529 Plan

[swanysto]

Is a 529 plan the best route to go for investing for my child's future?

 

[RPD]

That's a rather open ended question, but it's a good way to invest money that can only be spent towards education and even if your child doesn't use it, it can be used by others.

 

[EOM]

If it helps you save towards the future by having an automatic $50 or $100/month contribution, then yes. It's tax free in the end, too.

I have one for each of my kids @150/mo. With the way college price are going up these days, it might not even pay for a semester, but we'll see!

 

[Jeeebus]

It depends on too many factors, not the least of which is your tax bracket and whether your state has income tax. For me, I don't like the restrictions on use (e.g. if my kids get scholarships) and the penalties paid if not used for education expenses. That, plus I get no break on state taxes (as we have none). I'd rather grow their education funds in a taxable account with far more freedom.

 

[swanysto]

If it helps you save towards the future by having an automatic $50 or $100/month contribution, then yes. It's tax free in the end, too.

I have one for each of my kids @150/mo. With the way college price are going up these days, it might not even pay for a semester, but we'll see!

Good point. It is really scary how much school is these days.

 

[swanysto]

It depends on too many factors, not the least of which is your tax bracket and whether your state has income tax. For me, I don't like the restrictions on use (e.g. if my kids get scholarships) and the penalties paid if not used for education expenses. That, plus I get no break on state taxes (as we have none). I'd rather grow their education funds in a taxable account with far more freedom.

Very good points. And it would be my luck that he doesn't go to college :/

 

[JTsyo]

One thing to consider is that you're not locked into the 529 plan for your state. If you see better returns or benefits with other plans you can sign up with them. I'm in NJ and the only extra benefit of it is that if my kids go to college in NJ then I don't have to pay the state tax.

 

[Scarpozzi]

Depending on your age and income, you can do a 1 to 1 savings using a Roth-IRA and use the earnings toward your retirement. Considering the maximum contribution is around $500/month, you could take out what you put in tax free from a Roth. This article explains it:

http://www.savingforcollege.com/articles/which-is-best-529-college-savings-plan-or-roth-ira-710

The 529 isn't a bad plan though and you could definitely do both to spread money around in a few different accounts.

 

[dullard]

529 plans are good but not perfect. I have one for my niece and will likely open more for other nieces and nephews as they come along.

But, like Jeeebus said, there are restrictions. In general, you are stuck with high fees or limited investment selections. Tax free earnings (and possibly tax-free principal depending on your state) are the main benefit. It just depends if the benefits outweigh the negatives for you.

To help with the restrictions, do realize that you are not limited to your state's 529 plan. That way, you can shop around for lower fees or better investments. You could live in state X, open a 529 in state Y, and your son can go to college in state Z and it will all be fine (check with your state if you can claim state income tax deductions though since I didn't look into all states). You are still stuck with one main restriction though: with college less than 18 years away, you may choose investments that go down in that period. 18 years is a relatively short time frame, so go stock heavy at first and quickly wind down to something less volatile as he nears his mid teens.

 

[vi edit]

To help with the restrictions, do realize that you are not limited to your state's 529 plan. That way, you can shop around for lower fees or better investments. You could live in state X, open a 529 in state Y, and your son can go to college in state Z and it will all be fine (check with your state if you can claim state income tax deductions though since I didn't look into all states). You are still stuck with one main restriction though: with college less than 18 years away, you may choose investments that go down in that period. 18 years is a relatively short time frame, so go stock heavy at first and quickly wind down to something less volatile as he nears his mid teens.

Yeah I didn't like the options IL had at the time so I opened a "College Iowa" account that is brokered through vanguard. I just grabbed a few index funds through them and have built up close to $20000 in savings in about 7 years there. I don't get any tax savings since I'm not an Iowa resident any more. But it was still a better deal that IL was offering.

 

[edro]

When I ran the calculation for expected funds required in 18 years for 4 years of college, it said I need to be saving $500/mo.
Sorry kid, you're going to require some scholarships and your own loans.

 

[s0me0nesmind1]

It depends on too many factors, not the least of which is your tax bracket and whether your state has income tax. For me, I don't like the restrictions on use (e.g. if my kids get scholarships) and the penalties paid if not used for education expenses. That, plus I get no break on state taxes (as we have none). I'd rather grow their education funds in a taxable account with far more freedom.

I would rather use my ROTH IRA (or at least, ensure that I max out my ROTH) - My funds will grow over time tax free, and I can take out any contributions at any time for free. That is my plan for helping out with college for my kids.

 

[vi edit]

When I ran the calculation for expected funds required in 18 years for 4 years of college, it said I need to be saving $500/mo.
Sorry kid, you're going to require some scholarships and your own loans.

I firmly believe that college costs are going to have to level out sometime soon. They have outpaced inflation, income, and so many other economic markers that it's unsustainable. Simply, we can't continue having kids exit college with $100,000 in loans competing for $50,000 a year (if that) jobs.

Costs are going to have to level out, and kids are going to have to start looking at more cost effective options. For example, I live in a city with a state university. It's $11,000 a year for in-state tuition. I live 6 miles from campus. You want to save money? You're going to UK kid. $44,000 for 4 years right now. Room and board courtesy of mom & dad. I'll cover half, they cover half. I'm a firm believer in having skin in the game. Adds some accountability on their end.

Compare that to a one year cost of a froofy liberal arts college that's almost $44,000 for one year. It's going to have to flatten soon.

 

[BarkingGhostar]

Good point. It is really scary how much school is these days.

You have to wonder if it is in part because the institutions know they can depend on parents and private lending to handle the absurd costs.

Personally, I didn't get a dime from my parents and beyond the freebie grants I worked my ass off for my education. This was a good thing since the field dropped dead after the Clinton administration came into play and I only had a small loan to pay off compared to what others are borrowing/spending.

 

[s0me0nesmind1]

I firmly believe that college costs are going to have to level out sometime soon. They have outpaced inflation, income, and so many other economic markers that it's unsustainable. Simply, we can't continue having kids exit college with $100,000 in loans competing for $50,000 a year (if that) jobs.

Costs are going to have to level out, and kids are going to have to start looking at more cost effective options. For example, I live in a city with a state university. It's $11,000 a year for in-state tuition. I live 6 miles from campus. You want to save money? You're going to UK kid. $44,000 for 4 years right now. Room and board courtesy of mom & dad. I'll cover half, they cover half. I'm a firm believer in having skin in the game. Adds some accountability on their end.

Compare that to a one year cost of a froofy liberal arts college that's almost $44,000 for one year. It's going to have to flatten soon.

As long as people can freely take loans with little or no reprocussions - or credit checks - or limits as to what they can do - it will continue. I don't see any changes coming for at least 10-20 years when a bubble will likely pop.

 

[vi edit]

You have to wonder if it is in part because the institutions know they can depend on parents and private lending to handle the absurd costs.

It's absolutely because of that. No different than cheap interest rates and shading loaning practices inflating the cost of housing into oblivion. When there's no site to the bottom of the money bag the price just goes up and up and up.

 

[dullard]

It's absolutely because of that. No different than cheap interest rates and shading loaning practices inflating the cost of housing into oblivion. When there's no site to the bottom of the money bag the price just goes up and up and up.

Since we are this far off topic anyways, it might be interesting to discuss where those costs are going. There aren't any more professors and the professors don't make any more money (actually now many are associate professors or lecturers earning in the $20k/year range). There aren't that many more people at the top either (a university has only one president).

What we have instead is a massive unprecidented boom in administration and workers at universities that have nothing to do with education or research. I worked at a university in a small department. Shortly before I left, they replaced our one secretary with 4 secretaries and two interns without any extra workload for them. Repeat that same story throughout all departments, then you need to add middle managers to handle those extra people, then every higher up needs a half dozen high paid assistants (especially coaches), etc. Add in graphic artists, grant writing consultants, machinists, paper shufflers for all these added employees, etc all that have nothing to do with actual teaching.

That is why they need all this extra money. But you are correct that parents and governments are prefectly willing to pay it.

 

[edro]

I was just reading about the comparison of 529 and Roth IRAs.

Correct me if I'm wrong, but I think I read that you can early withdraw your Roth IRA WITHOUT penalty even for non-qualified contributions, as long as you don't remove the profits. Is this correct?

For me in Ohio, I see this comparison:

Roth has more investment choices
Roth is Tax free withdrawal for education AND other things (house, medical)
Roth is Post Income Tax, so you can't deduct contributions
Can withdraw Roth contributions (not profit) for ANY REASON? (is this true?)

529 has less options
529 can deduct up to $2000/year (Ohio) - so tax free in and tax free out
Can only be used on education

 

[vi edit]

Yeah but if you go Roth, then that's *YOUR* retirement you are chewing through. At least with a 529 plan, if you don't use it, you just end up paying long term capital gains on it as you would any investment.

 

[rcpratt]

I'm not convinced that anything will happen with tuition rates until the government intervenes. There are a lot of wealthy people that can boost this system for a long time. I think this is one of the biggest threats to further income separation and continued disappearance of the middle class.

 

[edro]

Yeah but if you go Roth, then that's *YOUR* retirement you are chewing through. At least with a 529 plan, if you don't use it, you just end up paying long term capital gains on it as you would any investment.

What do you mean by YOUR?
Can't I have multiple Roth accounts?
Oh wait... maybe you mean my Roth contributions are capped, so I cannot put as much towards my retirement AND college for kids. Right?

That makes sense.

I'm nowhere near the limit ($5500) on Roth contributions (I am mainly 401k) but I understand your reasoning.

 

[s0me0nesmind1]

Yeah but if you go Roth, then that's *YOUR* retirement you are chewing through. At least with a 529 plan, if you don't use it, you just end up paying long term capital gains on it as you would any investment.

Unless you are maxing out BOTH your 401k and ROTH IRA, it is ABSOLUTELY STUPID to toss money into a 529. Absolutely stupid.

Now if you start to find some excessive money leftover every year after maxing out your IRA and 401k, then MAYBE start the POSSIBILITY of contributing to a 529.

Until then, it's stupid to even consider. Most users here aren't maxing out their retirement.

 

[dullard]

Unless you are maxing out BOTH your 401k and ROTH IRA, it is ABSOLUTELY STUPID to toss money into a 529. Absolutely stupid.

Now if you start to find some excessive money leftover every year after maxing out your IRA and 401k, then MAYBE start the POSSIBILITY of contributing to a 529.

Until then, it's stupid to even consider. Most users here aren't maxing out their retirement.

I wouldn't go that far. And if you were to go that far, I would say you are absolutely stupid to fund an IRA / Roth IRA before an HSA. Assuming you use them properly (no early withdrawls or misuse):

HSA: neither contributions nor gains are ever taxed

401k: contributions are not initially taxed, but contributions and gains are taxed eventually

IRA: contributions MAY not be initially taxed, but contributions (if applicable) and gains are taxed eventually

Roth IRA: contributions are taxed immediately, but gains are tax free

529: contributions are fully or partially taxed depending on state, but gains are tax free

 

[s0me0nesmind1]

I wouldn't go that far. And if you were to go that far, I would say you are absolutely stupid to fund an IRA / Roth IRA before an HSA. Assuming you use them properly (no early withdrawls or misuse):

HSA: neither contributions nor gains are ever taxed

401k: contributions are not initially taxed, but contributions and gains are taxed eventually

IRA: contributions MAY not be initially taxed, but contributions (if applicable) and gains are taxed eventually

Roth IRA: contributions are taxed immediately, but gains are tax free

529: contributions are fully or partially taxed depending on state, but gains are tax free

I totally understand your point, but an HSA has... uhhh...a certain... REQUIREMENT... that is a bit large compared to others.

It means you have to have shitty insurance at all times if you want to contribute. Anyone that is employed is likely in the same boat. Don't get me wrong, I would totally have an HSA if my insurance wasn't so good.

My point still remains, you're an idiot if you fund a 529 but don't max out your 401k/IRA.

 

[swanysto]

wow, lots of great info. Thanks guys.