4 Tips for Investing in a 529 College Savings Account

Nadira Deery, MSF, CFP®

Director of Financial Education

Last Updated
December 28, 2022
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How to Determine How Much to Invest and What Account to Choose

If you’re like many parents, you may experience severe sticker shock when you first see the current cost of a college education. A well-published statistic is that college tuition increases at a rate of 8% each year, which means the price doubles every nine years.1 Knowing this, you may begin to wonder how you’ll ever be able to save enough to cover the cost of college for your child(ren).

While saving for a child’s or grandchild’s college education may seem like an overwhelming task, taking small steps to put aside funds today can add up to big gains over time. One of the most popular ways to invest is through a 529 college savings account. The benefit of these accounts is that earnings grow tax-deferred and can be withdrawn tax-free when used to pay for education-related expenses.

The following tips can help you decide how to invest in a 529 plan.

Tip #1 – Establish your long-term goals.

What do you want to accomplish with your college savings? Would you like your child to be able to attend a public, in-state school? Or do you want to allow them the flexibility of attending school out of state or at a private university? Maybe you’re only willing to cover four years of college expenses, and any graduate school will be up to your child to fund. Or perhaps you want to cover whatever level of education your child pursues.

As you’re considering your goals, remember that you likely won’t need to save every penny of your child’s tuition amount. At Creative Planning, we recommend saving around 70% of the cost of college, with the expectation that additional money will be available from financial aid, scholarships and/or current income.

Tip #2 – Set a monthly savings target.

With your long-term goals in mind, back into a monthly 529 plan contribution amount you can realistically maintain over time. Your wealth manager can help you determine this amount based on your investment timeline (i.e., the number of years until college), current financial situation, other financial obligations, expected rate of return, etc.

The best way to ensure success is to be diligent, consistently setting aside your target savings amount each month. Missing even a few months can negatively impact your ability to achieve your college savings goals.

Tip #3 – Decide what type of 529 plan to invest in.

Once you’ve decided to begin contributing to a 529 plan, you need to make sure you choose the right plan. As with most financial planning considerations, the best plan for you depends on your personal financial situation and goals for the future. Your wealth manager can help you evaluate multiple plans and choose the one makes sense for your particular situation. Following are some important questions to consider:

  • What is the average annual investment return?
  • What are the fees, including sales charges and expense ratios?
  • In addition to the standard tax advantages of saving in a 529, does the state offering the account provide any additional benefits for participating, such as a state income tax deduction or credit?
  • What investment options are available? Are funds passively or actively managed? Are there age-based options, exchange-traded funds (ETFs) and/or FDIC-insured investments? How do these investments fit into my overall investment portfolio?
  • Are there any minimum contribution requirements to be aware of?

Tip #4 – Save for your retirement first.

It’s natural for you to want to provide for your children first and foremost, but hear us out here. There is a 100% chance you will retire someday. There’s also a chance you may be forced to retire earlier than expected. It’s important to ensure you have adequate retirement savings so that you don’t become a financial burden on your children.

Even if you believe there’s a 100% chance your kids will attend college, there are multiple ways to fund a college education. You only have one chance to retire. Plus, if your kids decide not to attend college and you have put the majority of your savings into a tax-advantaged college savings account, you may find yourself with a lot of college savings but not enough retirement savings. And you’ll likely face steep penalties for using the college savings to fund non-education-related expenses.

When stated in those terms, you can see why saving for your retirement first offers stability for your children. Making sure your financial future is secure is one of the best ways to help your children achieve long-term financial success.

Ready to start saving for your child’s college education? Creative Planning can help. Our teams consider your current financial situation, specific goals and any challenges you face as they work to develop strategies to help you achieve your objectives. If you’d like help saving for your child’s college education, schedule a call with a member of our team.

Footnotes:

  1. https://finaid.org/savings/tuition-inflation/
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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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