If your child is already in high school, prepaid plans are appealing. If you know what school your child plans to attend, it may be beneficial to lock in the current tuition rate and hedge against future tuition increases. If your child is young, a college savings plan may be a more feasible option, allowing you to build up college funds at a much earlier date and gain from the benefits of compounding interest.
Once your family decides on which type of plan will best serve the goals set for your child’s secondary education, make adjustments to your budget to reach the financial goal you have set. Be as diligent in making contributions to your child’s 529 Plan as you are to saving for your own retirement. It is always easier to pay voluntarily into a college fund, than to pay off school loans with additional charges and interest.
Preparing for your child’s college career (like any other life-changing event) is easier with a plan. Whether preparing for your child to “leave the nest” or building your own “nest egg” for retirement, remember that time is always your greatest investment tool. It’s true. “The early bird gets the worm.”
About the Writer: John Brummitt is Chief Financial Officer for the Free Will Baptist Board of Retirement: www.boardofretirement.com.