<p>Saw this today and thought I was enlightening.</p>
<p>The</a> great college savings fiasco - MSN Money - New Investor Center</p>
<p>One option not discussed is the Independent 529 which is like a prepaid tuition plan....guaranteed tuition contracts....good for those close to college age (if your stdent has a good idea of where they are likely to attend)....not tied to any state, so open to all...</p>
<p>No, I am not a broker...just a lucky parent who got involved in this last year (and transferred a large amount of my D's 529 into it...prepaid two years of tuition....)</p>
<p>There wasn't anything in that article that was news to me - we went through this in 2000, which was when my in-laws opened 529's for my kids, and they went straight down with the market then. It took a while (few years) to regain their initial value, and the two oldest kids' are in conservative investments now, so they didn't lose too much this time. </p>
<p>I wonder about the comment by a college planner that a family can't qualify for financial aid because of their 529; if they had saved in a regular account it would have had the same effect on their financial aid eligibility. For families with young children, it could be a great time to get into a 529.</p>
<p>^ But if they had saved in retirement accounts it wouldn't count in the FA calculation. The article makes a good point: save for your retirement first, especially if you're a family of modest means. Some folks scrimp and save to accumulate college savings, foregoing prudent investments in retirement plans. But that $50K or $100K in non-retirement savings will be taxed pretty heavily to pay for Junior's tuition bill; they won't be more lenient just because your retirement is underfunded.</p>
<p>Funding retirement first before saving for college makes sense for a lot of reasons, not the least of which is the time horizon over which savings can be compounded: much longer for retirement savings than college savings.</p>
<p>Once retirement savings are sufficient (and what "sufficient" might be varies wildly depending on how you calculate this), saving for college is the logical next step for parents. I disagree that 529s are a "fisaco". They're much better than the alternative UGMA/UTMA vehicles that many people have used in the past, and certainly better than the default of not saving at all. </p>
<p>Having $50-$100K in a 529 is not taxed heavily at all when compared to having the funds in a UGMA. Compare the parents' asset protection allowance of $40-$60K and the expected contribution percentage of 5.6% versus the student's zero asset protection allowance and expected contribution of 20%, it's clear that these assets are very lightly taxed, at least by FAFSA.</p>
<p>I'm more of a believer in UGMA or joint accounts. Being taxed on income and gains is minor, especially with W's tax reduction of 2001 and 2003 and being able to deduct losses. Contrasting to 529, where there are no taxes on gains, there is also no benefit if there is a loss. </p>
<p>One also looses flexibility in a 529.</p>
<p>^ "Taxed" is being used here in a metaphorical sense, as in "taxed" by the college in calculating financial aid. The difference is that money in a 529 owned by the parents is considered a parental asset, not the child's asset, whereas an UGMA or a joint account with the child is considered the child's asset. Colleges assume that (nearly) 100% of the child's assets are available for college, and calculate FA accordingly. But they don't think it's reasonable to assume that 100% of the parents' assets are available for college---more like 20%, on average. So if you have $100K in a 529, they'll assume you have $20K available for your kid's education. If you have $100K in an UGMA, they'll assume you have $100K available for your kid's education. If you're going to be full-ay in either case because of your income level and/or others assets, then yes, and UGMA may make sense. Few of us are that privileged, and that $80K difference in expected family contribution (EFC)---i.e., $80K in financial aid that you get with the 529 but don't get with an UGMA---makes a huge difference. That's a pretty stiff "tax," a lot heavier than anything Uncle Sam will ever do.</p>
<p>Wonder why the media continues to miss the Independent 529 Plan, which unlike 529 savings plans (or UGMAs) would not have suffered from the financial market meltdown, and (also unlike 529 savaings plans or UGMAs) is guaranteed to match the rate of growth in college tuitions.</p>
<p>In the end, it looks like these financial reporters still only talk to commissions-seeking financial advisers -- those who push other products. There's no money pushing the Independent 529 Plan because you get that directly from the plan.</p>
<p>exactly my point^^</p>
<h1>Your are correct. But the BIG IF, is the college deems the kid worthy enough for the $80K in financial aid in the form of grants, scholarships, or merit awards. By the time the parents realize that their kid probably does not qualify, the situation may be too late to change.</h1>
<p>For most of us, 529s are a recent invention and very few have had the money to invest these 10-9 years.And if you did invest 10 years ago, (1999) the parent would probably discover that a taxable savings account/CD would have a better bet.</p>
<p>529s certainly have their drawbacks in some financial situations, but for us (we figured we'd be full-pay parents and the tax differences vs. other options was not that great), an age-adjusted portfolio, one that automatically shifts investments to more conservative vehicles as the child approaches college, worked out great. D is now a first-year, so when the markets went south, most of the money was in bonds and money market funds. Age-based portfolios are worth considering, and nearly all 529 plans offer them.</p>
<p>^^Aged based is really the only way to go. I also bought a ton of US savings bonds which seemed even then to be kind of old school compared to those elusive go-go returns of the stock market, but now the bonds look like a smart investment...</p>
<p>Rodney: that's why I posted :)</p>
<p>And the benefit of a prepayment plan like the Indedenpent 529 Plan is that all this worry about investment decision and portfolio allocation is unnecessary. The plan's payout matches the tuition you want to match. The plan's sponsor, which are the participating colleges I assume, bear the risk of having the investment returns match tuition growth rates, not us -- and that's a good thing, because neither my 529 savings plan nor my UGMA (after last year) have been able to match tuition growth rates, even though I started years ago!</p>
<p>4th: now, if I could only figure out if D2 will be attending one of those schools on the plan.....she's a soph in HS and we are just not there yet, but I'm actually thinking about moving some of the other $$ in there and taking the risk; I think they will guarantee a small % rate even if you go to a non-participating school (last year that was 2% which actually outperformed many, many other investments.!)
Do you know if they are still offering a guaranteed rate?</p>
<p>Rodney: I think the 2% refers to the maximum loss, i.e. they guarantee you will not get less than 98% of your investment (nor more than 102%), but what you get between those ranges depends on their investment results. And yes, that beat most standard savings plans and UGMAs last year.</p>
<p>Best of luck with your child!</p>
<p>We invested in a state run 529 which is in an age based portfolio. It has weathered the financial market downturn and is actually making money so you really have to know what you are doing and watch what is going on with the fund. We opted for the state fund because it is managed in a way that is more beneficial for the account owners as opposed to a private brokerage firm. When we first opened the account, the managers of the account were the group that handled the states teacher's retirement fund. We have been very pleased with the growth of the fund.</p>