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529 College Savings
The costs of a college education continue to rise. It is important for families to begin planning and saving for college at the earliest stage possible. The questions in college planning revolve around when to start saving, how much per year to invest, where to invest it and the return expected on your annual investment.
When you start saving for college is likely to have the greatest impact on the total funds that you save, since each year you save represents another year of principal to increase the total college fund. When you start has a huge impact on how much per year you must save. If we assume a rough average cost of four years of college of $115,000– including books, housing and food – and we assume no financial aid and that you are saving the funds in a traditional savings account, you would need to save about $6,000 a year for 18 years – in order to have the full funds available. In this example, you would need to start savings this amount each year starting with when the student turns age 4 (since you won’t have to pay for the fourth year of college until s/he is roughly age 21.And in this example, you are only funding college for one student – many families have to multiply these numbers.
The earlier you start planning for your family’s education, the smaller the annual amount that you will need to save.
The easiest method to establish a college savings fund is known as a 529 plan. A 529 plan is an education savings account. 529 Plans are savings plans sponsored by states, state agencies and/or educational institutions which are authorized by Section 529 of the Internal Revenue Code. These plans may offer investors special tax benefits since they are not subject to federal tax and, in most cases, are not subject to state tax as long as withdrawals are used for eligible college expenses.
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