You’re totally sleep deprived. More than a little overwhelmed. A fragile little human is crying for reasons that completely mystify you. And now you’re being told you need to start your newborn’s college fund before it’s too late.
As easy as it may be to ignore that investment advice … don’t.
“Opening a 529 college saving plan account to save for your child’s education when he or she is a newborn can give you more time to invest in their college fund,” said Matthew McCarthy, principal at The Vanguard Group, which manages the assets of New York’s 529 College Savings Program Direct Plan. Upromise Investments serves as Program Manager for New York’s 529 College Savings Program.
He and others are quick to say that it’s never too late to start saving, but starting early can give you a greater chance of success.
“Even if you experience modest growth in your 529 plan account, opening an account before your child turns 1, as opposed to waiting until he or she is, say, 8 or 9 years old, can make a big difference in your return,” he said.
And while many experts encourage any form of saving for college, they often see extra advantages when you save with a 529 plan versus other investment options.
“A 529 plan offers benefits you can’t get in other college savings vehicles, the fees can be low, and you can typically choose from a wide range of investment options – all of which help makes it an efficient and attractive way to build your college fund,” said McCarthy.
Perhaps the single most compelling feature of the New York plan is the state income tax deduction it offers to New York residents.
“New York’s plan offers an annual deduction of up to $5,000 to state residents who are account owners,” McCarthy said, “and $10,000 for married couples filing jointly. And that feature is available every year you make contributions to the program.”
In addition, accounts grow tax-deferred and there are no taxes on withdrawals, including earnings, made for qualified educational expenses – tuition, certain room and board costs, books, plus required fees. However, it is important to remember that earnings on nonqualified withdrawals may be subject to federal income tax and a 10 percent federal penalty tax, as well as state and local income taxes.
State-sponsored 529 plans have been around since 1996, and while the basic features are still the same, the plans have improved since they were introduced.
New York also offers three age-based options, each of which takes into account the child’s age and the parent’s tolerance for risk –- conservative, moderate or aggressive. As a general rule, age-based accounts opened for younger beneficiaries will typically be more heavily invested in stocks early on seeking to take advantage of the longer time horizon and to try to maximize returns.
As the child nears college age, the assets of his or her 529 plan account are automatically transferred to portfolios that become more conservative to attempt to preserve their principal value.
With the cost of college generally rising faster than inflation, nearly every family will have to make sacrifices to be financially prepared. But when you consider the tax savings, potentially low fees and multiple investment options offered by a 529 plan, it continues to be a prudent choice -– regardless of when you begin saving.
For more information about New York’s 529 College Savings Program Direct Plan, obtain a program brochure and tuition savings agreement at www.nysaves.org or by calling 1-877-697-2837. This includes investment objectives, risks, charges, expenses, and other information. You should read and consider them carefully before investing.
