We all know that college tuition is expensive and it's only getting worse with average annual tuition increasing by 8%. Student loan has issues on many levels. Millions of Americans are saddled with insurmountable debt that they end up paying for decades while having a degree does not guarantee a job.
However, you never hear about the other side of the story and that is those who have never had to worry about student debt due to assistance from their parents or relatives. These stories are obviously not entertaining for the media; who would want to read about the parents who diligently contributed to their children's 529 accounts for the past eighteen years? However, this is the case for one out of two students who either have parents fund their tuition or a relative who may have allocated part of their estate for these education expenses.
One of these methods is through the 529 plan which is a tax-deferred account that is tax-free if the fund is used for a qualified educational expense. It amazes me when I hear about parents working normal jobs being able to fund their kid's entire tuition and still have money leftover for graduate school all because they were able to save small dollar amounts diligently.
We are currently contributing $100 per paycheck ($100x26 pay period = $2600/year), but my goal is to increase this to $200 per paycheck, roughly $5200/year. And whenever we receive unbudgeted cash like our annual bonus, we will contribute a portion of it to this account as well.
There is no right formula as each situation is different and not all schools cost the same. It's what you're comfortable with and my plans may change. But one thing's for sure, I want to contribute an amount that I am comfortable with for the next eighteen years and help however I can. This way, they can graduate from school and get a good start on their financial journey. I also know that my contribution will likely not be enough to cover the entire portion of their tuition, however, the amount that they have to cover in loans will not be as burdening. (read: How to come out of College with Manageable Debt)
We started a 529 college savings plan for them through Charles Schwab. The best part is, once you have set up an automatic contribution from your payroll, you never have to think about this although an annual review of your progress would be advisable.
Setting up this account was something that I dreaded as I did not know where and how to start this process. But after completing it, I feel relieved to complete it. It was an easy process and hopefully, this can relieve some of your stress as well.
1) Opening an account
Some employers may offer a 529 plan and use the financial institution that manages the retirement account. Our company currently does not have such a program so I used Charles Schwab 529 Plan (https://www.schwab.com/college-savings-accounts) as we have our personal stock brokerage through Schwab as well as my retirement account. However, most financial institutions including major banks should have this program.
2) Register and Login
Register as a new account user. When signing up, keep in mind the account holder will be you, the guardian. And the beneficiary with be the child.
If your children do not end up using all of the amounts from the account, the beneficiary can be transferred to an immediate or extended family member for the use of education, so the beneficiary is not permanently set.
3) Choosing Investment Portfolio Options
Choosing an investment portfolio can be based on Aggressive (more individual stocks) to Conservative (broader index funds). The easiest option and the one we selected was an age-based option where the assets will move to the more conservative portfolio as the beneficiary ages and gets closer to college.
4) Selecting Funding Method
You will need to select how you plan to fund the account. Some options include:
a) automatic contribution from a bank account
b) Manual contribution from your bank account whenever you choose to
c) Payroll deduction (see below #5): automatically deduct funds as a direct deposit to this account.
5) Payroll Deduction Option
Through the Payroll deduction option, you can set up a direct deposit amount to go straight into your 529 plan account. Although you are using after-taxed funds as opposed to pretax deduction, the amount accumulated are withdrawn tax-free as long as it is used for qualified education expense (similar to Roth IRA).
Your account may generate a Payroll Deduction Authorization Form that you can submit to your HR. Or if your payroll is through ADP, you can set up the direct deposit amount yourself using the account number and the routing number.
Gift Contributions
A feature that I encountered while browsing the site was something called "Ugift" which is essentially a unique code you can share with family members who may want to help with the contributions. I am certain a similar feature will exist with any institution owning a 529 account.
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