529 College Savings Plan

[Disflyer]

We are looking into starting a 529 plan for our DD (2). I am just wondering if anybody has any experience with these plans, good and bad.

Thanks all!

 

[bettymae1121]

I'm expecting my first child and am wondering too. Especially about what happens if you save in a 529 and your child does not go to college, what happens to the money?

 

[Disflyer]

in the limited research we have done it looks like there is a max contribution of 320k, any funds not used for higher education will be subject to a 10% penalty and be treated as income.

This is really one of the biggest sticking points for us. If I over contribute and not all goes to her college then I am penalized for it and I don't like that thought. Mainly because I don't want to force her into a 4 year school if she has her heart set on a trade or votec.

 

[DizzyStitch]

I think that what is subject to penalty is the interest that you did not pay tax on. I would suggest talking to a financial advisor. They will have ideas on what plans to use, etc. I have plans for my two girls and my step children. We recovered from the 2008 debacle and the funds are finally growing. But on the flip side I did not put the entire college savings into 529. I left some of it in other types of savings just in case someone gets scholarship money. I just pay taxes on the earnings.

 

[platamama]

529 plans...I have one for my DD and I go back and forth about how much to put into it. Here are various considerations:

If you pick the one for your state, I believe most of the time you get to claim your contributions as a deduction on your state income tax return (this may not apply to all states, so check the state you live in). So if your state has a 5% income tax, that's how much of your contribution you can get back on your taxes.

You can participate in any state's 529 plan. Utah's is almost always near the top of the list.

savingforcollege.com is a thorough website and one of the originals about 529 plans and a good way to compare them.

I think for financial aid reasons, a 529 plan is considered a parental asset and therefore only a small portion of it (5.64% max?) is calculated as part of the family contribution. As comparison, 20% of a student's assets are expected to go into the family contribution. So it would behoove you in terms of financial aid to not have much in your child's name.

You as the owner of the account can change the beneficiary. If 1 child doesn't go to college, you can change it to another in the family (you, a niece or nephew, a grandchild). And if there's no one to name as a beneficiary, you can withdraw funds with a 10% penalty in addition to claiming the earnings as income (I think that's all).

If your child gets a scholarship to college, I think that you can take that amount out of the 529 without the above penalty.

For my state's plan, I find changing the allocation of funds restrictive, but at least the expenses are low.

My state's plan is super easy to set up automatic contributions from a checking account (as low as $25 per interval) so it can build without much pain, and you get the benefit of dollar cost averaging.

If you're disciplined enough, sign up on the upromise website and do all online shopping from there, and have your rewards automatically deposited into your 529 account. Free money! But only if you don't carry a balance on your credit cards, otherwise you'll be paying more in credit card interest than any money you'd get in your 529 plan.

Speaking of credit card interest...I personally wouldn't bother with a 529 plan at all until your debt is gone.

 

[Disflyer]

529 plans...I have one for my DD and I go back and forth about how much to put into it. Here are various considerations:

If you pick the one for your state, I believe most of the time you get to claim your contributions as a deduction on your state income tax return (this may not apply to all states, so check the state you live in). So if your state has a 5% income tax, that's how much of your contribution you can get back on your taxes.

You can participate in any state's 529 plan. Utah's is almost always near the top of the list.

savingforcollege.com is a thorough website and one of the originals about 529 plans and a good way to compare them.

I think for financial aid reasons, a 529 plan is considered a parental asset and therefore only a small portion of it (5.64% max?) is calculated as part of the family contribution. As comparison, 20% of a student's assets are expected to go into the family contribution. So it would behoove you in terms of financial aid to not have much in your child's name.

You as the owner of the account can change the beneficiary. If 1 child doesn't go to college, you can change it to another in the family (you, a niece or nephew, a grandchild). And if there's no one to name as a beneficiary, you can withdraw funds with a 10% penalty in addition to claiming the earnings as income (I think that's all).

If your child gets a scholarship to college, I think that you can take that amount out of the 529 without the above penalty.

For my state's plan, I find changing the allocation of funds restrictive, but at least the expenses are low.

My state's plan is super easy to set up automatic contributions from a checking account (as low as $25 per interval) so it can build without much pain, and you get the benefit of dollar cost averaging.

If you're disciplined enough, sign up on the upromise website and do all online shopping from there, and have your rewards automatically deposited into your 529 account. Free money! But only if you don't carry a balance on your credit cards, otherwise you'll be paying more in credit card interest than any money you'd get in your 529 plan.

Speaking of credit card interest...I personally wouldn't bother with a 529 plan at all until your debt is gone.

Thanks for all the info! We live in TX so no state income tax for us. We have a regular contribution that I have for her that is self managed with Fiedlity so I only have to worry about capital gains, the 529 plan won't be the sole source of funding for her education. I am looking at the tax advantages as one of many ways to lower my AGI so that is my primary reason with using it. TX also has a pre-pay option, essentially I buy her credits today for future use but it is restricted to TX state schools only and I don't like forcing her hand on where she has to go to school. The only debt we have right now is our Mortgage. I also like that I am the owner of the account, even when she turns 18. I like the idea of not allowing her to run off to Vegas with some dude and use her college fund to pay for a wedding I don't agree with, oh yes, I am a Dad, we have to prepare for these things.

 

[QT Pooh]

We use the Vanguard 529 plan for our two kids and have been very pleased with the ease of use - we do everything on line. My son started college this year. What I really like is that you can transfer funds from one account to another and change beneficiaries if plans change or scholarships happen...and no tax on the earnings unless it's used for something other than educational expenses.

We started saving early too and it's so nice not to worry about how to pay for college and knowing that the kids won't be strapped with student loan debt when they graduate.

 

[platamama]

You're welcome! I gain so much from these forums that I hope I can help out sometimes too.

I also wouldn't want to tie my child to one state's school choices, the choice should be up to her.

Just another thought to put out there - some have mentioned using a Roth IRA as a college funding vehicle. Is that what you mean by your Fidelity account? After 5 years you can withdraw without penalty, and if your child doesn't use it then it's still your money for retirement. And since you don't get any state income tax break, you're not losing out on anything there. The 5K annual contribution limit is the kicker if you're trying to build up a large amount, however if both you and your spouse do it it could add up. As a supplemental cushion for college it has some nice flexibility.

 

[trinchick]

Just another thought to put out there - some have mentioned using a Roth IRA as a college funding vehicle. Is that what you mean by your Fidelity account? After 5 years you can withdraw without penalty, and if your child doesn't use it then it's still your money for retirement. And since you don't get any state income tax break, you're not losing out on anything there. The 5K annual contribution limit is the kicker if you're trying to build up a large amount, however if both you and your spouse do it it could add up. As a supplemental cushion for college it has some nice flexibility.

This is what DH and I are doing. In addition to maxing out our 401K's (which is the actual retirement money), we're contributing $10,000 per year to our Roths and considering that as college money. The initial investment can be withdrawn tax-free and penalty-free to pay for college and we can leave the growth in there for retirement. The only problem I foresee with this plan is if we qualify for financial aid. Then I believe that the sale of the stock would count as income on the next year's financial aid applications. DD is only 6 so we have some time to work out the kinks. But that's the basic idea.

 

[bettymae1121]

Hmmm...I don't like the idea of a 10% penalty (plus income tax) if not used for educational purposes. The kid hasn't even been born yet, there is no way to know what will be in store for him/her 18 years from now. A Roth might be the way for us to go, we lose the tax advantage but gain more flexability should plans change. DH needs a Roth for retirement as he has no 401k through work (just a weak pension plan, which we are not counting on for retirement as pension go the way of the dinosaur) but I get a 401k through my work, so I could open a Roth for me and ear mark it for college savings.

 

[riley2008]

Keep in mind too that 529 plans can be used for other post-secondary educational needs, not just books and tuition, i.e., living expenses, computer, etc. And again, it can be transferred to a sibling or other relative.

We're in Texas too and the state pre-pay plan only cover tuition and fees.

Shop around for a 529 plan. In Texas choose any because there aren't any "state" benefits for us - tax or tuition-wise that is. Choose the one that gives you the best options for you - costs, $$ matching, diversity, etc.

We set ours up as FIL as the primary owner. We contribute. We were advised this as it may help us when the boys go to school, as were are not the owners of the policy. (My MIL then had to set one up in her name, but we have no rights to it at all - only she can make decisions regarding the investments, etc. We don't like this idea at all. If she decides she doesn't like us anymore, which happens frequently, and we have to count that $$ in the future as a college asset for the boys, then we'll surely be screwed.)

 

[JamesMom]

Thanks for all the info! We live in TX so no state income tax for us. We have a regular contribution that I have for her that is self managed with Fiedlity so I only have to worry about capital gains, the 529 plan won't be the sole source of funding for her education. I am looking at the tax advantages as one of many ways to lower my AGI so that is my primary reason with using it. TX also has a pre-pay option, essentially I buy her credits today for future use but it is restricted to TX state schools only and I don't like forcing her hand on where she has to go to school. The only debt we have right now is our Mortgage. I also like that I am the owner of the account, even when she turns 18. I like the idea of not allowing her to run off to Vegas with some dude and use her college fund to pay for a wedding I don't agree with, oh yes, I am a Dad, we have to prepare for these things.

We got 4 year prepaid tuition plans for our 2 boys and as I understand it, if they chose to attend a private or out-of-state school, the plan pays the average in-state school rate (at the level you selected, ie, Type 2 or whatnot credits) to the non-plan school. To me that was very flexible.
I am SO happy that we got the old plan for my 8 year old. We paid about $23,000 for 124 credit hours. To go to UT Austin right now costs $10,000 a year for tuition that makes our plan worth $40,000 and we still have 9 years to go as he is in 3rd grade. Not as good of deal with our 6 year old - paid about $30,000 for enough to go to UNT for 4 years - which costs $8,000 a year. In 12 years, though it should be worth a bit.
I like the prepaid because I don't have to worry about stocks going up or down or doing adjustments especially important as tuition keeps going up and up. Just pay and go. BTW - I got an inheritence last year to pay the accounts in full so I saved the interest charged for payment plans.
I worry more about making the room and board payments which cost almost as much as tuition! Wish there was a prepaid plan for that!
HTH.

 

[riley2008]

I had to read more information on Roth IRAs for college. Here's an interesting overview if anyone is interested"

http://www.bankrate.com/brm/news/529/20051024a1.asp

If you only withdraw your contributions it's tax free, if you withdraw contributions and/or interest after the age of 59.5yo, it's tax free; otherwise, you pay tax on the the interest that has been earnedwhen withdrawn, regardless if it will be used for college.

 

[ICF]

The 529 for residents in the state of Indiana - ran thru collegechoice 529, gives us a tax refund of 20% on the 1st $5,000 invested.

The last couple of years we've put at least $5K in the account so we've gotten an automatic $1000 refund when we do our taxes.

This makes for a very sweet deal for us.

 

[Disflyer]

Again thanks all for the replies, it is one of those things my parents never talked to me about so I am really at a loss. Besides both DW and I practically worked full time during our college years to pay most of it ourselves, this is all new to us and it is something we want to give our DD!

 

[tonums]

We did the prepaid 2 year plan for our kids, its about 30 ish a month for each. I figure until we are in a position to max out our retirement savings then thats all I am going to put towards college. We currently have no mortgage, car payments or debt, so we will probably bumb up their savings sooner rather then later. I have no problem limiting their options for school on my dime. I know that sounds cold, but the florida prepaid is a great plan, and if they insist on going out of state then they arent going to reap the full rewards. When we can, we will bump them both up to the full 4 year, tuition+books+fees plan.

 

[DawnM]

How does the prepay work if you move states?

We moved to NC six years ago now but I am glad we didn't go ahead with the CA prepay plan as we had thought of doing when the boys were little and we had no plans to leave CA.

I have no idea if we will live in NC by the time my kids start college.

Dawn