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
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.
How much is $100 a month in a 529 for 18 years? ›
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.
What is the NY 529 direct plan? ›
New York's 529 College Savings Program Direct Plan provides New York families with a tax-advantaged way to save for college, and allows City employees to save for college through easy payroll deductions. You may contribute as little as $15 or as much as you want for each investment option for an account per pay period.
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.
What's a disadvantage of 529 plans? ›
If you use distributions from your 529 account to cover anything other than education costs, you will face a penalty. You will be able to withdraw your money from the account but will be responsible for income taxes on the earnings – federal, state, and county if applicable – as well as a 10% penalty fee.
Is a direct 529 plan better than a broker? ›
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. See our list of 529 plans with the lowest fees.
What happens to 529 money if a child does not go to college? ›
So, if your child opts out of college, you can name a younger sibling or even a niece or nephew or potentially another relative. And you can even name you or your spouse as the beneficiary if you're interested in furthering your education.
Why not to use a 529 plan? ›
You would lose out on federal financial aid. Since a 529 plan could reduce the federal aid your child would qualify for, they may miss out on receiving federal Direct Loans or Direct PLUS Loans or grants, like the Pell Grant or Federal Supplemental Educational Opportunity Grant.
Is NYS 529 plan good? ›
529s have the following advantages: Your earnings are tax-deferred. No federal taxes on qualified withdrawals* New York state taxpayers may qualify for more state-tax benefits**
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.
Some 529 alternatives include using a custodial account, Roth IRA or Coverdell Education Savings Account.
Is it risky to have a 529 plan? ›
All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
What are the two main types of 529 plans? ›
There are two types of 529 plans: education savings plans and prepaid tuition plans. Most education savings plans are available to everyone, but a few have residency requirements for the saver and/or beneficiary. Prepaid tuition plans typically have residency requirements.
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.
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.
