Family Finance: Saving Up for College
It's September. Brace yourself - you're also one school year closer to college-tuition bills.
If you feel a knot in your stomach just thinking about it, I can't blame you. Luckily, socking away money for college doesn't have to be hard. Ohio's do-it-yourself 529 plan - College Advantage - is one of the top-rated college-savings plans in the nation, according to investment research firm Morningstar and the website savingforcollege.com.
FYI: A 529, glamorously named for the part of the tax code that created it, is a tax-advantaged investment account specifically for college savings. Each state has its own plan.
Ohio residents who invest in Ohio's College Advantage plan get a state - not federal - income-tax deduction of up to $2,000 per child per year, based on contributions. The money grows tax-free.
"Parents, grandparents, aunts, and uncles can all put money in them as well," said Carol Friedhoff, a certified financial planner with Savvy Outcomes in Dublin. "It has so much flexibility."
College Advantage has won accolades for its low-fee investment options such as Vanguard index funds, and FDIC-insured savings accounts and CDs. The minimum contribution is only $25, and includes an option for direct deposit from your paycheck or checking account.
Even if you contribute only the minimum, it adds up.
"$25 a month, at 5 percent earnings, after 10 years, that's $3,882. After 15 years, it's $6,682," Friedhoff said. "It's enough to put a dent in the first year of tuition."
If counting on stocks and bonds to fund a big goal like college seems unsettling to you, there are ways to minimize risk. Robert Reed, of Reed Financial Planning in Columbus, recommends the 50-50 rule.
"Put half of the money into an equity-index fund, and half into a bond fund," Reed said. "Once a year, look at the balance between the two. If the bond fund is now worth 60 percent and the stock worth 40, sell part of the bonds to buy more stock until it's back to 50-50. Over time, this formula has been proven to reduce risk and boost returns."
This is a good strategy if your children are in preschool or elementary school, but your mix should become more conservative as they enter high school.
"Don't put anything in the stock market unless you don't need it for seven years, because (if the market crashes) you will have to wait that long to make your money back," Reed said.
If you aren't sure your child will attend college, or you don't have enough money to fund that and retirement, skip the 529 and open a Roth IRA instead, Reed said. There's no tax break, but there's no penalty if you use money from a Roth IRA to pay college bills - "and if you don't need it for tuition," Reed said, "you can keep the money for retirement."