If you want to help pay for your children’s college educations, you might want to consider contributing to a 529 plan. With this plan, your earnings grow federally tax-free, as long as the withdrawals are used for qualified higher education expenses such as tuition and room and board. Yet, you may have heard some things about 529 plans that are keeping you from investing in one. However, these concerns may be more myth than reality – so let’s take a look at a few of them.
“I need a lot of money to contribute to the plan.”
This myth has essentially no truth to it. Typically, only a modest amount is required to open your 529 plan, and you can generally transfer small sums to it from your checking or savings account.
“If my child doesn’t go to college, I lose out on the money I’ve put in.”
This myth runs counter to one of the 529 plan’s greatest benefits: flexibility. If you’ve named one child (or grandchild) as a beneficiary of a 529 plan, and that child or grandchild decides against pursuing higher education, you can simply change the beneficiary to another eligible family member. Furthermore, if none of your intended beneficiaries will end up needing the 529 plan, you can name yourself the beneficiary and use the money to take classes or receive some other type of qualified education opportunity. In a worst-case scenario, in which the money is never used for education, you will be taxed on the earnings portion of the withdrawals – but had you never contributed to a 529 plan, the funds would have been taxed, anyway. (However, you might be subject to a 10% penalty tax, in addition to regular income taxes, on the earnings portion of the withdrawals.)
“I have to invest in my own state’s plan.”
Not true. You’re free to invest in the 529 plan of any state, no matter where you live. But it could be advantageous for you to invest in your own state’s plan, as you might receive some tax breaks for state residents. (The tax issues for 529 plans can be complex, so you’ll want to consult with your tax advisor about your situation.) Investing in your own state’s plan also might provide access to financial aid and scholarship funds, along with possible protection from creditors.
“A 529 plan will destroy my child’s chances for financial aid.”
While a 529 plan could affect your child’s financial aid prospects, it might not doom them. And the benefits of building significant assets in a 529 plan could outweigh the potential loss of some needs-based financial aid.
Before investing in a 529 plan, you’ll want to explore it thoroughly, as you would any investment. You can find details about a 529 plan’s investment options, share classes, fees, expenses, risks and other information in the plan’s program description or offering statement, which you should read carefully before making any purchasing decisions.
But, in any case, don’t let “myths” scare you off from what could be one of your best college-savings vehicles.
Investment Strategy Can Be Your ‘GPS’ as You Travel Toward Goals
Summer is here at last. For many people, it’s time to get the car ready for a long road trip. And with GPS-enabled smartphones, it’s now a lot easier to navigate these drives without getting lost. During your life, you may take many journeys – one of which is the long road you’ll travel toward your financial goals. But even on this path you can benefit from a “GPS” in the form of your goal-oriented, personalized strategy.
Your investment strategy can function this way by helping answer these questions:
How far do I have to go?
Your smartphone’s GPS can quickly tell you how many miles you need to travel to arrive at your destination. And a well-constructed investment strategy can inform you of when you might reach a goal, such as having a desired amount of money when you retire, given your current age, earnings, sources of retirement income, and so on.
What route should I follow?
Your GPS will plot out your route, showing what turns you should take along the way. Similarly, to reach your desired financial outcome, your investment strategy helps guide the investment decisions you make, such as investing adequate amounts in the appropriate vehicles, including your 401(k) and IRA.
What problems await me?
When your smarthphone’s GPS shows red on the route you’re following, you know that heavy traffic lies ahead. And your investment strategy can also help you manage bumps in the road, particularly if it’s a strategy you’ve designed with a financial professional, who has the knowledge and technology to create various scenarios and hypothetical illustrations to account for potential difficulties – i.e., a rate of return that’s less than expected, a lower income base than you had anticipated, greater college costs than you bargained for, and so on.
When should I take an alternate route?
For whatever reason, you may deviate from the course plotted by your GPS – which will then helpfully re-route you. While following your investment strategy, if you make a wrong turn, so to speak – perhaps by putting insufficient funds in a retirement account or by assembling an investment mix that has become unsuitable for your risk tolerance – you may need to get back on track.
As we’ve seen, some analogies exist between your smartphone’s GPS and your investment strategy. And yet, there’s also a big difference in terms of complexity. It’s simple to program your smartphone to give you the directions you need. But crafting a personalized investment strategy takes time and effort. You need to consider all your goals – college for your children, a comfortable retirement, the ability to leave the legacy you want – along with your time horizon, risk tolerance and other factors. And your investment strategy may well need to change over the years, in response to changes in your family situation, employment and even your objectives – for example, you may decide you want to retire earlier (or later) than you had originally planned.
In any case, like your GPS, your investment strategy can help guide you – so make good use of it.
