I did my research on college fund when my child was a few weeks old. The vast amount of information out there was overwhelming. I highly recommend doing this before your baby’s arrival.(See PREPARE FOR BABY ARRIVAL CHECKLIST). This article will give you a good foundation about college fund and will make your further research a lot easier.

WHAT

College fund is also called 529 plan. It is usually sponsored by the states. Few basic concepts:

• You are the account owner.
• Your child is the beneficiary.
• You are the only person who can manage the account and your child has no legal rights to the money, regardless of his/her age.
• You can open as many accounts as you want. (Not recommended).

WHEN

Ideally, as soon as your child is born.

WHO

Anyone planning to send a kid to higher education. There is no income limits or age limits.

WHY

College fund is the only investment where your earnings do NOT get taxed. Also, compound interest is a wealth builder. The sooner you start, the more compound interest will work for you.

HOW TO CHOOSE

• Look at whether your state offers tax deduction/credit or other benefits (financial aid, scholarship funds, or protection from creditors). If it does, then it make sense to choose the plan offered by your state of residence.
• If not, then you can choose any other state’s college fund depending on performance, annual plan fees, additional penalty for non-qualified withdrawal, lifetime limits etc.

HOW TO INVEST

• Open an account with the plan you choose.
• Contribute with post-tax dollars (your take home pay). I recommend setting up an automatic investment every month.
• People other than owner (eg. Grandparents) can contribute as well. Consider asking for college fund contributions as gifts for your child instead of material gifts.
• Choose an investment option.
• There is no annual limits. However beware of gift tax. There is a threshold (varies every year), after which you will incur gift tax (18K in 2018).
• There is lifetime contribution limits per child, which varies by state, ranging from a few hundred thousand to 1/2 million dollars.
• You can change your investment options twice per calendar year.
• You can rollover your money into another college fund once every 12 months.

QUALIFIED WITHDRAWALS

• You can use your fund at any accredited college or university in the country (no matter which state you open your college fund).
• Tuition and fees.
• Books
• Computers technology, related equipment and internet access.
• Special needs equipment.
• Some room and board expenses.

NON-QUALIFIED WITHDRAWAL

• You, as the owner, can withdraw funds at any time for any reason.
• The earnings will incur income tax and an additional 10% penalty tax.
• Some states like CA has additional state tax penalty.
• Exceptions: your child dies or becomes disable, attends a U.S. Military Academy or receives a scholarship.

EXCESS FUND

You can:

• change to another family member who has qualifying withdrawal.
• Save for the future, in case your child wants to attend grad school later.
• Make yourself the beneficiary if you intend to go to school.
• withdraw but subject to tax ( see above)

Early bird gets the worm! This could not be more accurate with regards to college funds.

Yours positively,

Postive Circle.