We’re all trying to save for college. But aside from your typical 529 plan, hopefully you’re counting on your traditional cash savings to help out. The only problem is right now it’s probably earning close to 0% at the bank.
That’s why you should check out the Sallie Mae High Yield Savings account. It’s currently paying 1.4%. You can also get a certificate of deposit at up to 3%.
And if you use Upromise, you can get a bonus automatically deposited into your Sallie Mae account.
A report released by Sallie Mae last week shows that 52% of parents are “saving the same amount or more” for college despite the down economy. The report continues:
In fact, 62 percent of parents of college-bound children are saving for education, trailing only retirement as a savings priority. Fourteen percent of parents reported saving the most for their children’s college, second to 27 percent who save the most for retirement. For nearly half (46 percent) of parents, saving for college ranks in their top three savings priorities.
It amazes me how many people are able to set aside savings for college but don’t want to invest in a 529 plan right now because of “market conditions”. Those market conditions have pushed the market higher three months in a row, and people have missed out ona 25% gain.
2008 is drawing to a close, which means it’s your last chance to get a tax deduction for 2008 if your state offers an upfront tax benefit for 529 plan contributions.
Many states that have state income taxes offer upfront tax deductions, sometimes equal to the amount of money you contribute to your 529 plan. For example, if you contribute $10,000 this year you may be able to deduct that amount from your income when reporting taxes.
To see which states offer upfront tax deductions for 529 contributions, see the 529s.com state guide.
Stuck with big losses in your 529 account this year?
The Wall Street Journal reports on a way you may be able to deduct these losses. But be forwarned: there are many caveats, especially if your state offered up front tax benefits for your contributions. And if you child isn’t going to school in the next year or two, do you really want to withdraw funds from your 529 account with stock prices are this low?
Here’s the explanation, in part:
Imagine a couple that put $120,000 into a 529 tax shelter for a grandchild a year ago. If the market had continued to boom, that money would have grown tax-free. As long as it was eventually spent on qualified tuition expenses, no tax would have been paid on withdrawals. These 529 plans are terrific tax shelters for middle-class couples with children or grandchildren.
Obviously, though, investing has been a hazardous occupation of late. Imagine that same couple now looks at the 529 and realizes those investments have plunged to just $70,000 in value.
Yikes. That’s a $50,000 loss.
The couple can close the account and withdraw the money. At that point, they may be able to deduct nearly all of that loss from their taxable income. That wouldn’t restore all the money lost, but could at least soften the blow.
Many Americans may be missing out on this deduction. Most 529 plans are sold through financial advisors, but comparatively few know about this rule. (For those seeking more details, they can be found in IRS Publication 970, Tax Benefits for Education, page 51, and in the Federal Register, Vol. 73, No. 13, page 3445.)
Investments in 529 college savings plans seem to be declining as people worry about stock market losses.
This is a dumb move. Why you would contribute funds when the Dow was at 14,000 and not when it’s at 9,000 is beyond me.
But you need to be smart about it. If your kid is going to college in less than 5 years, most of your money should be in low risk investment options. Most 529 plans offer age-based plans that keep more of your money in less risky options such as bonds when your child gets closer to college.
Also keep in mind that your kid will be in college for about 4 years. So if your kid starts college in 5 years, the average time you have to keep your money in your 529 plan is another 7 years. 7 years is a long time in the stock market. After all, the stock market is currently at 5 year lows. It has gone up and dropped back down in a period of just 5 years.
If your state offers upfront tax deductions for contributing to 529 plans, then you have all the more reason to contribute. Scared about investing in stocks? Then just buy the low risk options in the 529 plan. They may only return 1-3% per year, but if you get an upfront tax deduction you’ll be laughing all the way to the bank.