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With the cost of tuition rising faster than inflation, saving for college early is critical.  A quality education must be planned for from an early age–sometimes even from birth.  Parents who wish to help pay for their children’s college education have a number of different investment options.  Currently, the most popular investment vehicle for college savings is the 529 plan.  529 plans, which are offered in every state, allow college savings to grow tax free as long as the money is used for qualified higher education expenses.  Every state’s plan is slightly different.  For help deciding upon a plan, check out my article How to Choose a 529 Plan for College Savings.

529 plans are a great choice for college savings.  However, they can be somewhat confusing when it comes to making withdrawals.  Any money withdrawn from the account must be planned out in advance in order to avoid any taxes or penalties.  In order to help you make the most of your 529 plan withdrawals, I have created this Guide to 529 Plan Withdrawals.  With this information, you should be ready to efficiently use your 529 plan for maximum savings.

Where can I use my 529 plan? 529 plan funds can be used at any college, university, vocational school, or other accredited postsecondary educational institution that is eligible to participate in the federal student aid program.  These can be either public or private institutions.

What tax-free and penalty-free withdrawals can I make? 529 plan withdrawals can be used tax-free and penalty-free for qualified higher education expenses.  These expenses included tuition, fees, books, supplies, and other required equipment.  Room and board expenses qualify for those who are enrolled at least half time at an eligible institution; however, the amount of room and board allowed is determined by the school’s estimate of room and board costs that is reported to the government.  Funds may also be withdrawn penalty-free (but not necessarily tax-free) if the student receives a scholarship, passes away, has a disability, or enrolls in a United States military academy.  There is also a limited exception for those claiming a Hope or Lifetime Learning credit.

What withdrawals are not tax-free or penalty-free? Other than the exceptions listed in the previous questions, all withdrawals that are not used for qualified education expenses are not tax or penalty-free.  Currently, even transportation costs are not considered qualified education expenses.  When you make a non-qualified withdrawal, the earnings portion of the withdrawal is subject to a 10% withdrawal penalty and is taxable as ordinary income.  In some states, you will also have to repay any tax deduction you received when you contributed that money.

How can I avoid withdrawal fees on extra money? There really are only a couple of ways to avoid withdrawal penalties on money you have left over after college.  The first option is to leave the money in the account in case you decide to pursue any post-graduate education.  The second option, and by far the most popular option, is to transfer the money to another beneficiary.  Other beneficiaries can be any of the following:

• the designated beneficiary’s spouse
• the designated beneficiary’s son or daughter or descendant of the beneficiary’s son or daughter
• the designated beneficiary’s stepson or stepdaughter
• the designated beneficiary’s brother, sister, stepbrother or stepsister
• the designated beneficiary’s father or mother, or ancestor of either parent
• the designated beneficiary’s stepfather or stepmother
• the designated beneficiary’s niece or nephew
• the designated beneficiary’s aunt or uncle
• the spouse of any individual listed above, including the beneficiary’s son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
• any individual for whom the home of the designated beneficiary is his or her primary home for the entire tax year
• the designated beneficiary’s first cousin

With this extensive list of possible beneficiaries, the money can usually be put to good use.

What should I watch out for when making withdrawals? When you make a withdrawal, you need to be very careful that you are not going over the amount of your qualified higher education expenses, or you may be subject to the penalty.  This can get a little confusing when you are also applying for the Hope or Lifetime Learning credits, since those will lower the amount of your qualified education expenses.  On the other hand, you need to make sure you are withdrawing enough so you can maximize your tax benefits.  Finally, you need to make sure you withdraw the money in the same tax year that you actually pay the education expenses.

With this guide in hand, you are ready to make withdrawals from your 529 plan.  Do you have any other advice for 529 plan withdrawals?  Which 529 plan do you like the best?  We look forward to hearing from you!Similar Posts:

• How to Choose a 529 Plan for College Savings
• What Comes First? A Step-By-Step Guide to Financial Independence. Step 5: Set Up College Funds
• Funding Your Children’s College Education While Still Teaching Financial Responsibility
• What Comes First? A Step-By-Step Guide to Financial Independence. Steps 3 & 4: Complete Your Emergency Fund & Set Up a Retirement Fund
• Does a Four-Day School Week Make Sense?

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Retirement may seem like something that is ages away.  You are young and enjoying life, why should you worry about retirement?  Well, it turns out that now is the BEST time to start planning for retirement.  The sooner you start saving, the more freedom you will have when that time comes.

Although the number varies for each family, financial planners predict that today’s twenty-somethings will need approximately $3 million to retire comfortably.  That is a lot of money.  In order to save that much money, a savings account simply isn’t going to cut it.  If you are serious about saving for retirement, you need to consider more aggressive investment vehicles.  One of these investment vehicles that I am quite fond of is a target retirement fund.

What is a target retirement fund? A target retirement fund is a retirement fund (usually an IRA or Roth IRA) that adjusts the percentage of stocks, bonds, and cash that you hold depending upon how many years you have left until you retire.  These funds usually start off very aggressive, with most of your money held in stocks.  As you age, more and more of your investment will be transferred into safer investments such as bonds and cash.  A target retirement fund does the hard work of asset allocation for you.

What are the advantages of a target retirement fund? There are several advantages of a target retirement fund.  First of all, a target retirement fund is easy, making it perfect for the passive investor.  You do not need to worry about going in and redistributing your assets on your own–it is done automatically.  Another advantage is that a target retirement fund gives you a great deal of diversification.  Most target retirement funds invest in index funds, such as the Vanguard Total Stock Market Index Fund.  These funds, which often outperform actively-managed mutual funds, purchase a small amount of every company in a certain index (such as the S&P 500).  This spreads out your investment over MANY companies and helps to decrease the risk of your investment.  A third advantage is that target retirement funds are usually inexpensive because of their use of index funds.  For example, the Vanguard Target Retirement 2050 Fund, which I am interested in using, has a very small 0.20% expense ratio and no other fees.  These fees add up, so it really pays to get an inexpensive fund.

What are the disadvantages of a target retirement fund? There are two main disadvantages that I see in a target retirement fund.  First of all, you lose a little bit of control over which index funds you are investing in and what percentage of your investment you keep in stocks, bonds, cash, and other vehicles.  This can be a bit limiting to the active or aggressive investor, but is perfect for the passive investor.  The second disadvantage to target retirement funds is that many of them have a moderately high opening deposit.  For example, the Vanguard Target Retirement 2050 Fund has a $3000 minimum investment to open the fund.  Once the fund is open, though, there are not minimum deposit amounts.

Overall, I think a target retirement fund is a very good option for a majority of investors.  However, if you would like a bigger say in your asset allocation and risk management, then you may not want a target retirement fund.  For me, a target retirement fund would be perfect and I cannot wait to start one (just gotta get that $3000 opening deposit).

What do you think?  Are you a fan of target retirement fund?  What are you currently doing to save for retirement?  Be sure to leave your comments!Similar Posts:

• What Comes First? A Step-By-Step Guide to Financial Independence: Step 7–Build Wealth Through Wise Investments
• How to Choose a 529 Plan for College Savings
• What Comes First? A Step-By-Step Guide to Financial Independence. Steps 3 & 4: Complete Your Emergency Fund & Set Up a Retirement Fund
• Our Financial Goals
• What Come’s First? A Step-By-Step Guide to Financial Independence: Step 6–Pay Off Your Low-Interest Debt

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One of the most important decisions newly married couples will need to make is whether or not they will help fund their future children’s college education. If you decide that you do, in fact, want to help out, a 529 plan is probably your best option for saving up the money. A 529 plan allows you to save up for college expenses tax free, similar to a Roth IRA for retirement. However, the money will have to be used for college-related expenses or you will have to pay a penalty. You can, though, transfer the funds to a different beneficiary if you wish. Each state has its own 529 plan and you do not need to invest in your own state’s plan. It may seem a little overwhelming trying to determine which state’s plan is best for you. When it comes down to it, there are really three main things you need to consider when comparing 529 plans:

1. Does Your Own State’s Plan Offer Tax Incentives? Many plans will offer tax credits or deductions to the residents of that state. If your own state’s plan offers such an incentive, you will most likely be best off by choosing your own state’s plan. However, not every state offers such incentives. If your state does not offer tax credits or deductions, you will most likely be better off by looking into other states’ plans.
2. How Much in Fees Will You Have to Pay? Each 529 plan is different. Some of them have very low fees while others charge very high fees. Unless your state offers a tax incentive, you will most likely be better off by choosing a plan with very low fees. When looking at fees, make sure to consider enrollment fees, maintenance fees, management fees, and the expenses of the underlying investments. Some states with low-fee plans include Utah, Michigan, and Iowa. Make sure to compare the pros and cons of each state’s plans.
3. What Types of Investments are Used? Different states use different kinds of investment vehicles. In fact, most states will offer a few options for your investments. Make sure you are comfortable with the investments your plan uses. Do you want a plan that uses Vanguard mutual funds? Do you want an age-based plan? Do you want to invest in mostly stocks or mostly bonds? These are some of the questions you will need to ask yourself when deciding between different investment vehicles.

Although there are other considerations you may wish to make when choosing a 529 plan, such as minimum payments and maximum contributions, the three just listed should help you to dramatically narrow down your list of options.

As for me, personally, I have narrowed down my options to the Utah plan and the Iowa plan. My own state (Kansas) does not offer tax incentives for contributing to its own plan, so I decided to look out-of-state. Both of these plans have very low fees, although the fees are set up a little differently. Both plans have options that use Vanguard mutual funds, which I am particularly fond of and trust. The Iowa plan is also partnered with UPromise, which I happen to really like and which makes it easy for other family members to contribute to the plan. In the end, I will probably look closer at the fees and determine which one would be cheaper in the long term.

If you would like to learn more about 529 plans, check out Savingforcollege.com. There, you can compare different states’ plans and learn more about 529 plans in general.

Do you have any experience with 529 plans? Which plan is your favorite? Let us know!Similar Posts:

• What Comes First? A Step-By-Step Guide to Financial Independence. Step 5: Set Up College Funds
• A Guide to 529 Plan Withdrawals
• Tax Breaks that Every Student Needs to Know About
• What to Consider When Choosing a Bank Account
• What Comes First? A Step-By-Step Guide to Financial Independence: Step 7–Build Wealth Through Wise Investments

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In the world of personal finance, a healthy amount of savings is one of the most important things you can own. Many people suggest saving at least 10%-20% of your income each month. Now, these percentages may seem overwhelming to some people. Those who do not have a high income often find themselves so tight on cash that they feel like saving money is impossible. They feel like any realistic expectation of having money for retirement is an absurdity. However, this is completely the wrong attitude to have. Even if you cannot save 10%-20% of your income each month, you should still make an effort to save. This article will show you how saving just a little bit of money now can earn you big rewards in the future.

The key to saving a little now to have a reasonably high net worth in the future is a little thing called “compound interest”. What this means is that any interest you earn on your savings is added to the amount you have saved; then, the next month you will earn interest on the interest you already accumulated! This is free money! You do not have to save a lot for compound interest to work for you. Let’s look at an example.

Billy makes a humble $30,000 a year and is the primary income source for his family. Billy cannot afford to put 20% of his income into savings, but he determines to put $100 a month into a Roth IRA. This is only 4% of his income. As he continues contributing money each month, he becomes more and more surprised at how fast his money is growing. After 10 years, he has $18,775 in his account. After 20 years, he has $59,308 in his account. After 30 years, he has $146,815 in his account. After 40 years, he has $335,737 in his account. Finally, after 50 years, he has $743,606 in his account. Notice how he only ever contributed $1200 a year to his account, but every ten year period he earned higher and higher returns. A little really can go a long way.

Now, you may have noticed that the key to earning this high of returns is to start young. Some people may not have 50 years to let their Roth IRA sit. No matter where you are at, however, you need to start saving now. Set an amount that you feel is reasonable to contribute each month and stick with it. If your situation changes, then adjust the amount accordingly. Obviously, if you can afford to contribute 20% a month, you will be much better off. Just don’t think that because you cannot afford that much that it is not worth saving at all.

Do you have any savings success stories? Where do you find the money for savings? I would love to hear from you!Similar Posts:

• Why the Little Things Really Do Matter
• Are High-Yield Online Savings Accounts Dying Out?
• What Comes First? A Step-By-Step Guide to Financial Independence. Steps 3 & 4: Complete Your Emergency Fund & Set Up a Retirement Fund
• What Comes First? A Step-By-Step Guide to Financial Independence. Step 5: Set Up College Funds
• What Come’s First? A Step-By-Step Guide to Financial Independence: Step 6–Pay Off Your Low-Interest Debt