The majority of families manage to overcome the challenge of paying for college. To the extent parents or grandparents can afford to put some money away, there are various tax-wise ways to save for college, led by the 529 plan.
- Don't try to save all of it. Don't even think about trying to save every last cent that it's going to cost to educate your abecedarian. It will require putting aside more money than you could possibly afford. If you set your college savings sight too high; if you find that you can't save what you set out to, you may become discouraged and not save at all. Instead, plan on setting aside an amount that you can reasonably afford - perhaps enough to cover one-third of the cost. Just having the student out of the house will save you almost enough to pay of the tuition out of pocket.
- Keep saving for retirement. Don't begin saving for college unless you can at the same time keep up with your retirement plan contributions. In other words, don't reduce your retirement savings in order to save for college. While it's great to save for tuition costs, it's more important (and more financially advantageous) to put money away in retirement plans.
- The best places to invest college money. Unless the child is very near college age and it may be too risky to invest the money heavily in stocks, a 529 Plan is probably the best alternative for college savings. It is certainly the most tax advantageous. But you have to be careful because many 529 plans are weighed down with high fees and expenses and have been generating lackluster investment results as well. That's not a good combination.
- Finding a good 529 plan. While some 529 plans are not worthy of your money, others are. It just takes some digging. Every state offers at least one plan, and your own state's plan may – or may not – be the best choice. For information on how to select a 529 plan, click here.
- Opt for age-based investing. Unless you'd really prefer to select your own investments in the plan and otherwise move money around, choose instead the "age-based" 529 Plan investment alternative. The age-based option will automatically but gradually change the investment mix as the pupil nears college age. The younger the child, the higher the percentage of money in the plan that will be invested in stock. As the child nears college age, the percentage devoted to stock will gradually be reduced, which makes a lot of sense because the last thing you want is to lose a lot of money from a stock market tumble just before tuition bills arrive. The age-based approach is how most parents should be handling the money anyway, so rather than add "Worry about 529 plan investments" to your already extensive to-do list, simply choose the age-based alternative.
Alternatives to 529 plans. Custodial accounts were once the mainstay of college investment accounts, but no longer. In fact, the 529 is usually so much better that parents and grandparents are transferring custodial money into a 529 Plan. You might want to do so as well. You first have to sell all of the custodial account investments because the 529s will only accept cash. This could trigger a tax on the sale of the custodial account investments, but it's not likely to be very much.