Funding a 529 Plan

If you have children, then you're sure to notice how fast they grow up.  Unfortunately, there's something else that continues to grow over the years:  The cost of a college education.  If you've been thinking about funding a 529 plan, that's great news. A college education can help provide for a secure financial future.

If you're wondering how much you might need to save for college each month, then you've come to the right place.  According to College Board, over the decade from 2000 through 2010, the increase in the cost of going to college averaged 5.6% above the annual rate of inflation.  With the rapidly rising cost of a college education, the key to having adequate funds in a 529 plan is to start saving early.

Estimating Future Costs of College

The first step in saving for college is determining the future cost of a college education.  Typically, it's important to understand the full cost of college including tuition, fees, room and board.  One of the simplest ways to help understand the possible future cost of college is by projecting today's costs into future dollars.

The following table demonstrates the possible future costs of a four year education at both a public and private college:

Future College Cost Estimates

In this particular example, we are using information from the U.S. Department of Education's 2008 / 2009 survey published in late 2010.  In this survey, the average annual cost of a four year public education was found to be $12,113 and the average annual cost of a four year private college education was $30,803.

The numbers projected in the above table assume the cost of college rises at an annual rate of 5.0%.  If you'd like to run through some additional scenarios, then try one of our Online Calculators.

Monthly Investments for 529 Plans

Now that we have a better understanding of how much it could cost to fund a college education in the near or distant future, it's time to figure out how much money to set aside each month to meet the funding goal for a 529 plan.

Once again we're going to provide you with a table that can be used as a guide.  Keep in mind that these are hypothetical examples, and the actual cost of college and / or your return on investment may vary from this example, resulting in an over or under funding of your 529 account.

The table can be used as a guide to figure out how much you need to set aside each month into your 529 plan to meet your college savings goal:

529 Plan Monthly Savings Targets

The way to read this table is fairly straightforward.  For example, let's assume your child is three years old, and you want to plan for four years at a private college.  Our future college cost estimate table tells us those costs might be around $275,000.  Using the monthly savings target table above, we find the column for $300,000 and look across from age three.  In this example, the target savings is $867 per month into your 529 account.

In the above table, we've used an 8% return on investment for money placed into your 529 plan.  If you'd like to run some different college savings scenarios, our College Funds Calculator provides that flexibility.

Tax Free 529 Savings

As we've already mentioned in our article on 529 College Savings Plans, all earnings or growth of a plan are exempt from federal, and sometimes state, income tax as long as the money is used to pay for eligible college expenses.  This is an extremely important feature of 529 college savings plans as demonstrated in the following table:

Tax Free versus Taxable Accounts

In this third example, we are showing what happens to a $10,000 investment over an 18 year time period at an 8% annual return on investment when it is allowed to grow at a tax free rate in a 529 account versus a taxable account.  By the 18th year, there is a $15,055 difference in value between the two account types.

About the Author - Funding a 529 Plan

Copyright © 2006 - 2011 Money-Zine.com