Hi CC parents,
Long time poster here, but I generally stick to the Pre-med Forums here on CC. For the first time in a long time, I’m the one looking for advice
Short version of my story. I’m an MD, just out of fellowship, and after 6 years of training I’ve managed to pack every major adult milestone into the last year - engagement, wedding, first real job, new city, bought a house, baby on the way. I’m in a pediatric subspecialty field, so the paychecks are nice, but not what people typically think of when they think “doctor’s salary”. For those who care, my group is part of a larger practice management system, so I fit more of an employee model, with a graduated bonus structure until I reach a full partner share of the bonus. I cannot however just work more to bring in more revenue (I’m in hospital based field so my patient numbers are simply dependent on who is in the hospital needing my skillset).
I’m well aware of the usual financial planning advice and subscribe to the “Index Card” school of financial planning. I’ve been using a robo-investor site to management my rolled over IRA to minimize my fees. My wife and I have talked a lot, and I think we’re pretty open about our finances with each other, we’ve laid out plans to handle our credit card debt first, then move on to our respective student loans. I’m putting the max into my 401(k), my wife is now upping her contributions. I’m saving a little bit extra at the moment, but having only been on the job for a month and are only starting to get a handle on what our monthly cash flow in and out looks like. Our mortgage is <30% of my take home pay (just me alone, not our total take home pay) and we’re on the same page when it comes to living within our means.
Beyond starting a 529 plan, what else should I know? Is there a 529 plan that is universally accepted as better than the rest? What do you wish you would have known when your kids were still in the womb? How did you manage paying for daycare/private schools/etc, with saving for college?
Thanks in advance.
“Beyond starting a 529 plan, what else should I know?” - our family does not believe in 529 plans. We believe in only one way of savings - 401k. We used withdrawals from 401K, however, if you are too young for the withdrawals, you can borrow. Also, it is great to have your mortgage paid. The combo of equity loans (by far cheaper than student loans and tax deductible) and the usage of 401k (withdrawals or borrowing) was the way we paid for our D. medical school. Couple things to keep in mind about our specifics while your specifics might be different. We did not pay tuition for D’s UG, she attended on full tuition Merit. So, the good chunk of your financing is your kid’s hard work. When the kid receives the very first homework (my D. was 5 y o and already involved in sport heavily), tell them that it is a priority #1, nothing else is more important. My 5 y o thought that her sport was the most important, I actually asked her. At 5 they are so impressionable, they will listen better than at 10. It worked for us. We are not high earners at all, not any close to the MD salaries. We did not have other dependents. Frankly, we would have not done anything differently, not at all.
I strongly believe that you are on a right track by " putting the max into 401(k)"
The single biggest asset you have is your ability to work and generate a paycheck. (and your wife’s ability as well).
So first things first. Make sure you have adequate life insurance; make sure you understand your employer’s disability program and what it covers and what it does not.
I hold different views from Miami’s. Our 401K’s were intended to be used as retirement vehicles. We’ve always contributed the legal max and have not touched the proceeds. We had kids young however- and would not have risked borrowing or liquidating the funds for college. We know too many people who faced retirement with a raided IRA or 401K and that’s not pretty.
You can’t start a savings plan for an unborn child however- since you’ll need a social security number to get going.
I work in corporate HR and the biggest mistake people make is not fully understanding their benefits. Employees leave a lot of money on the table every year by not actually sitting down to read the benefit book. Don’t be someone who pays an extra 1200 a year for vision insurance when the maximum you’ve ever paid is $85 for an eye exam and $200 for glasses (yet people do it all the time). Don’t be someone who pays an extra $750 for dental insurance when you’ve never paid more than $300 a year for two cleanings.
We are using 401k for retirement also. We just bought our second home in a better climate. We did not earn enough to have saving besides 401k, that is why I mentioned, that we are not high earners. I also do not understand the flexibility of 529s. How these money could be used if they are not used for college? Do they earn interest? Do you pay tax on this interest? I do not trust anything about it as I lack any knowledge about it.
Well, there’s your problem right there.
Hi,
I recommend starting 529’s for each child as soon as they are born. That is step one. Step 2, is set up an education IRA as sort of a back up to the things the 529’s don’t cover. 529’s can cover just tuition or you can add in the room and board and fees. Still, even if you cover everything with the 529’s it is nice to have an education IRA for anything that the 529’s don’t cover such as books. In my view, that should cover and prepay most of your future costs. It is great that you are being so proactive about it now. You will find yourself a little confused about all the knashing of teeth you hear later from others if you plan ahead because you will not have those problems at all.
One caveat, if college costs are $50K a year, no matter how you plan, because most 529’s pay out of the PUBLIC rates of tuition, you may not be able to cover everything in advance. In other words, at $50K a year or more, what are we at $66K a year now for the big-shot schools, no matter how smart you think you are you could get humbled later at those rates.
I don’t understand the comment of “most 529s pay out of the public rates of tuition”. We put in enough (which along with appreciation) could easily cover those pricy schools. We even stopped contributing a few years before college started because it was clear we’d have enough. We also had a modest amount in UGTM accounts, which we used “last” in the paying for college timeline, and which were gifts to our children with whatever was left over.
Miami- you can google 529’s and taxes and learn everything you need to know in about 20 minutes. how can you not “believe” in something you know nothing about?
529’s can be a great deal for some families- do your homework. Our 401K money is for retirement- that’s the what the program is set up for- the fact that you can “raid” the funds for other purposes doesn’t make them the right vehicle for college financing if you haven’t first explored the other options.
I know people who use their 401K money for all sorts of things- doesn’t mean it’s a good idea. I have my own 401K set up in investments which are much more aggressive than I would have wanted for my kids college funds- particularly once they turned 13 or 14. Barring bad health, I know when I need to move from aggressive to less aggressive investments for my retirement… I would not have wanted to lose a decade of high growth in my 401k by keeping it liquid enough to finance a college education. That’s why using retirement money for retirement and educational savings for education makes sense- you adopt the appropriate risk/liquidity/tax strategy when you know what the money is for.
And it sounds like you are already thinking straight, but one thing we did was to take pretty much every bonus, every unexpected tax refund, etc. and just stick it in the 529. While of course maxing out 401k’s and paying off cc’s each month and all that good stuff. We also are believers in the power of index funds and dollar cost averaging and set-it-and-forget-it.
It seemed like a daunting amount to save back at the beginning, and at the beginning it seemed like “token” amounts, but over time it grew.
But with reference to MiamiDAP, you will want to think up front whether you are saving for 4xprivate, 4xpublic, or whether you are going to focus on big merit. That will inform your choices significantly.
I don’t think you need to decide whether your unborn child is going to get merit aid or not. This is a little crazy.
Learning to put even small amounts away every month is a discipline that will pay off your entire life.
After I paid off my grad student loans, I continued to make my “payments”- but this time to my kids college accounts (I had two by the time I’d retired my educational debt). I never saw that money anyway so figured plowing it into savings would be painless.
I don’t understand the comment about public rates of tuition either.
Our 528’s have worked well for us. We haven’t been able to save the full cost of private schools but we’ve saved a fair amount and got state tax breaks along the way.
One of the posters on here is not terribly knowledgeable - taking money from a 401K (with the attendant penalties) is a horrible idea, to be done only in the case of a true emergency. I would suggest not listening to that one, and paying more attention to the posters who are more thoughtful. In particular, I’d pay major attention to blossom, who is spot-on (as she almost always is on CC).
Our financial advisor suggested we max our retirement contributions…which we did.
We did not have college savings for our kids, but we were a two earner household…and one parent incime went totally to pay for college during those big money years (except that Parent was still able to contribute to retirement).
I’m not advocating my plan…but it worked for our family.
Here is what I would have done in hindsight:
- Every single bonus check my husband received would have gone into college savings.
- A portion of every annual raise would have gone into college savings.
If we had done that…we wouldn’t have had to use one whole salary to pay for college. But it did work!
As simple as it sounds, the best way to save is to live below your income and pay yourself first. I mention the obvious because very few people do that.
Don’t be consumers. A lot of people wind up buying a lot of trappings for their babies/children - clothing, gadgets. So much isn’t needed. Get the grandparents to give monetary gifts that can be used for college savings rather than the 20th baby outfit that isn’t really needed. The $100 stroller works just as well as the $500 version.
Thank you all for the replies…
@MiamiDAP - we won’t be old enough for this baby to pull out of the 401k without penalty. Perhaps future little ones, but not sure that’s the right option for us.
@GoNoles85 - are you talking about the prepaid tuition 529’s as opposed to the ones that operate more like an IRA? I have seen those discussed on a few websites, but I don’t think my state (Georgia) offers that option. And is there a specific product that’s an educational IRA ? Or are you just using an IRA as a tax sheltered investment account with the expectation of using it for children’s education? When I googled “educational IRA” I got information about the Coverdell IRA, but my income will price me out of that product.
@blossom - I really like the idea of continuing to make payments on my student loans. I function very much in the same matter of out of sight, out of mind and that would be a painless way in which to transition over previously earmarked money. On a side note, clearly my kid is going to be brilliant, so I think merit aid is the way to go 
Does anyone have any opinions on which open enrollment 529 plans have the best combination of performance and low fees?
Any thoughts on managing the cost of private school during K-12?
We had a pre-tax account through one of our employers for day care & medical expenses. The money is withheld, you pay the expenses out of pocket, then get a reimbursement check from what was withheld. We socked all those reimbursement checks into our kids’ 529s. Gave us a great leg up on saving for them.
The withdrawals from our state’s 529 are tax free federally and at our state level as well. Your own state is the place to start. I think a prepaid state tuition plan is not the same as a 529. 529s have high contribution limits and you can use them at most US colleges. Don’t put the your college savings in your kid’s names, by the way.
We did private school as well – and essentially were able to continue to pay that yearly amount per year as they went on to college.
In general, I’d recommend going with Vanguard or Fidelity for your 529s and other investment accounts. But, it looks like GA has its own plan but I don’t know anything about it: https://ost.georgia.gov/georgias-529-college-savings
@Bigredmed I assume you are aware of the HOPE scholarship? https://gsfc.georgia.gov/hope
Aren’t most 529s run by states? Just looked on Wikipedia, and only states can administer the savings type of 529. But they may have an investment company do the record keeping, etc.
oh, and one other thing we did was overpay our mortgage so that the house would be paid off just before the oldest went to college. Turned out to be unnecessary for us, as we had enough savings, but it was a great “backup” plan, and that extra $$ per month was certainly appreciated (and went immediately into investment; once you are comfortable at a certain lifestyle, seems silly to spend more)