We just paid the bill for the fall of our kid’s senior year of college, and we realized what a lifesaver the 529 college saving plans have been. When my kid was born, we started a 529 plan for him and so did his grandparents.
As a result, paying for his college education has been painless, despite the fact that we are full-pay. And we are not super rich- I am a public school employee on a union-negotiated payscale, and until this year, my spouse earned less than I do. And, no, we don’t come from rich families- the grandparents were three public school teachers and one salesman.
We did not realize that the 529s would do so well. We have not had to pay one additional penny towards his tuition/ room and board!!! Our savings account has GROWN during his college years. Never thought that would happen!!!
(And yes, we have been saving in retirement accounts, too. Also, encourage your kid to start a retirement account asap. My son started one during his freshman year of college using his summer income.)
Delightfully, we are able to say to him the same thing for professional grad school that we said when he entered undergrad: go to whatever school you want to go to that you can get into; if it offers you a big scholarship, wonderful— but if it doesn’t, don’t worry.
We never thought that would happen. We would have taken out home equity loans or whatever else was needed to be able to send him to his top small liberal arts college. And it would have been worth it- just the other day, he said that he thought he was getting the best college education possible. He has loved his classes and his four years of immersion in the life of the mind with amazing professors and peers.
The moral of the story? If you are a new parent reading this thread, start a 529. If you have a grown kid, advise them to start one for each of your grandkids, and do the same yourself.
There is a little window where income is so low that minimal to no taxes are owed. Roths fund post tax. If you didn’t make enough to pay tax, it goes in essentially tax free. It compounds tax free and withdraws tax free. Better yet, Roth contributions are not subjected to RMDs. Better still, they can be inherited tax free and still are not subject to RMDs. The only way you can replicate this once earnings rise is through a HSA.
I agree that starting early is huge. Great job. But let’s not pretend that every family can save enough in a 529 to accomplish what you have. Especially now. I recently had a discussion with one of my friend groups that have young kids and the number that families must now save per month to be full pay 18 years from now is not doable for most families; most 2 teacher families couldn’t do it. Very conservatively it’s over $1,700/month from birth. And sounds like you had grandparent help.
The benefit of a 529 is the tax-free withdrawals. And, in some states, the state tax-free nature of the deposits. The large growth would have mostly occurred in another account, given the same investment mix. As long as you’re confident you’ll have educational expenses, start early wher possible.
We started as soon as the tax benefits became permanent (kids were something like 2 and 5), stopped when we thought it would grow to enough by the time they were in college, and the market growth means we need to figure out what to do with what’s left (we’ll probably re-assign it to grandkids when they exist).
(Agree on the retirement accounts. If you’re fortunate to be in the situation, I suggest you do as we did and fund a Roth IRA equal to the kid’s summer earnings as soon as they have any. Tax-free generational wealth transfer. I made sure she signed up for the Roth version of the 401k at her new job. She’ll transition to traditional as her marginal tax rate (hopefully) rises.)
Every family has different priorities. Saving hard is just not a skill we teach and emphasize in this country. That said, an family that simply doesn’t make enough to do that will likely be able to get need-based aid reducing the amount needed to save.
Calculate your EFC now. Figure out the gap. Save like crazy to fill it. Certainly the student can have some skin in the game too if it would stress your financial situation too much. Beware of significant debt though, especially for degrees that don’t have high earnings potential.
I saved $150 a month each for both of my boys since birth. That savings is going to pay for 3 entire years of tuition plus room and board at our in-state flagship. That was invested in a fund that adjusted over time automatically. If I had put it in a strictly stock fund it would be paying for 4 years each. It doesn’t take a large monthly sum to save a lot for college. 18 years or more with compounding interest does wonders.
Absolutely agree with all you said. Thankfully I started a 529 at birth for both boys.
I got my son investing in a Roth with his earnings from his summer job before starting college. He’ll be so far ahead by starting super early. Compound interest is a great thing for saving.
Maybe, maybe not. Zero dollars invested in a 529 will pay for zero years of college.
When I started 18 years ago tuition, R&B was 2/3 what it is now. So if history repeats then $225 a month would go about as far as the $150 a month I invested then. It really doesn’t take a large monthly amount to save a good nest egg.
I don’t know if it is the state or a 529 company, but someone pays $50 to open the account to every new baby born in Denver (maybe in the state - my kids are too old for me to know the details).
The drawing for 12-17 year olds who get the covid shot puts $50k in a 529 account.
My kids had savings accounts we put gift money into, but I wish I’d put it in the 529 (and not touched it).
We did the same thing as the original poster. We started a 529 when my daughter was born and contributed to it every month. It grew significantly over time. Fidelity had a tool where you could put in the name of a school and the entry date. The tool would estimate the amount needed to meet the goal and break it down into monthly chunks etc. We picked an expensive school where she would be a legacy as a model and followed that plan. We had plenty by the time she graduated from high school. She was able to choose the college she wanted to attend without worrying about the cost. She even had enough left over to pay for grad school tuition. We also had the Fidelity credit card sweep feature mentioned below.
For people who are eligible for educational IRA account, I think educational IRA might be better or should be the 1st choice?! Besides tuition, room/board, we were able to use those accounts for monthly allowance for the kids, or summer housing. There might be less restrictions for educational IRA account. DH was able to grow the money pretty well (you can invest in stocks instead of relying on the selection of your 529 plan). Unfortunately, we only qualified for a few years.
We live in a state where there is state tax saving for 529 account, but the twice a year balancing and limited investment choices are not the most desirable.
I put aside $250 a month since my kids were young. But another easy way to build up a balance is my Fidelity Credit Card puts 2% o my monthly expenditures into one of the 529s I have.
So if you have a $3000 bill, that’s $60. It just goes in there - and over 12 or 15 years, that $60 grows and grows, etc.
The 529 has been a wonderful thing for us as well. In part it was the luck of the market and the fact that we invested the funds relatively aggressively (relative to the age-appropriate allocations that most 529s suggest) - the gain on my son’s account is larger than our initial contributions, the gains on my daughter’s account are a little smaller, just because hers was set up a few years later. In any event, the gains on what might seem like small investments up front can really add up over 18 years. Particularly as we are getting closer to retirement, it’s a relief to know that money has been set aside that will cover what they want to do without affecting what we want to do. The only thing I don’t like is the fact you can only change the mix of investments twice a year (at least with our funds in NY and Utah) - particularly in an unsettled market like what we have right now, that makes things more challenging.
While it’s true that if there was no growth and no compounding, $150/month wouldn’t amount to much (150 x 12 months x 18 years =32,400), the point being made here and the reality is that investing started 18 years in advance in 529s does grow and compound in tax-beneficial ways and in these users’ experiences, the growth has outpaced even the rising the costs of college to result in very abundant educational nest eggs. Great planning.
I wish we had started earlier. S22 was in 5th grade when we started. We could only do a little each month then, but we’ve been able to increase over the years and now can put in $200/month. We have about 1.5-2 years of instate tuition in it. Better than zero!
Totally agree. $250 to $500 per month…invested in diversified stocks with the Iowa plan…one D gas a merit scholarship so it is too much but we can use excess for second child…nomfamiky help at all.
I’ll figure something out…