A 529 for Sophia

Greg Spears

OVER CHRISTMAS, I got the sort of question I love to answer. My daughter’s thoughtful boyfriend had set aside some money for his niece’s college education. What was the best way to invest it?

I said that we’d paid for much of our children’s education with money invested in 529 college savings plans. The investment gains went untaxed because we’d spent the money on tuition, room and board. On top of that, our 529 contributions were deductible against our state-income tax in Pennsylvania, where we live.

Our daughter’s boyfriend lives in Boston. A quick search revealed that he would need to contribute to a Massachusetts 529 plan to gain a similar state tax deduction.  We saw that Fidelity Investments offered a low-cost 529 plan with target-date index funds. The only slight hitch in opening the account was securing his niece’s Social Security number, which he quickly obtained with a call to his brother.

Sophia is a cute three-year-old with blonde ringlets, so it’s going to be a while before she reaches college age. One of the best things about opening a 529 plan this early is the potential for compound investment returns. There’s another important advantage, however, to opening a 529 account for one so young.

A child with a college savings account in her name is three times more likely to attend college than one without such a fund, according to one study. Interestingly, it doesn’t seem to matter how much money is in the account. The expectation of college attendance is set even if the amount saved is just $50. The next step, then, is to tell Sophia about her 529—and her big plans for the future.

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