Where is the best place to start saving for a new baby?

We recently had our first child and would like to start saving for her. The idea of a 529 plan doesn't seem appealing because of its limitations and the rising cost of college tuition which a 529 won't cover, but we can be convinced otherwise. What is the best way to start saving for her?

Financial Planning, Lifestage Based Planning
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January 2017
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Congratulations on the birth of your first child! I have two of my own and know first hand that there is no bigger joy than being blessed with a child.

I also want to congratulate you on being prudent in planning for your child's future and college expenses. I would caution you that discounting the benefits of 529 plans would be a mistake. I have a 529 plan for my kids and it is a great tool for college saving.

Here are a few benefits that come to mind:

  1. All funds in a 529 plan grow tax-free. Because there is no capital gain tax expense, you are potentially able to save more money for college vs. simply saving in a taxable investment vehicle.
  2. Contribution into 529 plan might be state tax deductible. This varies from state to state, but can be a great incentive to put money in the 529 plan. I know in the sate of NY, a married couple can contribute up to $10,000/year and deduct that contribution on their state tax return. And believe me, NY residents need every deduction they can get.
  3. 529 plan are transferable - this means that if one of your children doesn't go to college or better yet, gets full scholarship to college, you can use the funds in the plan for any child or family member.
  4. 529 plans have low fee structures ( this is a general statement. You must understand the plan you invest in).
  5. In most plans, you have the ability to pick the type of investment you think makes best sense for your child's education expense goals.
  6. You are in control of the funds vs. the beneficiary.

That being said, there is a disadvantage of sorts. if you withdraw funds from a 529 plan for purposes other than education related, there will be a 10% penalty plus taxes on the withdrawal.

Another option to consider for education saving goals is a Roth IRA. Savings in Roth IRA's can be withdrawn without penalty for educational expenses (Limits and rules apply to this. Speak to a CPA or tax professional)

Hope this helps, good luck!

January 2017
January 2017
January 2017
January 2017