I have a CD maturing and I have to decide what to do with it. I have a D who will be a college freshman next year, most likely at a local state college, and another D who is now a high school freshman who will need access in less than four years. I would want to share the money equally between them no matter where we decide to put it until we use it.
I’m wondering if a 529 would be worth it for either of them at this stage. We are low income so any tax break will have very little impact.
I looked at boggleheads for topics like this and it just gives me a headache. It makes me think I should just let it roll over to get a ladder going.
Also, don’t know what state you are in, but, California’s 529 plan has an offer through September 30, where they will credit accounts (each owner/beneficiary pair is qualified separately for this offer) $100 if you open a new account and put in $1,000. So, for your two D’s you could end up plus $200 just for opening (presuming cash on hand supports that amount, of course.) [I’d been considering have DH open one for DS, just for the instant return, as I have the main one.]
In a high state tax state such as NY and your income is high, it might be beneficial because it is state tax deductible.
Otherwise it’s too close for your D’s to be worthwhile.
“In the majority of states, the full amount or a portion of a taxpayer’s 529 plan contribution is deductible in computing state income tax. … Seven states currently have a state income tax, but do not offer a deduction for contributions: California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina.Apr 11, 2019”
@artloversplus Unfortunately, we are in NJ so we wouldn’t get a deduction despite it being a high tax state. But I can’t really complain because our income is low enough that our tax burden is isn’t a burden. Lol.
Thanks for all the comments. It’s looking like it’s not worth it.
It’s not a huge amount of money. But I want to make the most of it. I’m just risk averse because if we invested it in a way that we could lose it, we couldn’t make it up with our income right now.
Although we did contribute for both kids to a 529 over the year, we also contributed to individual stocks and mutual funds out side a 529. All have done incredible. Where to invest short term? I don’t know. But, I will tell you our investments out of the 529 have performed better than the 529, even when you take into account the taxes. Unfortunately you need to do your taxes and take a risk.
Without the state tax deduction a 529 doesn’t make much sense in your situation. I’d stick with the CDs or a money market fund. Getting into stock or bond funds would add risk that you’ve already stated you don’t want
There are few self directed 529 plans, search the web for them. Here is an example.
“A 529 plan offers a hands-off approach to saving. These plans are only offered through a state-approved financial institution. … Self-directed Coverdell Education Savings Accounts can be invested in real estate, precious metals, private notes, and more.May 12, 2016”
At this point not sure a 529 makes sense since your daughters are in high school and college, and as others have said you’re not getting any tax breaks out of it. A CD is probably still the best bet. good luck!
The first key benefits of 529 is of course the tax-free income accrual (and disbursement) - which only matters if taxes ARE an issue.
But in cases where taxes DO matter, than the tax-free income means you get a higher ROI without having to seek out higher-risk, taxed investments.
The other benefit is state specific, as some states offer additional “local” features.
Finally, the 529 doesn’t have income ceilings - so it’s one of the few ways that high-earners can participate in a tax-free investment plan.
On the downside, 529s are among the most restrictive. If “life happens”, and it’s the last/only child and the saved amount is never fully spent on qualified higher education, then penalties await. If there’s any doubt at all, then a Roth IRA can be a great alternative, because it can be used EITHER for the kids’ higher education (e.g., graduate school), or remain with the parents for THEIR retirement if kids land a job after the first 4 years.
Given that you need the funds to be available in only a few years, you have very little room to recover from any potential down-markets.
If you won’t be saving taxes and there are no state-specific perks for your 529, then you might as well just stick with fix income investments that will come due when you’ll need the cash.
This will be worth it if you can put the money into a 529 that will give you a state tax deduction. Otherwise there will be no benefit for a relatively low income person who won’t keep the money there very long.
Since you are spending it relatively soon, my advice would be to put it in a secure fund there and not a stock fund because… the economy is looking shaky and your kids are going to school soon.
You can invest in low risk funds even if you need the money next year. In my state, you get nice tax breaks for the money you invest in 529. That’s free money.
If you can make Roth IRA contributions, the principal amounts would be accessible. You might get a tax benefit if you can use it with the savings credit, but most importantly, the funds would be shielded from FAFSA reporting. Qualified retirement funds are not entered in the FAFSA
@cptofthehouse Thanks for those ideas. For the last two years we have been making IRA contributions on a traditional because the second school on D20’s list uses AGI to calculate finaid and doesn’t consider assets for lower income levels. She could get a 75 percent reduction in tuition that way which would be an amazing opportunity. D20 isn’t a shoo-in at her first school and is an unmotivated student so it would be hard for her to do better than what the second choice school would offer, a debt free college education.
I found an 11 month no-penalty-for-early-withdrawal CD. And also credit union with good CD rates for 2 and 3 year CDs. That combo might be a good option.
I live in NJ but went into the NY 529 Plan (I like that they used Vanguard to manage the funds). Our initial deposit from 2015 has grown 26% using a moderate age-based investing option. Expense ratio 0.13% which is also low.
The stock market has out performed so I think this return is not going to always be there. But still, this is almost a full year of college paid for for my son.