Saving for College, and Saving on State Taxes

When my son was born in October 2010, one of the first things I did was make sure I had filled out his application for a social security number. Before he had one, I could not open a bank account, or a 529 college savings account in his name. A 529 college savings account is a state-run investment account which allows parents, friends, extended family (anyone can contribute) for someone's qualified education expenses. http://en.wikipedia.org/wiki/529_plan

What does this mean. It means you can invest money, and use the proceeds to pay for college, without paying taxes on the earnings. No capital gains taxes. Sounds good, right. You may think: But I don't want to have to remember it every month. Many plans will do an automatic withdrawal, so you don't need to think about it. http://www.axa-equitable.com/plan/education/529-plans/contributions-and-withdrawals.html

You may think: We just had a baby. Why should I save for college now? College tuition calculators, like the one below, suggest college in 18 years will cost about $440,000 for 4 years. Yeah. Take that in for a second. Now breathe. http://www.fool.com/college/college01.htm

BUT WAIT. There's an even better reason than pure panic to open a 529. Most states will allow for a state tax deduction for the amount you put into that State's 529 (you don't need to use the 529 of the state you live in, but that's the way to get the state tax deduction). My state (which is not a State), DC, allows $4000 in state tax deductions per filer (if filing jointly). http://www.dccollegesavings.com/pdf/dc_disclosure.pdf

Which means, if you are married, filing jointly, you can get an $8000 tax deduction. So, if you put away 666 dollars per month towards your child's education, you will get that much credited back on your taxes. Plus, after 18 years, you will have contributed 144000 of principal towards the account, and you'll likely have much more money in it due to investment growth. The deductions vary by state, and you should determine which plan you approve of based on its performance and tax deduction benefits. A good place to start your research is here. http://www.savingforcollege.com/compare_529_plans/

Also, you can have multiple 529 plans. http://www.savingforcollege.com/intro_to_529s/can-I-have-529-plans-from-multiple-states.php Say you live in DC and want the $8000 tax deduction, but want to contribute more, or want to contribute to multiple funds that may have a better performance. That's ok under the law, just don't contribute more than $13000 per contributor, per year. http://www.irs.gov/newsroom/article/0,,id=213043,00.html

In short, with proper budgeting, you can save a lot of money for college, and have the money you save refunded on your state taxes. College is going to be expensive, and utilizing a 529 plan is probably the smartest thing you can do to ensure your child's future education.