A new baby in the family calls for celebrations. It’s time to think about diapers, cribs, bottles, and… college tuition.
While new parents certainly have their hands full, it’s important to think about long-term planning, as saving early has benefits.
Your 529 cheat sheet
One way to save for future education costs is a 529 plan, which is a tax-advantaged fund, also referred to as a “qualified tuition plan”.
There are two types of 529 plans: prepaid tuition plans and educational savings plans.
• A 529 prepaid tuition plan allows parents (or others) to prepay tuition at current rates at participating public and private colleges. Paying early can save you money if prices are higher at enrollment time.
• A 529 savings plan can invest in the market through options like mutual funds, or money market funds. Money can be withdrawn tax free to cover eligible expenses, including tuition, room and board, books and computer equipment. Funds can also be used on certain K-12 expenses, and apprenticeship tuition and fees.
But beware, non-qualified withdrawals could mean you will owe taxes, as well as a 10% penalty.
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