These days, it seems like the planning toward sending your children to college has to start earlier and earlier. The competition doesn’t begin in high school anymore — you have to get the ball rolling as soon as preschool.
And the whole time, parents face the big question: “How am I going to pay for it?”
Among the myriad options are 529 savings plans, which are sponsored by states, state agencies or educational institutions, and come in two flavors — pre-paid tuition and college savings. The SEC website spells out the basics, including these major differences:
A key factor when mulling over a possible 529 plan is whether your state provides …
- A deduction for the investment on your state income tax,
- A tax credit to apply towards your state income tax, or
- Tax parity, meaning state residents get a tax break for investing in any savings plan throughout the country.
Obviously, taking the time to read through the rules of your state could save you lots of money, so check out this Morningstar primer to understand the ground rules and get the most bang for your buck.
Also, research the investment results of your state’s plans and programs. For example, according to the Morningstar report, some of South Dakota’s investment options have received poor ratings. Remember, in certain cases — including Arizona, Kansas, Maine, Missouri and Pennsylvania — you’ll get a tax break regardless of whether you keep your 529 funds within the state.
Saving for college is just as nerve-wracking to retirement-minded investors as the SAT is for your high school junior … but both also tend to reward the proper prep work.
Marc Bastow is an Assistant Editor at InvestorPlace.com.