By Paula Smith, Senior Vice President, DC and College Savings Strategy, Voya Investment Management
August 25, 2020
Trying to picture your child heading off to college when they are just entering preschool is difficult. However, there is some truth to the adage “It goes by in the blink of an eye.”
Even in the topsy-turvy world we’re living in right now, there is no time like the present to think about and plan for your preschooler’s future. A 529 can go a long way toward helping you achieve your college saving goals.
An early start means that much more of your 529 will be earnings
Like most things in life, a little now goes a long way later. It’s easy to put off thinking about college until children are in middle school, when it becomes a more immediate need.
However, I have talked to many parents who paid for college simply by investing in a 529 with regular, monthly contributions when their children were very young.
Let’s look at a hypothetical example. If you begin saving $200 per month in a 529 when your child is 3, then up that amount to $250 per month at age 9 and up it again to $300 at age 14 (roughly every 5 years), you will have amassed over $75,000 in 529 savings by age 18. This assumes modest, tax-free growth of 6% on average. Of that $75,000 balance, earnings account for nearly 40%!
Conversely, if you wait until your child is just about to enter high school to begin saving, you’ll have to contribute a little over $1,000 per month to get to the same $75,000 in 529 savings by the age of 18. This can be both painful on the budget and fails to take advantage of long-term, tax-free growth. Earnings in this case will only account for a paltry 14% of the account by the time your child is 18.
You’ll likely start planning for retirement just as your child is going off to college
For many, retirement starts to become top of mind around age 50, and then grows in momentum as they approach age 65. However, this is also often the time when our children begin to think about college — or actually head off to one.
Too often, parents are forced to make a choice between saving/planning for retirement and paying for college in the near term. We also see parents taking on student loan debt at a critical point in the financial planning cycle.
By beginning to save before you child even reaches kindergarten, this tradeoff could become a non-issue and allows you to approach retirement more easily.
529 plans have so much flexibility; they are a great vehicle for the long term
The various provisions in a 529 allow you to invest confidently knowing that you can pivot should an unforeseen circumstance arise.
For example, 529s allow you to withdraw money without penalty should your child receive a scholarship. You also can change the beneficiary of the account to a sibling, cousin or even yourself if your child decides not to go to college or has funds left over.
Newer provisions allow you to use the money for apprenticeships, to pay off beneficiary student loan debt, or even for K-12 private school tuition.
Balances in 529 plans are looked at quite favorably for the purposes of financial aid, so there is no worry about saving “too much.”
All this, while also offering the benefits of tax-free growth, professional management and ease of contributions makes saving in 529 plans are great option.
For parents all over America, back to school looks a lot different this year. However, things will eventually return to normal, or at least some semblance of normal. Now is a great occasion to consider planning for the long term and put time on your side with a 529.
About the author:
Paula Smith is Senior Vice President, DC and College Savings Strategy for Voya Investment Management, a wholly owned subsidiary of Voya Financial. Voya Investment Management serves as 529 Program Manager for the Wisconsin Tomorrow’s Scholar® program and the Iowa IAdvisor® program. She has over 20 years of experience working with retirement plans and 529 programs.