When Scott and Jennifer Perry learned they were expecting their first baby, they ramped up their saving efforts right away.
Putting together the nursery mattered, of course, but Scott — a self-taught enthusiast of personal finance — wanted the family’s monetary house in order.
Even so, after Isaiah arrived, the Raleigh, North Carolina, pair still faced lingering financial tasks. Near the top: setting aside money for their son’s long-term future.
The prospect felt overwhelming. After countless hours of digging into options, Scott chose a 529 college savings plan, a tax-favored account designed to help pay for education costs. Then he spent even more time narrowing down which 529 plan would suit them best — since, naturally, there are multiple choices.
Between sleepless nights and decision fatigue, you can imagine how planning for a newborn’s education can be draining.
Here’s the bright side: There’s a robo-advisor calledCollegeBackerthat makes launching a 529 plan possible in roughly five minutes.
Why Financial Pros Often Favor a 529 Savings Plan
In 2018, the yearly cost for one year at a four-year college, including room and textbooks, averaged $19,800. By 2036, that figure is projected to nearly double, reaching about $37,000 to $39,000 annually, based on a Savinly analysis of growth rates from the National Center for Education Statistics.
That’s before factoring in inflation, and still.Expect life to be pricey 18 years down the road.
Like Scott hinted, there are several — actually, quite a few — ways to kickstart a child’s financial future. He weighed alternatives from a Roth IRA (which requires earned income for the child) to a Coverdell Education Savings Account.
He ultimately chose a 529 college savings plan for multiple reasons, including:
- Contributions are invested in public markets, so your funds aren’t likely to sit idle; you’ll get to see them grow. “I can’t stand the idea of money just sitting stagnant for ages,” Scott said in an email. “You’ve got to start early and let compound interest do its work!” He also acknowledges there’s investment risk, as with any market exposure.
- These accounts are tax-advantaged, meaning your savings can grow and be withdrawn free from state taxes.
- The parent retains ownership and control of the account, so the child can’t spend it however they please. As much as Scott adores his son, he isn’t planning to hand over cash without oversight.
- These plans don’t impose rigid eligibility rules or steep minimum contributions. Scott notes he doesn’t add a large sum each month and appreciates that he wouldn’t be penalized for missing a contribution during an emergency.
- Funds in these accounts are accepted at nearly every U.S. college and many schools overseas.
Additionally, recent tax law changes allow 529 money to be used for private school tuition from kindergarten through 12th grade. That wasn’t an option when Scott opened his plan, but he likes having the flexibility given there’s no guarantee his child will attend college.
Which raises the question: What if Isaiah decides not to pursue college? What if he prefers launching his own business? The Perrys could transfer the funds to another immediate family member. Alternatively, they could take a non-qualified withdrawal and face a 10% penalty on earnings.
How to Start a 529 College Savings Plan
Deep breath.
See? There’s a lot to balance when it comes to creating an education fund for your child.
But suppose you’ve determined a 529 savings plan fits your goals. Wonderful. Now you face the next step: choosing which 529 plan is right for you.
And honestly, that’s the part many people want to avoid.
That’s where CollegeBacker comes in — a robo-advisor focused on 529 plans. The service runs on a pay-what-you-can framework, meaning monthly fees can be as low as $0. You can also open an account in roughly five minutes with no minimum initial deposit.
CollegeBacker also supports crowdfunding your child’s education. So instead of showering the kid with pricey toys, Aunt Mary could chip in to their 529 account.
To begin, you’ll set a savings target. Enter your child’s current age and the type of school you’re planning for. CollegeBacker will then estimate how much you should save each month. You can tweak that amount (or pause contributions) to fit your budget whenever needed.
Then you create a profile and invite family and friends to contribute.
The contributions are invested in a state-sponsored 529 savings plan.
When your child heads off to school, the funds can be used alongside scholarships and financial aid. They can even be spent on a computer if needed.
Once your kid is moved into the dorm and you blink back tears at the goodbye, take a long exhale — you planned wisely and started saving early!
Alexandra Vale ( [email protected] ) is a staff writer at Savinly.
