With the price of tuition climbing every year, it’s never too early to start saving for your child’s college education. If you’re thinking about joining a 529 college savings plan, start by asking yourself these five questions:
1. Which plan should I join?
Almost every state offers a 529 college savings plan, but you aren’t limited to your home state’s offerings. Comparison shop across state lines, but note that if you’re a nonresident, you may be required to purchase your plan through a financial advisor or broker.
2. What are the state tax benefits?
You’re free from federal taxes on any plan earnings, as long as your withdrawals are used for “qualified” college expenses (think tuition, room and board and mandatory fees). Many states also grant tax deductions or credits.
The catch: You may only be eligible for state tax benefits if you join your own state’s plan.
3. How should I invest?
Investment options typically include stocks, bonds and money market funds. Research the type of investments offered by different plans to find the one that best suits your appetite for risk.
4. What fees will I pay?
Fees vary from plan to plan, with charges for enrollment, annual maintenance and beneficiary changes among the most common. Aim for low fees to minimize the impact on your returns.
5. Are there any penalties?
You’ll typically pay income tax on any withdrawal not used for college expenses, plus you could face an extra 10 percent federal tax penalty on earnings.