If you are pregnant, opening a college savings account has probably crossed your mind. Now is the time. Don't wait.
Yes, you can open a 529 plan before your baby is born. This is a little known-move that is legal and usually encouraged by state-run 529 programs.
If you are pregnant, but won't have your baby until the next tax year, opening a 529 plan and funding it before the end of the year will allow you to save up to $2,000 extra for college and get the benefit of a state income tax deduction.
All you have to do is name yourself as the beneficiary when you open the account. When the baby is born and his/her social security number arrives in the mail, make the baby the beneficiary of the account.
I took advantage of this last year when I was pregnant. The Bean was born in April 2008, but I opened his 529 plan in November 2007. The extra tax deduction was nice, but we also thought we might benefit from this in another way.
The money you put into a college fund in the first three years of a baby's life is more valuable than the money you add later because it has more time to grow tax-free before college. Hurray for compound interest.
It's the same concept that applies to retirement savings. Money you save in your 20s and 30s is worth more than that saved in your 40s and 50s.
For instance, if you save $250 a month starting when your baby is born, you'll have $120,000 by the time college rolls around (assuming a rosy 8 percent return). If you wait until the baby is 5, you'd need to save $440 a month to reach that same amount. (Example from Liz Pulliam Weston's Easy Money).
Of course, if you have parents or family members who would like to contribute to the fund, encourage them to do so when the baby is younger, rather than waiting.
Our goal is to sock as much as possible into the 529 in the first few years. But it isn't all about the compound interest. Frankly, we don't know how much having a child is going to cost us year-to-year, if the family will fall upon hard times due to death, job loss or disability, so we thought we'd better save what we can while we can as a hedge against the unknown. I don't want to sound negative. But we know first-hand that disasters happen, and you have to get and stay in a position to survive them.
We didn't want to make the mistake of thinking we'd be better able to afford to fund the plan later, when in reality, we don't know what our finances are going to be like in the future. If there would be more children, better paying jobs.
If you are expecting, do a little homework about your state-sponsored 529 plan and think about putting a little something away.
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