Don't underestimate the value of time. The longer you keep your money invested, the more time it has to add up and potentially grow.
Let's say you set aside $1,200 a year—that's just $100 a month—in a tax-deferred account such as a 529 college savings plan,* for a total investment of $21,600 over 18 years. If this investment earns 5% a year, you'll have about $35,400 at the end of 18 years.
But if you wait 9 years before you start saving, you'll have accumulated about $13,900, factoring in that same 5% return.
In other words, you'll only have earned about $3,000 in that 9-year span—as opposed to nearly $14,000 over 18 years!
That's the beauty of compounding—earning money on your investment and then earning money on those earnings. And over time, it can only growmore powerful.
Starting to save earlier could mean you'll have moresaved
These hypothetical examples don't represent the performance of any particular investment. The assumed 5% rate of return is for illustrative purposes only. Actual market returns will fluctuate annually and aren't guaranteed. The ending balance doesn't take into account any taxes or penalties that may be due upon distribution.
Read chart description
Starting to save earlier could mean you'll have more saved
This chart shows that a monthly contribution of $100 will compound more if you start saving earlier, giving the money more time to grow. If you save $100 a month for 18 years, your ending balance could be $35,400. If you save $100 a month for 9 years, your ending balance could be about $13,900.
FAQs
Starting to save earlier could mean you'll have more saved
What are direct 529 plans? ›
A direct-sold 529 savings plan is 529 savings plan that is sold directly by a state, financial institution. If you enroll in a direct-sold 529 savings plan, you are responsible for managing your own investments through their plan's online account portal.
What happens to 529 if kid doesn't go to college? ›
Leave the account intact.
If your child is simply not sure about college or perhaps wants to delay applying, you can keep your 529 plan intact until the child does use it for qualified education expenses.
What does Dave Ramsey say about 529 plans? ›
“I would not overfund your 529. At today's world, I would underfund your 529 … The higher ed landscape is going to change so much in the next 18 years as the student loan epic failure debacle unfolds,” Ramsey said. “They have been overcharging for too long, and it's come home to roost.
Are there any disadvantages to 529 plan? ›
Not eligible for federal tax deductions or credits
You'll pay federal income tax on the money you contribute to your child's 529 account and won't be able to write these earnings off like you would contributions to a retirement account.
Is a direct 529 plan better than a broker? ›
Direct-Sold 529 plans
Broker-sold 529s generally have higher annual costs and may include sales charges of anywhere from 1 percent to 5.75 percent of your contributions. Also, many of the direct-sold 529s (but few of the broker-sold) invest in index funds with low expense ratios.
Are 529 plans worth it? ›
Susan Bart: Stacy, if you have children or grandchildren or favorite nieces and nephews who will be going to college, a 529 account can really be a great way to save for a college education. There is no federal income tax and usually no state income tax imposed as the funds grow in the account.
How the wealthy use 529 plans? ›
529s are funded with after-tax dollars, which means that over time the investments grow tax-free. These plans are attractive for wealthy families because they provide a way for a parent or grandparent to transfer much more money to a child than they would be able to without incurring gift taxes, Stokes says.
What happens to 529 money if you don't spend it? ›
If you don't need the account balance for a near-term purpose, you can leave it untouched in case a relative needs it for graduate school or your spouse decides to pursue an MBA. You can continue investing in your 529 for years, preserving the account's tax benefits.
How much will a 529 grow in 18 years? ›
By superfunding your 529 plan with a lump-sum contribution of $50,000, in 18 years when your child is ready to enter college, your account balance will have increased to $120,331.
It's easy to see why Americans don't embrace 529 plans. They often have limited investment options, high fees, complicated rules and anxiety-producing investment risks. All that said, the plans may ultimately be worthwhile for most families, as long as parents choose carefully. Focusing on fees is crucial.
Is there a better alternative to a 529 plan? ›
Some 529 alternatives include using a custodial account, Roth IRA or Coverdell Education Savings Account.
Is a Roth IRA better than a 529 plan? ›
The Roth IRA also offers benefits in terms of available investments, unlike the 529, where investment choice is limited to funds that may not offer low-expense options. That's not the case with a Roth, which allows you to invest in nearly anything that trades on a public market.
Can you have a self directed 529? ›
However, if you choose to self-direct your ESA you have the potential to earn more tax-free income in a shorter time than in a 529 plan. Self-directing your ESA allows you to invest in assets not available to 529 plans—because 529 plans cannot be self-directed.
What is an independent 529 plan? ›
What is the Independent 529 Plan? Answer: The Independent 529 Plan is the country's first college-sponsored prepaid tuition plan. College-sponsored prepaid tuition plans (also referred to as private prepaid tuition plans) are an alternative to traditional state-run prepaid plans.
What is the main disadvantage of a 529 prepaid tuition plan compared to a 529 savings plan? ›
Prepaid Tuition Plans
Prepaid plans are not available for K–12 education. As with 529 savings plans, prepaid tuition plans grow in value over time. Eventual withdrawals from the account used to pay tuition are not taxable. However, unlike savings plans, prepaid tuition plans do not cover the costs of room and board.
What is the difference between advisor sold and direct sold? ›
There are differences in the types of funds typically found in advisor-sold versus direct-sold age-based portfolios. The teams behind advisor-sold plans tend to favor actively managed funds--which charge higher prices--while direct-sold age-based options heavily favor low-cost index funds.
