Setting Up A College Fund For A Baby

Having a newborn is essentially one of the best times of your life.  It is also one of the best times for setting up a college fund for a baby.  The rule of thumb for investing is to start young and you can’t really get any younger than 0 years old!  Setting up a college fund for a baby is actually quite easy.  There are actually several different types of investments you can use for a college fund for a newborn – namely a 529 college savings plan.

Try our 529 Plan Calculator to see how much you can save for your child -->

Vanguard 529 college savings plan

Now that you have decided that you want to start saving for college for baby, you need to start doing some research and pick the type of college fund for newborn you want to open.  We strongly suggest opening up a Vanguard 529 college savings plan and would suggest you take a look at the Vanguard age based investment options.  The Vanguard age-based investment options will point you in the right direction in choosing the proper mutual fund and are one of the best college savings plans for babies as the investment vehicle is strategically targeted for maximal benefits based on when your child would need the funds.

How Do I Start A College Fund For My Child?

Starting a college fund for your child is really an easy task.  First, you’ll want to ensure you have at least $3000 ready to put into any of the Vanguard 529 college savings mutual funds.  This is the bare minimum you’ll need to buy into the fund.  If you don’t have $3000 ready to invest, you’ll need to open a traditional savings account for your baby until you have the $3000 minimum saved.  At that time you’re ready to start saving for college for baby.

Once you are ready to open your savings account for your baby, you can simply login to, or create an account at any of the popular online brokers like TD Ameritrade or E-trade.  From there you simply transfer the funds from your savings account into your brokerage account , enter the ticker symbol for the Vanguard mutual fund you have selected and make the purchase.

Vanguard college 529 plans are not available in all states. If a Vanguard 429 plan is not available in your state, you can visit this site and find the 529 brokers in your state.

What Is A 529 College Savings Plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

So in a nutshell, a 529 college savings plan lets you save money with tax advantages in place so long as the money in the account is used for your child’s college expenses or “qualified tuition plans”.   It is important to note that 529 plans are operated by state or educational institutions which means the brokers and investment options will vary from state to state.  The 529 plan is so named since it falls within section 529 of the Internal Revenue Service Code which created these plans back in 1996.

The Importance of Saving Early for College

Just as it is important to begin saving money early for retirement, it is just as important to save early for college.  Time is an extremely powerful variable when we’re talking interest and compounding.  As you can see on our compound interest calculator or our 529 plan calculator, every year you do not save can have a drastic effect on the final balance of your college fund for your children.  Believe us, when you start your baby education fund early, your child will have a savings plan that is extremely well funded!

How much will college tuition cost when my child is ready to go to college?

The cost of a college education in the future is very hard to predict.  Couple that with the variable of the type of school your child will end up attending and we have a very wide net to cast as far as nailing down the future cost of a college education.  Whether your child will be attending a private college or a state school will have a dramatic effect on the price of college tuition in the future.

What we can tell you is that tuition has been increasing at over 5% per year since 2006.  The average annual cost of a private college tuition is well north of $20,000 where as the average annual cost of a state school is quickly approaching $7500 – and that does not take into account the cost of room and board or books.

As of now, college still is considered a good investment in your child’s future.  People with four year degrees still will typically earn twice as much as those with only a high school education.  Whether it is a four-year degree or your child attends a two-year technical school, your child will definitely have a financial benefit by furthering their education.

How can I find money for my child’s college fund if my budget is tight?

It is no secret that Americans spend money on frivolous things.  Once you start taking a hard look at where you spend your money, we’re very confident that you could easily scrape together between $500 and $1500 per year with very little effort.  From not purchasing your latte once a week to driving a few miles per hour slower in order to get better gas mileage, putting together $50/month should not be a problem.  And like we said, through the magic of compound interest, $50/mo compounded over 18 years can grow into a nice little nugget.

What are Some Additional Ways to Save for My Child’s College Expenses?

While we already believe the 529 plan is the best way to save for your child’s education, there are other savings vehicles you can use to save for your child’s college.

529 College savings plans

  • Investment accounts that grow tax-free – no taxes paid so long as the money is used for education
  • No contribution limits
  • Some accounts can be started with as little as $25

Prepaid tuition plans

  • Investment accounts that allow you to pay for tuition at today’s prices
  • If you have a lump sum, you could pay for tuition now that your child won’t use for another 18 years – you basically lock-in your price now
  • These plans are administered by individual states and are only redeemable at public colleges in that state
  • Typically you must be a resident of the state

Coverdell education savings accounts (ESA)

  • Works like an IRA, but for education
  • $2000/year contribution limit with post-tax dollars
  • Money grows tax free
  • Neither the contribution nor the interest is taxed when you make a withdrawal

Custodial accounts

  • Savings account in your child’s name that you control
  • Child can take control when he/she reaches the appropriate age
  • The first $850 of earnings each year is tax free
  • The subsequent $850 is taxed annually at your child’s rate (usually 15 percent)
  • Withdrawals are subject to federal tax

What Is The Penalty On An Unused 529 Plan?

When you’re dealing with savings accounts that have tax benefits, there is always the possibility of penalties for early withdrawal.  Below we address the common penalties on unused funds that were put into a 529 savings plan.

Only earnings are subject to a withdrawal penalty

The IRS has a federal law that will impose a 10% penalty on earnings for non-qualified distributions beginning in 2002.  It is important to note that this penalty is not assessed on the principal.  There are also other exceptions that can be made due to death or disability or withdrawals due to scholarships and the funds would no longer be needed for educational expenses.

All earnings will be subject to income tax

Any earnings realized in the fund that are not used for educational expenses will be subject to income tax at your tax rate.  This means you could end up in a higher tax bracket and aint nobody got time for that 🙂

Excess funds? How to minimize the penalty…

In order to minimize the penalty paid on unused funds in a 529 account, you can change the beneficiary to another qualifying family member at any time.  This will help you avoid or delay taking any non-qualified withdrawals when the original beneficiary would not need the funds.

Are 529 Plans Only Good for State Colleges and Universities?

The thought that you can only use funds in a 529 plan at state colleges and universities is a very common misconception.  You can use the funds in a 529 savings program at any accredited college or university in the entire USA.