I Just Opened A College Savings Account For My Daughter, And This Is Everything I Learned In The Process

If I'm honest, I didn't get everything I wanted.

I'm a big believer that graduating from college without any (or very little) debt is one of the best gifts you can give someone.

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If you're saddled with student loans and credit card debt right out of the gate, it completely changes the way you enter the job market — you're desperate for a job (often any job) so you won't fall behind on monthly payments. 

And even several years down the road, it can be harder to leave a job or change careers because the risk is so much more daunting when you have monthly payments to make. 

So after my daughter was born, I started thinking about what I could do now to help her out in 17-plus years.

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I seriously doubt I'll be able to shell out a fat tuition check when the time comes (and really, how much is college going to cost in 18 years??), so I knew I needed to start saving early and trust that my investment would grow with time.

PS: According to data from the Education Data Initiative, a four-year undergraduate degree (including books, supplies, and living expenses) costs $35,551 per year on average, or $142,204 in total. And that's for today.

I had three things on my savings wish list: 1) the ability to auto-contribute each month, 2) a good interest rate, and 3) the flexibility to do what I wanted with the money.

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I wanted the withdrawal to be automatic and therefore less painful and easier to stick to. A good interest rate would bolster my contributions and make me more money, and flexibility would ensure that if my daughter decided not to attend college, I could still support her financially.

In the end, I opened a 529 college savings account, which met two of my three requirements. Here's why a 529 is great, why it's not so great, and what I've learned from the process:

1.) ✅ 

2.) ✅ 

3.) 🚫 

1. A 529 plan is basically a tax-free investment account that's designed to cover education costs.

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You put money in, it fluctuates with the market, and when you have something "educational" to pay for, you withdraw the money tax-free.

2. Every state has its own 529 plan or plans, and most of the time, you don't have to live in the state to access them. For example, if you live in Iowa, you can still apply for a 529 plan in New York.

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According to the Securities and Exchange Commission, all 50 states have at least one type of 529 plan. Forbes Advisor recently rated the 529 plans that people in any state can access. 

3. That said, you may get extra perks by being a state resident. That's how it is in Colorado, where I live.

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I opened my 529 with CollegeInvest, a Colorado-specific plan. You don't have to live in Colorado to open an account with CollegeInvest, but if you are a Colorado resident, you can get a hefty tax deduction. 

For the 2022 tax year, that tax deduction is $20,000 for single filers and $30,000 for joint filers.

4. The money I save with CollegeInvest can be used at colleges and universities all over the world.

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For me, this was a big one. Who am I to say that my daughter has to attend college in Colorado? Luckily, the money you put in a CollegeInvest 529 plan can be used for qualified higher education expenses at public and private colleges, universities, trade schools, vocational schools, grad programs, postgrad programs, and community colleges all over the world.

Basically, the school just has to participate in a student aid program administered by the US Department of Education — check out this "approved school list." 

5. But it can't be used for K–12 tuition expenses.

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The Tax Cuts and Jobs Act of 2017 made it so that 529 plans could also be used for K–12 tuition expenses — but let each state determine whether to expand the 529 qualified use. 

Colorado chose to keep things as is — so the money I save can only be used for qualified higher education expenses (not a fancy elementary or high school). For me, this wasn't a big deal, but for parents considering private school, it could be. 

6. Friends and family can also contribute to your 529 (or they can start their own for your kid).

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I haven't used this yet, but CollegeInvest has a link that directs friends and family to contribute money to your 529. So instead of giving a ton of plastic junk for your kid's first birthday, people can contribute $20 toward their education. Pretty cool. 

7. There are a lot of investment options within each 529 plan. I went for an age-based option so I wouldn't have to manually make changes down the road.

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The idea with an age-based investment plan is that when your kid is young, the account is more aggressive and tends to favor stocks. As your child gets older, the investments get more conservative and incorporate bonds and cash so you won't get totally screwed if the stock market tanks.

8. It's worth noting that there are fees associated with a 529 college savings plan.

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According to CollegeInvest's website, "Maintenance fees for our plans range from 0-4% annually, but the vast majority of accounts average less than 1% each year." 

The administrative fees for the plan I signed up for — a "Direct Portfolio" plan — are currently 0.29%.

9. Here's the kicker: If I need to withdraw the money for something that's not education-related, I'll have to pay taxes on the account's earnings and face an additional penalty.

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If I get into a tough spot and need the money, I'll be penalized. According to the CollegeInvest website, if you make a "nonqualified withdrawal," the earnings portion of your account is subject to both federal and state income taxes and a 10% penalty. Plus, and most notably, "any state tax deductions for contributions may be subject to recapture in subsequent years," according to the CollegeInvest FAQ page.

That latter bit is a killer. As you may remember from #3, I'm getting a $30,000 tax deduction for tax year 2022. 😬

10. And if my daughter decided not to attend college (or gets a hefty scholarship), I'd want to change the beneficiary to someone else — someone who would be attending an educational program or school.

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You can change the 529 plan beneficiary at any time. So if my daughter decided not to attend any sort of school, I could change the beneficiary to myself, my husband, or someone else in my circle. 

According to CollegeInvest, the 529 beneficiary "can be your son or daughter, a grandchild, stepchild, a favorite niece or nephew, or even yourself! The technical list is very broad."

11. Long story short, the biggest benefit of a 529 plan is the lack of taxes and the state tax deductions — but you have to truly believe that your kid (or someone else in your circle) will be interested in some sort of postsecondary education.

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You can save a lot of money, but you can't change your mind and withdraw the money to buy a car in a a few years. You should feel confident that someone in your circle will be attending a "qualified" school at some point.

12. It's also worth noting that you should take some time to poke around on the 529 plan's website. There are programs to help first-time savers and low- to middle-income families.

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I actually got a free $100 when I opened my CollegeInvest account, but totally blew it because by signing up for that program, I wasn't able to apply for another program that would've put $500 in my pocket. My advice is to read everything carefully (easier said than done, I know).  

13. And as a little disclaimer, investment returns are not guaranteed, and you could lose money, including the money you put in.

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Yep, as with any other investment account, nothing is guaranteed. 

Have any tips to offer a college savings first-timer like me?