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Simple tips for making educated choices about college savings

The kids are on their winter breaks now. But it will be 2015 soon and their schoolwork will resume. Which means your children or grandchildren will be another year closer to heading off to college. If you are planning to help them avoid graduating with a mountain of student loan debt, you may want to consider investing in a 529 plan.

Your 529 plan may be an effective way to save, because earnings will accumulate tax free, provided they are used for qualified higher education expenses. Furthermore, your contributions may be deductible from your state taxes.

A 529 plan offers other benefits, too. For one thing, the lifetime contribution limits for 529 plans are quite generous. While these limits vary by state, many plans allow contributions well in excess of $200,000. Plus, a 529 plan is flexible: should your child, grandchild or other beneficiary decide against college, you can transfer the unused funds to someone else within the same family tax and penalty free.

When you contribute to a 529 savings plan (as opposed to a “prepaid” plan), you will get several mutual fund-type investment options. Because you will own variable investments, you can expect your account balance to fluctuate over time. This may not concern you as much when your future scholars are young — but as they get closer to college age, you may want to move some of your 529 plan dollars toward more conservative investments.

In fact, some 529 plans offer multiple “age-based” portfolios that automatically shift from aggressive to conservative as the college years approach. Although all these age-based portfolios follow the same basic formula, they can vary widely among each other, usually based on how much risk you have indicated you can tolerate. The more aggressive you are, the greater the risk — and the greater the potential reward.

Given these age- and risk-based variables, you will need to think carefully when you make changes to your 529 plan. And since you can only adjust your 529 plan’s investment mix once a year, you will likely want to be sure you are making the right moves.

The gift of a 529 plan can be a great way to help your children or grandchildren cope with those big college bills. So educate yourself on the choices available to you.

For more information regarding college savings plans, please visit Participation in a 529 Plan does not guarantee the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses. State programs vary and therefore you should carefully review individual program documents before investing or sending money. Federal income tax on the earnings and a 10 percent penalty on distributions for non-qualified expenses may apply. RBC Wealth Management is not a tax advisor. All decisions regarding the tax implications of your individual investments should be made in connection with your independent tax advisor.  

Important disclosure information about Royal Bank of Canada (RBC) and RBC Capital Markets, LLC (opens new window)

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