'GMA' Quick Tip: Funding Your College Education
Investing in a 529 plan is key to funding your kid's college education.
Jan. 13, 2011 — -- Most parents wonder when they should start a college fund for their kids. According to "Good Morning America's" personal finance contributor Mellody Hobson it's never too early to start saving. Here she explains some of the college savings plan options available through the government.
Understanding the 529 Plan
529 plans or Qualified Tuition Programs are a great way for a family to save for their child's education, and I definitely recommend including them in your investment portfolio. A 529 plan allows you to put money in now for college expenses for your child and you can withdraw from it tax-free for qualified college expenses such as tuition, books, fees and even housing.
Which 529 Plan Is Right for You?
Before you decide you should know there are two types of 529 plans -- college savings plans and prepaid tuition plans. With a college savings plan you can use the funds at any school in the country and you can purchase other state's plans, so they offer you more flexibility. However, they also have more risk because you are investing in mutual funds with have a risk of going down. If you decide to go this route, different investment options are offered depending on the state, so choose the one that fits your risk appetite.
If you want to have a safer option that is guaranteed, I would consider the prepaid tuition plan. This option is only offered in certain states. This plan allows you purchase a certain amount of semester' tuition at today's cost at state universities in your state.
The state is guaranteeing that that the amount of tuition you buy will not rise, so you are essentially locking-in today's tuition. Remember if your child does not go to a state college, then you can use these funds at other schools, but you may not get the full value depending on the plan you have, so make sure you read the fine print. With either option, if your child decides not to go to college, then you can transfer the account to a qualified relative. It is important to remember that if you withdraw money for a non-qualified college expense you then you will pay a 10 percent penalty.
Each state has its own 529 plan and rules, so it can get quite complicated. The best resource for information on 529 plans is the college savings plans network website.