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How to Prepare For a 529 College Savings Plan

Jul 19, 2012

Saving for college is confusing to many people. They know that they should be saving money but really do not know where or in what type of an account to use. Navigating the waters of where to put college money investments, parents sometimes make the wrong choice and that can be deadly to any college saving plan.

Thanks to Uncle Sam for creating the 529 plan and the states for operating these plans the novice can have an easy time getting started in saving for college.

1. The best thing the Internal Revenue Service has is the rules for creating a 529 plan. This plan allows you to accumulate money and later withdraw it tax free when used for college and education related expenses. The plans are created to be dead simple to sign up for and to plan monthly contributions. So once set up the plan grows through the years totally on auto pilot. You can save as little or as much as you want, even some plans have no minimum dollar contribution requirements. If you don't want an automatic deposit set up you can opt for just writing a check and mailing it whenever you have money available.

2. To make the whole process uncomplicated you should pick an investment plan that is easy to understand. You can go as complicated or as simple as you like. You can pick an age related plan that adjusts to more safer investments as the student gets closer to starting college. You're able to adjust your plan over the years as you see fit. Age based investment options are great for parents who don't want to self manage their account.

3. Save as much as possible. The best way to save for college in your 529 plan is to set up a monthly deposit from your checking account. It's automatic and you won't ever forget to add money to the plan. To keep investing on a monthly basis, be sure to pick an amount to save that is high enough to make a difference but low enough that you won't be forced to stop the deposit.

4. Tax incentives from your state. Check your home state's plan to see if they have any incentives to using resident sponsored state 529 plans. If your state has an income tax, you may be eligible for a healthy tax deduction if your state allows it. Some states allow you to apply the deduction even if you invest in an out-of-state plan. Check your states rules to see if you can use the deduction. Some states let you deduct the entire contribution off their income tax.



Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Gmail.com. Want to be heard? Leave a reader comment below.

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