College is expensive, and many parents want to start saving as early as possible with a 529 account. The longer money is invested, the greater the potential benefit from compounded earnings. This is why some people begin saving for college even before they have a child.
How Does a 529 Plan Work?
529 college savings plans are named after the provision in the tax code that created them. Money in a 529 account can grow tax free and can be withdrawn tax free, as long as it’s used for qualified higher education expenses. Terms and fees vary from plan to plan.
Each state offers its own plans with different terms and annual contribution limits. Some states provide a tax deduction for residents who contribute to 529 plans, while others don’t. Some states allow residents of other states to invest in their college savings plans.
If you open a 529 account, you’ll have the option to contribute a large sum up front. That can help your savings grow substantially due to compounding.
How Can You Start a 529 Plan Before You Have a Child?
529 plans are designed to be flexible. When you open an account, you will have to designate a beneficiary, who can be anyone with a Social Security number. You will be able to change the beneficiary at any time. If you open an account before you become a parent, you can name yourself or someone else as a beneficiary, then change that designation after your child is born.
Should You Open a College Savings Account Before You Have a Child?
When it comes to investing, time is your greatest advantage. Starting to save for college early can allow you to benefit from compound earnings and save much more than you could if you waited. If you live in a state where you can qualify for a tax deduction, that can help you reach your savings goal.
One downside is that you may not have a child, or your child may decide not to go to college. In that case, you will be able to avoid taxes and use the money for your own educational expenses or withdraw it to use for another purpose (subject to taxes). You will also have the option to name someone else, such as a family member, as a beneficiary. Depending on your relationship to the new beneficiary, the funds may or may not be subject to federal gift taxes.
Money that you put toward a child’s college savings is money that can’t go toward your own current and long-term needs. Before you start thinking about saving for college, especially for a child you haven’t had yet, make sure you have an emergency fund with enough money to cover your expenses for at least a few months. If you haven’t started saving for retirement yet, make that a priority. Once you have addressed those goals, you may want to begin saving for college. Discuss your options with your financial advisor.
