5 Mistakes That Cost Small College Savings Accounts Big Money

US News

Utah parents Kristen and Luke Henderson have a 2-year-old daughter, Gretchen, who just moved to a different level of preschool. They've been saving for her education since before she was born but have just now started to be able to afford automatic contributions. Before that, they'd contribute sporadically and had family members help contribute.

Luckily, small amounts saved for college on a regular basis can, over time, add up to big amounts in the tax-advantaged college investment accounts known as 529 plans, experts say. Think about this: $25 per month saved for 10 years adds up to $3,000 before any earnings. All interest or investment earnings aren't subject to federal taxes.

But unfortunately, less money invested means a higher risk of losing more through common errors, such as not being aware of fees that can outweigh investment earnings.

Parents who avoid these mistakes could have their money go further toward paying for their children's college education.

1. Paying flat fees: Fees to manage 529 plan accounts are charged as either a flat fee or as a percentage, says Peter Dunn, an Indiana-based personal finance expert and radio host. For an account with a $25 flat fee, it would take a $1,000 investment earning 2.5 percent over the course of a year to break even. Otherwise, the money might be better off in a savings account outside of a 529 plan that doesn't charge fees.

However, there are 529 plans that charge administrative and investment fees based on a percentage of the account balance. These are better choices for families investing smaller amounts, Dunn says.

Administrative fees are charged just for having an account. Investment fees are based on what a family is invested in. For instance, a savings account within a 529 plan may not have an investment fee, but mutual funds would.

[Learn how parents are billed for 529 plans.]

2. Not comparing investment and administrative fees: The Savingforcollege.com 529 Fee study, released earlier this year, allows families to compare plans based on the fees charged on a $10,000 investment over a 10-year period. The study includes both investment and administrative fees.

Whether families contribute this much, the site provides a good way to compare plans, says Dan Thomas, a California-based certified public accountant and personal financial specialist.

Within Alabama's 529 plan alone, the study shows a range of expenses -- from around $500 for the lowest-cost option to around $1,200 for the most expensive option. The fees paid generally depend on the investment options picked. Thomas typically recommends families choose the lowest-cost option.

[Find out how much 529 plan ratings should matter to your choice.]

3. Never adjusting savings amounts: Parents may set an automatic withdrawal of an amount they can afford to put away now on a monthly basis and never change it, but that can be a mistake, Dunn says.

Parents of a newborn may only be able to put away $25 or $50 per month. However, as children get older there are three stages that are great opportunities to shift money spent into college savings: when babies stop using formula, when they get out of diapers and when they no longer need day care, Dunn says.

When the cost of Gretchen's preschool declined this year, the Hendersons started putting more in her college investment account.

[Understand how an age-based 529 plan works.]

4. Giving up on college savings if the account value drops: Don't let bumps in the road curtail college savings planning and stop saving all together, says Thomas. A bump in the road can be investments that drop in value or an economically difficult time for the family, when they might temporarily be unable to contribute. Every penny adds up to additional college savings.

"Everyone faces times when making the regular contribution to the plan is difficult," Thomas says. "When this does happen, commit to restarting regular contributions ASAP or figure out a way to make an additional sacrifice to keep up your regular contribution or make a catch-up contribution."

5. Being shy about asking friends and family to contribute: Parents should let friends and family know about their children's 529 plans, Thomas says. They're often surprised by who contributes, he says.

He also recommends families start a Upromise account. The online program offers families rebates on purchases made online, credit card purchases on a Upromise card and money spent on eating out that can be deposited into a college savings account. The Hendersons' savings thus far has largely come from family contributions.

There are quite a few mistakes that families can make when opening a 529 plan. However, the biggest mistake is not opening one, Thomas says.

The Hendersons just want to know they have a nest egg set aside for their daughter's education no matter what happens to them, Kristen Henderson says. They believe every dollar they contribute will help their daughter go to college.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.



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