Einstein's Logic

These days, a 529 savings plan is the most popular way for parents to save for college. They come in two categories: prepaid and savings, the latter being the most common and flexible. Whereas a prepaid plan lets buyers purchase tuition credits through a university at today’s costs, a savings plan is based entirely on market performance. Opening an account requires no minimum and some programs allow contributions of more than $330,000 per beneficiary.

Albert Einstein once said, “The most powerful force on earth is compound interest.” He would not be wrong. Let’s say you start with an initial $50,000 investment with a 5% return rate. Over 18 years that initial investment would yield you $120,331. Now let’s imagine a world where you don’t have to pay a dime in capital gains tax on that $70,331 dividend. Freshman year’s not looking too dismal now, is it?

What makes a 529 plan so great is that it allows you do just that: squirrel away money in a tax-protected, compound interest-generating account. As long as you take those funds out for use for higher education tuition or costs, you won’t be penalized and you can pass along any unused funds to other children or you can use it yourself to go back to school and learn something new.

Also, most offer age-based asset allocation options meaning the closer the child gets to starting college, the more conservative the funds become. To learn more about 529 plans, check out Savingforcollege.com and read up on your options. These plans will be addressed again in later tips.