@intparent : not sure what you mean about the states, but they use brokerage firms to manage all that money. E.g. Fidelity manages the New Hampshire 529. Their national version is called the UNIQUE plan. Likewise, Vanguard manages plans for some other states. We have both Fidelity and Vanguard plans. They have the least management expenses, I think.
@blossom has great advice about benefits etc.
The main advantage to using your own state’s 529 is that in many cases you get to deduct state taxes on what you contribute (up to some limit). In my high tax state (NY) this is a nice chunk of change.
Bigredmed,
- Are you talking about the prepaid tuition 529's as opposed to the ones that operate more like an IRA?
Yes.
- I have seen those discussed on a few websites, but I don't think my state (Georgia) offers that option.
Check again. That would shock me. I thought all states have the prepaid version of the 529 plans but if for some reason the Peach State doesn’t there are generic ones, I think, I don’t know much about those.
- 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.
Ed IRA = Coverdell = Same thing.
You can’t contribute if your income is above $110K single/$220K MFJ so that is an issue that, frankly, I was unaware of. But if you are below the income thresholds you put the money in with no tax break, the money is then withdrawn tax free for QEE’s later. I used them to fill in for whatever my 529’s didn’t cover. I hope you can benefit from them, I had actually forgotten how low the contribution limits are … $2K seems like a quant amount. They need to jack that up big time IMHO.
Regarding my comment that 529’s cover tuition at the public school rates, here is what I meant. If I purchase a 4-year tuition plan when my child is 4 years old, let’s say, and I pay $80 a month until the child turns 18 here is what happens. If the child attends a CC or 4-year public, the plan covers the cost no fuss no muss.
But, if the child attends a private school the plan will pay out at what it would have cost had the child gone to a public U. Who pays the difference between public and private tuition costs? You do. That is another reason to have the Ed IRA to fill in the blanks.
Most parents don’t know if their kids will attend public or private when the kids are 4 years old. So, you kind of have to guess at that part. So, repeating my advice, purchases 529’s for each child as early as possible and then fund a Ed IRA if you can. If not, set up a private you own you control it fund and put money away and even though it won’t be withdrawn tax free it will still be there when you need it.
Does that advice apply to 529s as well as just regular savings?
All states do NOT have prepaid 529 plans, There are 10 states with pre-paid plans that are accepting new accounts now:
Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington
Each one has its own rules, so you need to read up on any that may make sense for you. In some cases, the money can still be used for out of state schools, but you need to look at the nuances for each plan if you are interested in them.
Regarding the savings type of 529, they may be administered by states only. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company. So you may deal with a company like Vanguard as designated by the state, but the states call the shots and make the rules for the 529 (within the constraints of the tax code that defines 529 plans).
Many states with the savings plans provide a full or partial break on state income taxes, which is the benefit of looking into your own state’s plan if one exists.
This link might help as to which states offer prepaid 529’s and savings type 529 plans:
http://www.finaid.org/savings/state529plans.phtml
Oddly, I thought they were all prepaid type b/c that is what they are in my state. You know, this actually explains why I’ve never thought funding college was that much of a big deal whereas what I hear from other parents and read here suggests otherwise. I thought much of that was whining and complaining but now that I realize prepaid 529’s are not an option for everyone I see what they drama is all about.
Again, let me say, if your child(s) are going private there will be a gap even if you get a 529 early because 529’s are not going to cover private school costs. That is the way it works. You can PP, but you PP at what it would cost at a public U.
But if you have the option of the savings type of 529, you certainly can save enough for a private university education (if you have the income and are so inclined). The caps for donations are high enough.
Correct. Good point. One can always combine a prepaid 529 plan and a savings 529 plan as long as one stays below the annual contribution limits. That would be smart.
I’d also suggest selecting the plans that cover tuition, room and board not just tuition. The monthly costs are not bad if you purchase the plans early. You stop paying when the child reaches age 18.
Part of my plan came from paying daycare which is part of your question. I wish I had saved in an ESA but we are in a good position.
- Lived frugally, 5-10% to retirement savings, everything else went to eliminate wife's debt from grad school.
- When daycare hit, had to backup on extra payments to student loans but realized if we could pay that much for daycare for two kids, that we could cash flow a lot of college. Kept saving for retirement and with each raise increased contribution.
- Always lived in smaller house than most in our income bracket. When out of debt other than mortgage, maxed out ROTHs and 401.
- Now with no debt and twenty years savings for retirement, we can stop new contributions to retirementif necessary to cash flow college. If state school, won't have to stop all contributions.
- When youngest graduates college, will have another decade to renew savings for retirement.
Yes, I know stopping contributions to retirement isn’t the best plan but we have lived frugally and increased savings annually until we eventually were able to max out which has put us in a good position with our retirement savings. I think getting out of debt is a priority over college savings and all but basic retirement contributions.
@Bigredmed - Not sure if this site has been mentioned or if you have already checked it out, but http://www.savingforcollege.com/ is the best source of information on 529 plans and there’s a message board much like this one that will answer a lot of your questions.
We think 529 helped us a lot. We actually purchased our state’s prepaid tuition plan when our kid was in the elementary school. We purchased the public school plan but we were allowed to use it at an OOS private college in the end. (We ended up using up all of our 529 money in the first 2.5 years. We wish we could have bought a private college plan. But how would we know that when our kid is in the first grade?!)
BTW, Thanks for your help in the past N years. DS still has a long way to go. The next “milestone” will be this Friday.
I would not be thinking about college funds for the kids just yet. Make certain that you are paying enough into the 401k at work so that you get the company match. Pay down your own student loans. Live far enough below your income so that you can put money away into the emergency fund. You want to have 6 months of household expenses there, just in case something really bad happens and you are without steady income for a while. Slap some into a revolving “life happens” savings fund too. New tires? you will need them. Dental work, you might need that too. If you have a grand or two readily available you won’t be accidentally maxing out your credit cards whenever those kinds of predictable but unpredictable expenses turn up.
When you’ve got a solid emergency fund, a healthy life happens fund, and your student loans are showing evidence of dwindling away, that would be the time to shift the money you had been sending off to the emergency fund each month off to either a general investment ear-marked for college, or to a specific college fund.
We did not set up a 529. We have one kid, and if she had not gone the college route, we would have had to take a loss when we pulled the money out. We kept our money in vehicles that could be used for whatever we saw fit.
The point is that if you do not have anything left after you contributing to 401k, then 529s are out. I can see that MD’s family can contribute legal max to 401k and then save somewhere else. I am not saying that 529s are the worst or the best type of saving, one needs to compare. However, I would not only max on 401k, I also would pay off my mortgage as soon as possible before I save somewhere else. Everybody is different. Combo of equity loans + 401k worked perfectly for us and we are passed full retirement age. We used it for medical school tuition as well as buying a second home. If I was ever interested in 529s, I definitely would study them before I plunge good chink of my income there, to make sure that it is better and more flexible saving than any other type of savings. Ultimately, it is decision of every family. When my D. is done with her residency and ask me similar questions, I would advise her to do what we are done. But even now when she is just fresh out of medical school, we keep telling her two things, contribute to 401k and pay off your car loans and your mortgage when you have it as soon as possible. We cannot advise anything else, we do not know anything else, but we did well with this philosophy.
I reccomend opening a Fidelity 529 plan for your child and then applying for the Fidelity 529 credit card. I have the Fidelity 529 MasterCard and it puts 2% up to 1500 of what you spend directly into the 529. If you spend over 75K a year, then have your spouse open a separate one. We use our CC, which we always pay in full each month, to pay for everything we possibly can including thing like homeowners and auto insurance. At the beginning, I had to direct deposit $50 a month into the 529 to not be charged an annual service charge. When my kids are given a monetary gift, I pocket the money and electronically transfer the amount to their account from my checking account.
Sometimes paying off your mortgage isn’t the most financially prudent thing to do. Currently, with very low interest rates, I’d rather hang on to my now small, 2.5% mortgage and invest my money elsewhere.
We began saving for college when our son was born, but only after maxing out our retirement contributions every year. We just got used to living on whatever was left over after retirement, college fund, and mortgage payments had been made. Our state run 529 has served us well because of the tax advantages, and even though our son ended up getting enough scholarship/merit aid funding for college so that we won’t actually need all the money saved in the 529, that money can be removed without penalty up to the amount of full tuition each year, as long as you document how much tuition would have cost before the merit aid was applied. Or you can keep it invested in the 529 for either grad school or a subsequent child’s education. It’s a very efficient way of saving for educational expenses, and you can choose the level of risk you are comfortable with in the investment, just like a good retirement plan.
I’d get rid of your debt first.
Get Dave Ramsey’s “Total Money Makeover”–very sound financial advice on getting out of debt, budgeting, how much to save for an emergency fund and where to invest your money. It’s a plan with a priority list as to where to put your money first depending on your circumstances.
I wish we had it when we were first married. Dave Ramsey has a religious bent which turns some people off but it doesn’t change his good advice.
A couple of big picture things to think about.
One, for purposes of financial aid, colleges will take a larger percentage of savings held in a child’s name than in the adult’s name. I wish I had known that when we started out, because it might have made more sense to keep more of our college savings in our name rather than the kids.
Two, certain types of educational savings vehicles (Education IRAs for my kids, Coverdell for yours) can be used to pay qualifying high school tuition if you choose to send your kids to private high schools. Which was nice, because we were able to deplete some of those assets before the kids hit college and it was time for FAFSA to start squeezing blood from the stone.
Three, be careful of the income limits on 529s and IRAs. In our circumstance, we only were able to contribute to Education IRAs for the years while my wife was not working and staying home with the kids. We maxed those years out and would do that again, even at the expense of paying debt off first. Otherwise, I agree wholeheartedly with @blossom’s advice about paying your debt first, and then continuing to make those payments but simply switching them to your chosen savings vehicle.
Four it is tough to decide whether it will be better to pay down your mortgage now at the expense of savings because you don’t know where interests rates and your income will be when it is time for school. Quite honestly, we would have been better off paying off our mortgage and using a line of credit to pay for college because of where interest rates are now and because kid #1’s school does not count primary home equity in parental assets for financial aid purposes. But who knows where interests rates will be in 16/17 years and what financial aid polices your kid’s school will use?
Five, and this is the important one. You will not be able to save everything you think you need for college. Say that once a quarter for the next 15 years. Overall solid financial health is far more important than the amount of money sitting in junior’s college fund, because there is a good chance that you are going to fund some of the cost out of regular income. Best be ready for that by getting rid of as much debt as possible, making sure that the retirement accounts are in reasonable shape and that you like the car you are driving when you take the first one to college.
“We did not set up a 529. We have one kid, and if she had not gone the college route, we would have had to take a loss when we pulled the money out”
- I did not see this before. This alone would have stopped me from opening the 529. As I said, we did not have any money left for any other savings than 401k and we never could contribute max to 401k either as we are not high earners. We did not even have a regular savings, we did not see any reasons for it. But why when you pull the money from your own saving, like 529, why you have to take a loss? This is not good!