With so many people I know having children, this question comes up a lot. What is a smart investment that you can give a baby? As a parent it is essential to start saving for your child at a very young age. The power of compounding can work wonders!
Today more than ever people are entering college to pursue advanced degrees. I think setting up a 529 plan for your child is a great decision for their future. Who knows what the future holds but you can be certain that saving for an education for them is a safe bet. So what does 529 mean or where did it derive its name? 529 refers to Section 529 of the Internal Revenue Code which has established the plans.
Giving the parents a 529 in the parent’s name is the way to go; it will make it easier for others to contribute to the account. Contributions to the 529 plan are made with after-tax dollars. Meaning you have already paid taxes on it when your employer gave you the money in your check.
There are special tax circumstances if you use the money for qualified college educational expenses. It will grow tax-deferred as long as you use the money for qualified educational expenses. What I didn’t know and many do not know is that 529 plans are not a federal program, they are actually unique to each state. Some states have added tax benefits for investing in the 529 of their state.
The funds upon distribution do not have to be used at a college in the state that the 529 was set up, they can be used at any accredited public or private college within the United States. The investment vehicles that the 529 plans invest in are generally conservative.
The account owner is usually an adult and the child is named as the beneficiary. An account owner can change the beneficiary at any time. Like most investments there is a minimum initial investment to open the account. There is up to a 10% penalty for using the funds for expenses that are not deemed qualified college educational expenses.
At juniors next birthday be sure to open him/her a 529, because as a parent of 2 little kids, I know I would certainly appreciate it for our kids! Investing in an education is by far the best gift you could ever give!