When you think about planning for college expenses, what’s the first thing that comes to mind? For many parents, it’s the 529 plan. But a recent spike in the popularity and accessibility of automated investing has made it a viable option for long-term investing goals. Can automated investing supplement the 529—or replace it altogether? Let’s take a closer look.
Saving with the 529 plan
The 529 plan is a tax-advantaged investment vehicle that’s generally regarded as the most popular way to save for college. Two types of accounts fall under the 529 plan:
- A savings account that’s invested in mutual funds, exchange-traded funds (ETFs), and other similar investments.
- A prepaid tuition plan that secures the price of tuition for eligible public and private colleges.
The 529’s primary draw is tax-free growth. Plan participants don’t pay federal or, in most cases, state tax on earnings when the funds are used for qualifying education costs. And account holders can switch beneficiaries without penalty in the event a child decides to forgo college.
Things to consider about the 529
If you’re on a fixed budget or prefer more control over your investments, you might consider the following:
- Cash to start: Depending on the state, some 529 plans may require an initial deposit ranging from $500 to $1,000.
- Fees and penalties: Funds used for nonqualifying expenses are taxed as income and subject to a 10% penalty.
- Minimal flexibility: A 529 account has limited investment options, which may frustrate more knowledgeable investors.
- Limited coverage: The prepaid tuition option only covers tuition and doesn’t account for other college-related expenses (room and board, food, books, etc.).
Planning for college with automated investing
Automated investing with a service like Truist Invest—offered by Truist Advisory Services, Inc.—may help grow money long-term to meet a variety of financial goals. Increased wealth. Big purchases. Retirement. And yes, college savings. How you spend any earnings is completely up to you.
Like the 529, an account driven by automated investing can simplify a big goal like saving for your child’s college education. Even better, you’ll have financial advisors on your side to help you create and manage a portfolio based on your financial goals, risk level, and investing time horizon. The advisors can connect a bank account to set recurring contributions that suit your budget.
The advanced technology, personalized for your needs and preferences, analyzes your portfolio daily and adjusts where necessary to help ensure your goals stay on track. Plus, Truist Invest accounts offer flexibility and control over your investments. At any time, you can work with an advisor to update your goal, risk level, contribution amount, and timeline to impact your earnings.
Things to consider about automated investing
Assets such as indexes, stocks, and ETFs aren’t subject to the same tax codes as a 529 plan.1 While there are no penalties for withdrawal from a brokerage account, the earnings are taxable as income. Also, the amount held in brokerage accounts is part of your expected family contribution (EFC), which could reduce a student’s college aid eligibility.
Is it too late to start saving?
Ideally, you want to establish a college fund as early as possible and front-load your contributions so you can take advantage of longer time horizons and compound interest. Some 529 plans change asset allocations when a beneficiary reaches a certain age, becoming more conservative to protect the investment.
For many parents, saving a lot up front isn’t possible with the cost of child care, housing, monthly expenses, and retirement contributions. In fact, many parents don’t have abundant room in their budgets until their children age out of child care. Automated investing with input from financial professionals can help parents invest aggressively on a timeline that better suits their finances.
There’s no right or wrong way to save for a child’s future. What works in the beginning may require adjustments along the course of the investment, and that’s OK. The most important thing is to prioritize education savings—and understand that the best strategy is one that complements your overall financial plan.