Hands down, the best way for a new parent to invest in and save for his or her child’s future is with a 529 plan. And you want to start saving as soon as possible.
But what is a 529 plan? The 529 plan is a tax-deferred plan that encourages saving for future college costs. Earnings in this plan are not subject to federal taxes and in most cases state taxes as well, as long as the withdrawal is used for college expenses. These expenses can include everything from room and board, to books, classes, enrollment, etc. Parents can contribute up to $13,000 per year on a 529 plan. The 529 plan is owned by the parent with the child’s name listed as a beneficiary. Each state has its own 529 plan but the child doesn’t have to attend a qualified school in that specific state, though there are advantages to doing so. For example, in New Jersey, students can receive a $1500 tuition credit for using a 529 plan purchased to attend a school in the state.
What if your child doesn’t go to college? The great thing about a 529 plan is since the parents are its owners; they can have it transferred to another beneficiary in the family such as a child, grandchild, sibling, etc. – who is attending college.
What are additional investment options for new parents? Another option is to set up a custodial account. When the child turns eighteen, this automatically becomes his or her account and he or she can do what they wish with it. It’s not strictly limited to education. The custodial account is also tax-deferred. Both the 529 and custodial plans work almost like a 401k. Parents can invest in different options and mutual funds, etc. The only thing that parents need to be aware of is that if they are planning to save specifically for a child’s education, the custodial account sometimes works against financial aid since the money will be in the child’s name.
How do you set up one of these accounts? Both the 529 and custodial plans can be set up through either First Financial or the state. Have questions about investing or you’d like to set up a no-cost consultation with the Investment & Retirement Center located at First Financial Federal Credit Union? Call 732.312.1500, or you can obtain more information on our website at FIRSTFFCU.COM, under the Investment & Retirement tab.
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