Saving for College: 529s
I've had it on my to-do list since Henry was born to start a tax-free 529 savings plan to begin squirreling away money for his college tuition (and to allow the magic of compounding interest to help us out). We're opting for a 529 rather than pre-paying in-state tuition because we have no idea where Henry will end up (we really don't even know if he'll go to college).
But here we are, seven months later, and we haven't done it yet. I really don't know how to compare all the plans (every state has a different one, and you can invest in any state's plan). Matt's dad is recommending that we invest in the Indiana plan, since they could receive a tax break for investing in Henry's plan. There's also a plan available through Matt's work. I'm tempted just to go with Vanguard, since we already have retirement savings there.
Here are some of the things I've learned to ask about during the research process:
Although I like budgeting and mortgages and stuff, I don't really like doing research about this kind of stuff. I just want someone (not a salesperson) to say, "I've done all the research; here's the plan you should invest in." Anyone in that boat?
Also, I really hope that we can convince family members to donate to his college fund instead of getting him crazy amounts of presents for his first Christmas and birthday. I imagine the kid will just be happy with boxes and paper!
But here we are, seven months later, and we haven't done it yet. I really don't know how to compare all the plans (every state has a different one, and you can invest in any state's plan). Matt's dad is recommending that we invest in the Indiana plan, since they could receive a tax break for investing in Henry's plan. There's also a plan available through Matt's work. I'm tempted just to go with Vanguard, since we already have retirement savings there.
Here are some of the things I've learned to ask about during the research process:
- What is the expense ratio?
- What is the minimum initial investment?
- What is the total contribution limit?
- Are there any enrollment, transfer, or commission fees?
- Are there any account maintenance fees?
Although I like budgeting and mortgages and stuff, I don't really like doing research about this kind of stuff. I just want someone (not a salesperson) to say, "I've done all the research; here's the plan you should invest in." Anyone in that boat?
Also, I really hope that we can convince family members to donate to his college fund instead of getting him crazy amounts of presents for his first Christmas and birthday. I imagine the kid will just be happy with boxes and paper!
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17 comments:
Does your bank have a free financial advisor whom you can talk to? That's what we did, and we go to him with all our IRAs, other retirement accounts, stocks, mutual funds, etc. We got the VA plan for Selwyn, and I don't believe we've picked one for Everett yet. Thank you for reminding me! I don't think you will really screw up the choice of state, so perhaps a tad more research or advice, then just pick one, and go with it. You'll feel better having just DONE it.
And as for gifts, remember that your practical family/friends might be perfectly happy contributing to a college fund, but lots of people take great joy in giving children gifts and seeing them open them (even if they just play with the paper!). Maybe people could wrap a contribution in a fun box for Henry to open! :)
It kind of hard for me to understand your specific question.... From my point of view, the most important is to SAVE THE MONEY. (the name of the bank account is no matter to me).
I mean I have several different saving accounts, some are for buying a first house. But in the end, I can use any money from any account to buy anything.
All the different financial options are always so overwhelming! I haven't really researched this topic yet but I also like the idea of encouraging family to donate to a college savings plan instead of buying lots of stuff for Christmas/birthdays.
I am very anti 529's for a few reasons. 1) the maintenance fees on the plans and the return is not awesome. It costs like 3 or 4% annually when you're only receiving a projected return of 5% - terrible investment. Keep the money in your mattress and you'll probably be better off. 2) I'm against saving for my child(ren) colleges. I'm pro saving for my own retirement. My kid(s) can take out a loan for their education, I cannot finance my retirement. If we have the means when they are in college, we might help (i.e. pay off loans after college) but I refuse to give them a golden ticket. 3) 529s are only for college. What if my baby really wants to do a trade - and is good at it and would be really smart about pursuing and executing it? There goes all the money we set aside. Bad investment.
Yes, there are tax incentives but unless you are maxing out your 401K/403bs, IRAs, and you have your 6-12 months savings, than a 529 *might* make sense. They also vary by state - and there's some issues with transferring out of state.
My advice if you REALLY want a college fund (as a person with an MBA in finance) would be invest on your own! Take the $100/mo. you want to invest in a 529 and put it in individual stocks. You'll get a much better ROI and the account maintenance fees will not suck up your returns. Read up about investing (investing in 3rds is a great long-term stock investing solution). You can also set Henry up with his own IRA - zecco is a great site for easy investing. Do you know how much money he would have when he turned 50 if you saved $1000/yr for him????
We told friends and family our thoughts and made suggestions like take our child(ren) on a trip or do something to spend time with them now. They won't notice the $50 you gave them when they are 12 but they will remember the day you took them to the zoo or to Quebec, etc.
I'm not anti-college (my husband has a phd and teaches at an ivy league college, I have an MBA and used to do outside sales management but now stay home with my baby). I want my baby to work as hard as we did and not have expectations from us for college.
I can't really offer any advice, seeing as I'm Canadian, but I hear you on the "please donate to an education fund in lieu of too many clothes and toys". If you have any advice on how to deal with extravagant gift-givers, I would love to hear it! My in-laws are a little excessive when it comes to gifts, and I'm a little worried about what's going to happen once baby arrives in late Dec/early January.
Before I was following wedding blogs, (which is how I found your Feeding the Soil site, via $2000 Wedding!), I followed personal finance blogs obsessively. My favorite one by far is My Dollar Plan, and she talks about 529 plans on there quite a bit. Just my two cents!
Hi, Melissa! Thanks for that advice. Here's the link for anyone else who's interested:
http://www.mydollarplan.com/our-529-plans-accounts-and-rationale/
Hi, Annalisa! The fees we're looking at are more like 0.25%. To your point about retirement and college: I'm pro-saving for both of them. I think college tuition rates are ridiculous, and I don't think young adults should start their lives off with debt for their education. I had to work in high school and college to contribute to my college education, but my grandparents also paid a chunk of it, so that I could graduate without debt. I'd like to be able to do the same for Henry, and I hope he will do the same for his children (if he has them).
Now, cars are a whole different story, in my opinion. I think children should have to pay for their own cars and gas. We'll cover his insurance until he graduates from college.
If Henry doesn't go to college, we can still get the 529 money back. We'll just have to pay the taxes we didn't pay on it all along.
Have you thought about the Coverdell Education Savings Account created by Congress? You can save up to $2000 a year and invest it in pretty much anything you want (no restrictions like state plans). It's only eligible for people who make less than $220k (which I'm sure you qualify : )
We are planning to start out with the Coverdell and supplementing with a 529 plan when we have kids. There are a lot of websites that compare plans for you, I'd take a look at a few of them and see what they say...
Fantastic suggestions above -- I like the idea of tax-deferred. I work for a financial adviser who uses thousands of different products to fit our clients needs. We have used John Hancock in the past, and we also recommend Scholar's Choice -- it has various levels of where they invest your money, depending on your kids' age. Not selling anything, just putting some companies out there for you to peruse.
Cheers,
~Dwen -- a reader for a while.
I've been a blog lurker for some time, but never actually commented, however, I couldn't resist with this topic. I definitely think contributing to some of Henry's college is a great idea, but I did want to share some of my own experience.
My parents gave me a few thousand dollars a year for school, which did not even come close to covering the tuition, books, and room and board. When I found the college I wanted, my parents pointed out that they would not be financing all of it and starting my life in debt was not a good idea. I spent my entire senior year of high school working my butt off applying for all sorts of scholarships. In the end, I compiled enough scholarships to pay for my 4 years.
More importantly, I think I loved my school and myself even more for having accomplished such a feat. Had I not gotten those scholarships, I ultimately would've had to go to an in-state school, so my parents knew there was a backup they could afford. While I don't have kids of my own yet, I know I'll be taking the same approach with them - give a little, but they'll have to raise the rest.
Check whether your contributions to your state plan will be deductible from your state taxes. Some states, like NY where I live, all for the deduction as long as you use the state's plan. Others, like Pennsylvania, will allow you to deduct contributions even if you choose another state's plan. I really think 529s are great. Most offer a range of investment options, many of which are likely to outperform the 5% that an earlier commenter quoted. And we have low expense ratios in our options here in NY. That said, if grandparents are most likely to contribute a lot if the plan is in Indiana, perhaps that makes the decision for you!
One thing to note - Matt's parents might not get the tax deduction unless they are the account owners for the account in Indiana. I don't think there's any reason they couldn't set up an account in Indiana that they contribute to and receive deductions for, and then you could set up one wherever that you contribute to. A child can have more than one of these in his or her name, I believe. But I know that in NY only the account owner receives a tax deduction on contributions. Hope this helps!
If you don't plan on staying in Texas, wait. In Texas, one of the only states with no income tax, it isn't that great of a deal.
You could set up a 529 for others to contribute to. I am in Texas, and I have a Fidelity California socially responsible fund. Sounds like Indiana could be a good solution for you, assuming the fees won't eat you alive. I went with California because it had the lowest fees at the time, but there are tons of choices now. You can always roll the money to another state's plan if you move or just keep both.
That said, I think your career and your retirement are more important right now. I would handle those first.
Sara, Henry is the cutest, most adorable little guy! I love your photos of him! He looks so engaged!
So, I will share the advice I received from our financial counselors at work for free! 529s are really set up for people who have trouble saving. The tax deduction/benefit is really minimal in the end, though it sounds enticing. The counselors I met with (and we are all non-prof so we are not talking big salaries here, though the counselors come from high end places prior) all suggested simply opening a vanguard or t rowe price (a company with no-load funds and no/low fees) account for my baby. They all 3 felt that 529s generally offer not so great funds with not so great returns and not so much choice. Then there are all the restrictions. What if Henry doesn't go to college? What if he goes to private college? What if he gets a scholarship? After speaking to them, I realize that really what I want is to set aside money for college for my baby, that is a smart investment. I'm not going with a 529, but with a Vanguard account. I don't want to be too negative on 529s, but they are more of a "gimmick" --albeit a well intentioned one--for folks who would otherwise not set anything aside for their child. I don't think you guys are necessarily the target audience and I think a lot of people just do it because it is called a college fund etc. If you look at it from purely a financial point of view, however, the best is a solid balanced fund (which you can choose from Vanguard just by using their self-assessment questionnaires or speaking with someone) with strong solid returns and as little restrictions as possible. I am planning for college for my baby, but I also want to know that G-d forbid there is a tragedy, this money will be available to me/us as well without penalty and that all the money I save over all these years is mine to do what I want with without restriction. Especially if you anticipate grandparents to contribute--the restrictions and fine print is a pain to muddle through and you may not get the little tax credit 529s provide in the end. I would go with Vanguard (or other) and keep it a simple return, like you would do for yourself. If you think about it, 529s are really no different than that, aside from the minimal tax benefit...good luck.
Just to add something: Why pay any fees? If there is another option without fees, like I said above, then why bother with fees? The tax benefit barely outweighs the fees in some cases. I just feel when I set my money aside, the last thing I want/need to do is lose some of it to fees. I also don't get credit cards with annual fees no matter how "good" the benefits either. Just a thought.
@ Anonymous (9:21 AM): Thanks for your insight. I'll definitely talk with Vanguard to see what they recommend.
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