Perspective | Even if your child is only a few years from college, it's not too late to fund a 529 plan

<pre><pre>Perspective | Even if your child is only a few years from college, it's not too late to fund a 529 plan

I looked at my child's 529 plan and realized that it needed an infusion of cash.

My son, who has autism, will end up spending an extra year in college. He's struggling a bit, so we decided it's best that he didn't have the stress of finishing his studies in four years. This means increasing his college savings beyond what was originally planned.

I share this because parents of schoolchildren and children who have already attended college often ask me if it is still worth putting money into a 529 college savings plan. But more on that later.

Here are some basics for 529 plans.

There are two ways you can put money into a 529 plan. A prepaid study plan enables you to save the costs of a state school. The idea is that you get tomorrow's lessons at today's prices. However, please note that you also have to save on accommodation, meals and other training costs that are not included in a prepaid study contract. Also note that with prepaid study plans, if your child wants to go to school outside of school, you may have to make up for a difference in tuition fees.

The second way to put money in a 529 is the more popular investment plan. This type of account works much like a Roth IRA. You invest with after-tax money and determine how the funds are to be invested. For our three children, my husband and I selected “age-based” portfolios, which are created after the date on which your child uses the funds for higher education. The younger the child, the more aggressive the investment options can be. The closer your child gets to college, the more conservative the investment will be.

There is a widespread misunderstanding of 529 plans that restrict the student to attending a state college. Although the plans are government-sponsored, the money invested in a 529 can be used for qualifying expenses at any public or private institution, regardless of where you set up the account or where the beneficiary attends school.

Money withdrawn from a 529 account is exempt from federal tax (and in most cases, state and local taxes) when used to calculate tuition costs. Many states offer tax breaks for residents who contribute to a 529 plan.

The state tax break is the main reason we continue to fund 529 plans for our children, two of which are currently in college. Since they are in school, we invest conservatively to keep our risk as low as possible. However, due to the state tax relief, it is worth contributing to the 529 plans.

Now, what time is it to fund a 529 plan? I asked Madeline Hume, a Morningstar research analyst, to look into the problem. Incidentally, Morningstar, an independent investment research firm, recently released its latest ranking of the best and worst of the nation's largest 529 college savings plans, which account for around 97 percent of its $ 529 billion fund assets.

Q: Is it ever too late to fund a 529 plan?

Hume: No, the middle and advanced levels are not too late to open a 529 account. Children benefit from having a 529 account opened on their behalf regardless of when it is opened. Granted, the financial benefits may be lower, but the psychological ones remain: According to Washington University at the St. Louis Center for Social Development, it's also children with small savings accounts of less than $ 500 that act like a 529 account Intended for college are more than three times more likely than peers to enroll with no special savings. You are also more than 4½ times more likely to graduate. College savers can also benefit from opening a 529 plan, even if they start too late. Approximately 46 percent of Americans live in a state that offers a state-specific income tax credit for contributions to a 529 plan, and college savers can benefit from this benefit each year by contributing to a 529 plan, which can reduce their tax burden ,

For those who are late and want their wealth to grow as long as possible, there are ways to delay the start of payments. There is a common misconception that 529 plan assets have to be used for basic training, but this is not the case.

Investors can withdraw money for higher education from a 529 plan tax-free, in addition to undergraduate studies. If a child is seriously thinking about a graduate school, parents can give their children more time to grow by funding primary education in some other way. College savers can also change the beneficiary's name on the account and use that money for another child.

Q: Do you have any suggestions on how to invest in a 529 plan for older children?

Hume: There is no perfect solution for college savers, and this is especially true for those who start too late. While age-based portfolios are still a viable option and could be the right choice for most investors who want to set and forget them, others may want to take more or less risks than what the age-based portfolios offer. 529 plans also offer static portfolios for these investors. As the name suggests, static portfolios will remain unchanged over time unless you adjust them. They can include equity funds, bond funds, money market funds or a combination of the above.

Static portfolios are best for those who want to differ from the standard age-based portfolio and understand how their willingness and ability to take risks differs from the norm.

In a recent blog post, Hume and Margaret Giles, a data reporter for Morningstar, showed how even a year can make a significant difference. Morningstar found that the average college saver only opens a 529 account when his beneficiary is over 7 years old.

"College savers who start investing in 529 plans will later miss the stock-intensive portfolios with the greatest growth potential," they wrote. “Equities are certainly more volatile than bonds, but they have a higher return potential in the long term. To make matters worse, savers who invest too late in a 529 plan also miss out on the benefits of return measurement as their investment horizon shortens. College savers may be tempted to make up for lost time by making large contributions or taking additional risk in their portfolios. However, it is difficult to make up for years of shortfalls, which underscores the virtue of saving for college as soon as possible.

When it comes to saving in a 529 plan, it's never too late, but better sooner than later.

Please visit me today at noon (Eastern Time) to have a live discussion about your money. My guest will be Anthony ONeal, author of Debt-Free Degree, which was selected for the Color of Money Book Club last month.

I live every Thursday from 12pm to 1pm.

Last week I asked: what is the best gift you have ever received that is not from a store?

Lloyd Davis from Flower Mound, Tex., wrote about a gift that his wife received. She is a baker and her aunt has put together a recipe book that his wife's grandmother uses. “The recipes are still used many years later. I don't remember what I got from someone or gave just a year or two later. The recipes have been very well received and continue to be appreciated. "

"When I was about 10 years old, my grandmother knitted a woolen tights for me – double layered and long enough to cover my forehead and ears," she wrote Herb Taylor from Freeport, Maine, "I am 70 now and I still wear this hat, especially when I snow or hike with my dog. My grandmother didn't have much money, but she had a lot of love and common sense to make gifts that were useful and also for Would stay for years. "

"As I write this, I have tears in my eyes," said Lorna Gilkey from Alexandria, Va. “The best gift I never got from a shop was from my sister Patricia. At Christmas 1999 she gave us all individual tapes of Stevie Wonder's song "These Three Words". The song talks about how a sincere "I love you" is the most powerful gift we can give each other. A few other family members said it was cheap; I saw her heart in the gift and appreciated it. She died two months later. Twenty years later, I still appreciate this gift. "

"My husband, Elliott, received the kidney of a young man who was killed in a car accident," he wrote Babs Waters from Alexandria, Va, “This invaluable gift that I received ten years ago has enabled my husband to live a very productive life in service to others, and has linked us with an amazing family in another part of the country who is also blessed by the fact is that her late son is The organ has given another person a new life. The best gifts always come from the heart. "

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