You have plenty of reasons to save, from the need to cover huge expenses like retirement to smaller goals like next winter's cruise around the Caribbean. Anyone with little tykes to send to college may have another large expense on their savings list.
If you're trying to pile away enough to send your young scholars to college someday, you might ask your employers whether they offer automatic payroll deductions to fund a 529 savings plan. USA Today reported recently that more companies have started offering this benefit.
A 529 savings plan is an educational savings account that acts like an investment account and allows parents, grandparents, or any other well-wishers to save money toward someone's educational expenses. They come with a tax break, too. Unlike some retirement accounts, you have to pay tax on any money you deposit to the accounts. But your earnings remain untaxed as long as the money goes toward qualified educational expenses.
The 529 plans don't come with as many strings as some tax-advantaged savings accounts. The contribution limits can be impressively high. Most have no limitations on the age or income of participants. The money can also stay under parental control, so your son or daughter cannot cash in the account in at age 18 to buy a motorcycle and ride off into the sunset.
The fact that the federal tax breaks have become a permanent feature of these accounts has helped make them increasingly popular and led some 4,500 employers to help their workers save by making it possible to move money straight out of their paychecks into a 529 savings account, USA Today reported.
This could be a great opportunity for anyone who has good intentions to save for college, but who just hasn't gotten around to opening an account and starting a savings program. Making the savings an automatic deduction could take any of the college savings procrastinators out there and turn them into model savers.
In this way, an automatic 529 payroll deduction could be as helpful as an automatic retirement savings program, like a 401(k) -- the money disappears before you're ever tempted to spend it. Those two accounts -- 529 educational savings accounts and 401(k) retirement plans -- share another common trait. Both offer savers a relatively limited menu of options, typically mutual funds, for investing their savings.
Here's where the parent who's saving for college needs to do some homework. These 529 educational savings plans abound. They're sponsored by states, and virtually every state has one or more plans available. You're not required to invest only in your state's 529 plan. The world of educational savings accounts is your oyster.
Each of the plans has different fees, different investment options, and different features. There may be advantages in sticking with your state's plans. Specifically, some states offer a tax deduction for any contributions made to a 529 educational savings account. Some states' plans, however, may levy significant fees that make them less attractive.
Before signing up for an automatic 529 savings plan at work, you'll want to make sure the plan fits your needs. Research the fees you'll be charged and the investment options available to you. If you're not offered a state tax deduction and your state's plan has relatively high fees, it may not be your best investment option. The website savingforcollege.com is one place to start comparing accounts.
Here's the down side to these accounts. If you need to withdraw the money for something other than higher education expenses, you'll pay income tax on your earnings and a 10% penalty. However, the flexibility built into most accounts will allow you to change the beneficiary if it simply happens that your child isn't college-bound. You can even use a 529 account for yourself if you have aspirations to continue your education or change careers.
Though they're increasingly popular, 529 savings accounts aren't the only way to save for college. You can get more information about these accounts and other college savings vehicles at the College Savings Center.
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