5 steps to college saving before baby arrives

http://www.savingforcollege.com/articles/20100528-5-steps-to-college-savings-before-baby-arrives

Long before your new baby enters the world, you start making preparations. From buying a crib to picking out clothes, there are plenty of things you can do to make sure you're ready.

Setting up a plan for college savings is another way you can get on the right track before your baby is born. Follow these five steps and you'll be in a great position to take advantage of all the benefits that a 529 plan has to offer.

Set aside the cash

Although you can't set up a 529 college savings account before your baby has a Social Security number, you can set aside some cash to start the program as soon as possible. Most plans can be started with an initial $25 to $50 contribution. You could also start a 529 plan for yourself or a cousin of the child then switch the beneficiary. Ken Nussbaum, a CPA and personal financial specialist with K. Nussbaum & Associates in Richmond, Vt., says that both options have costs and benefits.

"You may miss out on the immediate (state income) tax benefits and a little bit of growth (if you set up the account after the baby is born), but then you also don't have the extra administrative headache of changing the beneficiary," he says.

Develop a funding strategy

You can't know what your child will want to do for his or her education before he or she is born, but you can certainly use an online calculator to get a sense of what college might cost by the time he or she is 18. You can also come up with a preliminary plan about how much you'd like to contribute to the 529 plan and how far that will take you based on typical investment returns.

Linda Pietroburgo, a principal at the Moneta Group in Clayton, Mo., cautions against getting too worked up over the costs. "The numbers can produce a lot of anxiety," she says. "People need to take each step as it comes. Early on, you need to realize that saving a small amount and making it one of your priorities is really the most important thing."

Compare your choices and select a plan

Years ago, most 529 plans had just a few investment options. Today, the choices can be dizzying. Now is the best time to do research on your options since you're more likely to have the time and energy to do so than when you've got a newborn in the house. It's generally best to start with your own state's 529 plan. Visit the website to find out the details of the available plan as well as any state income tax breaks you might receive as a result. Also, decide if you want an age-based plan that adjusts automatically over time or a static plan that you can control yourself. If you're not happy, check out the 529 plans offered through other states.

Talk to relatives

Grandparents and other relatives are often eager to put money aside for a grandchild when he or she is born. "Grandparents might immediately think of doing something like a $1,000 savings bond," says Pietroburgo. "But this is the time you can say, 'Would you mind putting some money into a 529 plan rather than doing a savings bond?'" she says.

"Savings bonds are great but they can get lost, and a 529 really is one of the best savings vehicles for education," Pietroburgo says.

If other family members have expressed interest in doing something for the child, politely encourage them to consider a 529 plan. Sites like FreshmanFund.com allow you to set up an account to which friends and family can easily contribute.

Start smart habits

The best way to get on the right track is to begin now. You can have a small amount of money pulled from your paycheck before you even see it for college savings. And commit to increasing that amount every year or every time you get a raise, says Nussbaum.

"As you get more income, it makes it a lot easier to ratchet up that amount," he says. "Psychologically, it's much easier to go from $200 a month to $400 a month than to go from $0 to $200 a month." If you start today, you'll be well prepared by the time your child gets a college acceptance letter.

Posted May 28, 2010