The Importance of Opening a College Savings Account for Your Children

Money for College Savings Account

We can often forget to save money for our children’s college in the shuffle of monthly car payments, utilities, and groceries. However, with a designated college savings account such as the 529 plan, it’s easy to save. This can be an advantageous savings plan if you would like to start saving for a child’s education early.

What is a 529 Plan?

According to Forbes Advisor, “A 529 plan is a savings plan that lets families set tax-deferred money aside for a child’s future education costs. 529 plans are created to cover higher education expenses but can also be used for K-12 costs in certain states.”

The plan you choose may have limitations. Every state offers its own version of the plan along with some private colleges and universities as well.

Two Types of 529 Plans: Prepaid Tuition and College Savings Account

There are two types of 529 plans to choose from, a prepaid tuition plan and a college savings account plan. A prepaid tuition 529 plan gives you the ability to prepay college tuition at today’s prices, guaranteed by the federal government. This plan mostly applies to in-state public colleges and universities. Unfortunately, not all colleges and universities participate, which could affect where your child can attend school.

The second plan is a 529 college savings plan. Rather than putting your money for your child’s college into a savings account, this plan allows you to put your after-tax dollars in investments such as mutual funds. You can also put your money into exchange traded funds (ETFs), which your money will grow tax free. The earlier you open a 529 savings plan, the more time your money has to grow. Keep in mind that this college savings account is an investment account. Therefore, this account carries risk, and there is a chance of losing your money. Despite short-term market fluctuations though, long-term investment accounts generally yield decent gains over the course of years.

Who Benefits From a 529 College Savings Account?

College is not getting any cheaper. The average annual cost of tuition to attend a four-year university on average in 2019-20 was $10,440 according to College Board. That accumulates to over $41,000 over four years at a university. This also does not cover any additional costs such as books, supplies, or room and board. Therefore, most families can benefit from a 529 prepaid tuition or college savings account plan.

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