Use the '2K rule' to save for your kid's college education
- Fidelity recommends you multiply your child's age by $2,000 to figure out how much you should save.
- A tax-advantaged 529 plan can boost your college savings.
- The average 529 plan investor has more than $32,600 in their account when their scholar reaches age 17.
Saving for your child's college education can seem like an impossible goal. Unlike with retirement savings, few clear guidelines exist.
College costs vary widely depending on where your child goes to school and whether they qualify for financial aid.
Fidelity Investments has tried to clarify college savings with a new rule of thumb: Multiple your child's age by $2,000 to stay on track to cover half the average cost of a four-year, public university.
Under this strategy, if you have a 5-year-old, you would need to have $10,000, or $2,000 times 5 years, to be "reasonably confident" that you can afford roughly half of the cost of four-year, in-state public university, said Keith Bernhardt, Fidelity's vice president of retirement and college products.
At age 18, the typical time kids head off to college, your $36,000 fund could reduce the cost of school by 50 percent with the rest coming from financial aid, student and family earnings, Bernhardt said. "Different people have different financial goals, but the 2K rule provides a starting point."
Fidelity financial advisors developed the straightforward technique after a company survey found that 69 percent of parents wished there were more specific guidelines on how much to save for college.
The 2K rule for college savings comes with a catch: It assumes you use a 529 plan.
A tax-advantaged, state-sponsored 529 plan can boost your college savings. Investment earnings in the plan are not subject to federal capital gains tax and generally not taxed by state governments when used for the qualified education expenses, such as tuition, fees, books, as well as room and board, of the designated beneficiary.
Many states offer tax breaks with their 529 plans. Thirty-three states and the District of Columbia give residents a state tax credit or deduction if they invest in their state's 529 plan. Five states — Arizona, Kansas, Missouri, Montana and Pennsylvania — offer a state income tax deduction to residents for any 529 plan contributions.
Beyond the tax benefits, investors should know about the two types of 529 college savings plans: those sold directly by the states and those sold through financial advisors. (To make matters more confusing, there are also 529 prepaid plans that allow account holders to buy tomorrow's tuition at today's prices at in-state public colleges and certain private schools.)
Direct-sold 529 plans generally have lower investment fees than advisor-sold ones. However, advisor-sold plans tend to offer more investment options.
"The No. 1 factor reaching your college savings goal is that you are contributing to an account consistently," Bernhardt said.
Most people with 529 plans come close to Fidelity's 2K rule.
The average 529 plan investor has more than $32,600 in their account when their child reaches age 17, according to data from Ascensus College Savings, which administers 34 college savings plan in 18 states and the District of Columbia.
"Many parents don't save for their kid's education because they think the goal is unachievable," said Peg , senior vice president at Ascensus College Savings. A strategy like the 2K rule simplifies college savings goals, she and can make them easier to reach.