This guest post is by Kimberly Palmer, author of the new book, “Smart Mom, Rich Mom: How to Build Wealth While Raising a Family”.
For a long time, I resisted opening 529 college savings accounts for my two children. It seemed like a giant hassle, adding even more paperwork to an already complicated situation that included various retirement accounts and a mortgage. I could barely keep up with our current stack of accounts; how could I possibly manage more?
But after delaying the decision for a couple years, I finally decided that I couldn’t pass up the tax savings any longer. After all, if you open a 529 account, the earnings are not taxed, as long as you use the money for its intended purpose of education.
After conducting some basic research about our available state plans, I went ahead and opened the accounts. Here are three reasons why you should also consider opening up a 529 college savings account today:
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The tax savings: The most obvious reason is also the most important: An analysis done by Vanguard for the New York Times showed that if you put $5,000 a year into a 529 savings account that grows 6 percent a year, then after eighteen years you’ll have $179,140 in the account for education expenses. (You can also play around with your own numbers using college savings calculators at FINRA.org, Bankrate.com, Fidelity.com, or your own financial institution.)
It forces you to save the future. It’s so easy to let daily and monthly expenses eat up your entire budget. But if you set up a college savings account and commit to making regular deposits into it, you’re setting money aside for the future and guaranteeing it won’t be spent on restaurant meals or new outfits instead.
It gives you a chance to talk to your kids about your educational values. Ever since we started actively saving for college, the topic has come up more in dinnertime conversations. Our kids are interested to hear that we want them to go to college one day, and even though they are still just learning to read, I think it gives them a good goal to plan for. They also are starting to grasp that college is expensive and that finding a way to pay for it one of our priorities, so we might make some other sacrifices in the short-term to get there.
The good news is that there are steps you can take to minimize the paperwork headaches involved, too. I chose to open my accounts with financial institutions that I already had an existing relationship with, so I didn’t have to set up yet another set of logins and passwords. (You’ll want to check out your state plan, too, because even though you are not required to go through your state’s plan, doing so can offer additional tax savings benefits.)
I also opted for automatic savings deductions out of my bank account and into the new 529 account, so I didn’t have to remember another transfer to make every month. This way, we’re making slow and steady progress toward saving for college – something I know we’ll appreciate in about a dozen years.
Kimberly Palmer is the author of the new book, “Smart Mom, Rich Mom: How to Build Wealth While Raising a Family”. You can connect with her at kimberly-palmer.com.