Blossom,
Funny that you mentioned "and long weekends in Costa Rica. " - we are flying there soon for 2.5 weeks vacation.
Sorry to interrupt the flow of discussion. But I feel that the bigredmed got our opinions of various saving philosophies and got to choose his own.
My first year resident D. is getting her first big purchase this weekend - a car. We told her to replace it earlier, but she did not listen. Based on this, I actually have another financial advice. Do not hold to your very old vehicles despite of your personal attachment to them. Replace them as soon as they reach certain mileage, it will save you a bundle over your life. My D. spent more on her car than the car’s current market value. She said, she learned her lesson.
I agree with @Pizzagirl on choosing good public schools. We made a trade off where I have a pretty long commute in order to be in very good (but not the absolute best) public schools. Commuting costs plus my time spent commuting are still far less than private school tuition but you might not be able to commute long distances if you have to take call at the hospital. We were able to redirect private school tuition to college savings almost immediately after moving. It adds up fast.
Thanks everyone. I appreciate the input. As far as being a new parent, after years of pediatrics training and telling other people how to raise their kids, we’ll see how good my advice was!
Thanks, @sax, I’m glad I’ve provided information that others find useful.
What’s clear to me, is that I’m making adequate decisions, but let’s recap.
[list]
[]Clearly the 401k is non-negotiable. We can afford to max out, I don’t get an employee match this year, but will get graduated matches the follow years (it’s an annual decision each year if there is any match at all, but the odds are good they will match). Not paying into that is unwise and misses out on compounding returns. Regardless of any arguments in favor of using that money in the future (which are few), bottom line is I won’t be old enough with this child, or #2, or even #3 (if we get that far) where pulling $ out of the 401k is even a possibility - maybe if #3 went on to medical school (and threw a gap year or 2 in before going).
[]Paying credit card debt off is the next most important thing - that’s no surprise. I expect that we’ll have that taken care of by the end of 2016.
[]With medical student loan debt equivalent to most people’s mortgage (and with a higher interest rate), I need to pay that down as quickly as I can. However, given it’s a multiple year proposition, I don’t think (for all the same benefits of investing in a 401k - compounding returns, etc) that I can put off 529 savings for the minimum 4 years it would take to pay off my student loans entirely, not when I can afford to do both at the moment.
[] Somewhere in here, I need an emergency fund…
[] 529 plans need to be monitored for risk, even the age targeted ones, so making sure I’m in the right plan that matches my risk tolerance matters. Costs and fees also vary widely…but with the potential state income tax benefits, I need to really hash things out.
[] Prepaid tuition plans probably aren’t right for me because (a) my home state doesn’t offer one, and (b) I don’t know where we will actually be living by the time this comes to fruition.
[li] As much as I would like to build equity in my home, my mortgage is (a) for a house that we’re assuredly going to outgrow and (b) it’s got the lowest interest rate. It’s really my lowest priority at the moment. [/li]
I’m now going to freak out about the cost of private schools…maybe I can figure out who to bribe to access the charter school near my home…
As for more questions. Can anyone explain the UGMA and UTMA benefits? I’m not sure I see advantages that apply to me. I guess if I were closer to the border of my tax bracket, it might make sense (maybe?)…
No need freaking out about private school tuition. That’s down the road a ways, by then you should have paid off student loans and have a good amount in 529 and 401k. And it might not be a necessary expense.
Are you familiar with the white coat investor site? It is a site dedicated to financial issues for physicians. You might want to check it out.
Good recap but I still say that a 529 or ESA should be after you have retired med school debt. The interest you pay on loans is guaranteed. The interest, capital gains, dividends in a 529 or either not guaranteed or if so, less than interest on loans. I know you are thinking compounding and time value of money but that works both ways. If you you throw all extra money at credit card and then student loan debt, you will be amazed at how fast you can pile up cash when you don’t have those payments.
I don’t recommend UGTM actually (we had them only because this was before 529s were “invented”). The kiddie tax comes into play (more so today than 20 years ago; kids pay kiddie tax into their 20s now). I don’t think there’s an advantage to them at all these days.
The private school vs. public school benefit is very situational. In my case it worked to our advantage to use private schools. The public schools near our jobs are very bad. Most people at our companies live 45 mins to an hour away in order to have good schools. However, they pay much more for their houses and much higher property taxes and the commuting time impacts family time. They typically end up selling and moving closer to work once their kids graduate.
We bought a house in a lousy school district. Cost significantly less than a similar house an hour away in a great school district. Our property taxes are extremely low (hence the lousy schools). Our commuting costs are nominal, allowing us to keep cars for far longer - more savings. The savings went into private school tuition. The other benefit was we both worked close to our kids schools and could be there for parties, performances, pick them up when sick, and could be involved in the schools as volunteers. The $10K/year we pay for an excellent Catholic high school can be redirected easily to college costs. And we don’t have to move now that the last one is heading off to college. I realize private school costs are much higher in many places - that’s why this doesn’t work in many cases. For us, going from day care to private elementary wasn’t that big a leap, then private middle was another minor leap, then high school. It was just a fixed expense. On the other hand, if you go the public school route, then redirect as much as possible of your day care costs into a 529 once the kids hit school and you’re only paying for after school care (assuming both parents work outside the home).
We also put what we could into 529s. We did have some in an UTMA, but the 529s ended up being better. At one time UTMA and UGMA were all there was, but then 529s came into existence.
That you’re thinking about this now is a great sign - it means you won’t be one of those parents who doesn’t realize until acceptances come in that their child didn’t apply to any schools they can afford. That’s always sad to see.
To try a non finance guy’s answer to your question about UGMA/UTMA benefits as opposed to 529 plans, I do not think there are many. One thing that I do not believe you can do with a 529, and I know you can not do with a education IRA, is that we established UGMA DRIP (dividend reinvestment plan) accounts for each of the kids. Really the purpose of these accounts was to first, give us a place to put whatever excess we were going to contribute over the education IRA limits and second, to give the kids a place to put that portion of their birthday/Christmas money that mom decreed would be put away for college. Over time, they started putting some of their earnings from jobs into those accounts, and one of them actually sold their shares in one company and bought another because he thought it was a better investment. So the drip accounts had the secondary benefit of teaching the kids a bit about money and investing. We will see how well that “takes” over time.
Like several have said, we started UGMA accounts before 529 plans existed. Starting now, I would not bother with a UGMA. I did think the drips were worthwhile, but I would probably hold the drip stocks myself and just eat the taxes because of the difference in how funds owned by the student (UGMA) and other funds are counted for financial aid purposes.
FWIW, I did not intend to suggest that you needed to plan for private primary or secondary school. For us, we knew we were going to send the kids to private schools because both my wife and I were terrorized by nuns when younger and wanted to inflict similar damage on our kids. But obviously YMMV. Also, you can’t plot everything out now. Worry about ten fingers, ten toes and not ticking your wife off for this next little bit. Then teach them not to poop in their pants. School choices can wait a bit.
If your kids have earned income, they can open a Roth IRA @Ohiodad51
If you still wanted to use it for college, the amount contributed is never subject to taxes but the earnings are.
We convinced our older son to save for retirement when he was 16 by matching what he put away up to a certain percentage. He is 100 in index stock funds but since half the money was ours, it hurts less when it drops- although he doesn’t pay attention. We told him he’ll thank us in 40 years or so.
Back in the day when my kids were infants and before there were 529’s, you opened an UGMA. They have several disadvantages (one being that once the kid comes into his/her “majority” and is no longer a minor, the money is theirs- for a Porsche, for Freshman year at U Michigan, for a cruise. Their money.)
In addition to saving in a 401k/403b maximally up to the match, consider contributing to a Roth IRA to cover the last year of college for your last child. Use a 529 to pay for years prior to the very last. Money in a Roth can be withdrawn penalty free for qualified education expenses. If your child(ren) end up not going to college, or earning scholarships, the money is still there for your retirement. Don’t use a Roth for education before the last year of school because money withdrawn from a Roth counts as income in the FAFSA for the following year.