Comments on: Personal Finance 101: What Is a 529?

By: Ramora

Ramora — Fri, 28 Aug 2009 17:00:29 +0000

Another good article on 529.
I’ve a thought about this for long. Please comment on this strategy. I will open 3 529 accounts for my kid, wife and myself one for each and save the tax on contributions (3 * $750) on all three accounts. If my wife and I decided not to attend any college then we can make my kid as beneficiary on remaining 2. This way he will have good money for his college.

By: mk

mk — Sat, 25 Apr 2009 02:09:18 +0000

@jane: If Grandparent(s) set up 529 for grandkid(s), there is no impact on FAFSA. I would think parents should primarily focus and maximize 401K and Roth IRA, shelter as much as for themselves. I just don’t think 529 is flexible enough, given the uncertainty of many factors-how about job security & relocation?

Yes, it’s true you can change beneficiary. I would rather leave the option open as @Thrifty Momma.

By: Bill in Houston

Bill in Houston — Fri, 24 Apr 2009 19:53:10 +0000

“529″ is a farm-to-market road in Northwest Houston that runs westward all the way to Bellville, Texas.

(Thanks, I’ll be here all week. Try the veal!)

We plan on having kids, but since we don’t yet we’re just putting what we call “college money” into a Sharebuilder account every month.

By: Sharon

Sharon — Fri, 24 Apr 2009 18:35:04 +0000

If it was my kid and s/he was not willing to go to the school for which we had prepaid tuition, s/he would be going to college on their own dime! Bottom line for college is that it doesn’t really matter where you graduated from, for the most part. The factor in future success is the effort the student puts in.

Didn’t get in is another issue.

By: Thrifty Momma

Thrifty Momma — Fri, 24 Apr 2009 14:52:57 +0000

I have 11 years before he graduates high school. We are debt free including a paid for house. More than likely we will just cash flow his education expenses. But if we need to dip into the Roth then we can. We max each one so we will have more than enough to avoid taxes. I also don’t plan on taking out more than we funded. Since we only have one child, this is what will work for us. I do think everyone should look into all their options before making a decision. Financial decisions aren’t a one size fits all.

By: Jane

Jane — Fri, 24 Apr 2009 12:15:34 +0000

I have a 11 month old son, and I investigated 529 plans and decided against it. They might not remain tax free (it’s up for debate again in 2010 and probably many more times before my son reaches college), and I imagine it will really affect a child’s financial aid. Count me in the Roth IRA camp. Sure, you can only withdraw the contributions and not the earnings tax free, but it’s a start. You could combine that with other investment accounts that are not earmarked for education.

In general, I am frustrated by how the FAFSA system penalizes parents for saving and being frugal. I went to an expensive private school, and my father didn’t make that much money. But because he was a saver, we ended up having to shoulder the entire tuition and living expenses. I had friends whose parents made far more than mine that received financial aid.

By: Michelle

Michelle — Fri, 24 Apr 2009 11:36:43 +0000

I am mom to a 2 year old in TX – the state just reopened the Texas tomorrow fund…I went to the website to check it out and was very very HORRIFIED by the terms/conditions/assumptions of this plan. Yes, you’re buying credits – but texas has one of the cheapest higher ed systems – and they want me to buy $600 per month worth of credits for 16 years…and they estimate such a low rate of return//high tuition cost in the future, I’d be earning more interest with CDs! I know you’re actually hedging against tuition increases in lieu of interest but still – that $600 independently invested and conservatively estimated at 5% return over the same period is $178K. I’m currently saving about $200/month in a combination of plans (we have a 529 and a Roth, since Daddy will be *ahem* eligible for distributions concurrent with college) and hope to bump that up when my non-mortgage debt is gone…In addition to the math that just doesn’t seem to work, I also want my daughter to have more options than just Ut, A&M, Texas Tech. I lived in VA and I may be a snob, but I don’t think the TX options can compare to Virginia’s flagship public universities: WIlliam & Mary, Va Tech and UVA. I won’t tell you which one I went to!

By: Michele

Michele — Fri, 24 Apr 2009 02:49:49 +0000

One option left out of this discussion has been the Coverdell Education Savings Account (ESA). While you can only put up to $2000 in per year per child, you have more control over where the money is invested. It has the same tax advantages of the 529s. There are some differences in that with the ESA, you can use the money toward private school (elementary, middle, high school) and not just college. Drawback is the money has to go to the student by age 30, but it can be transferred to another family member. I personally think it’s a good idea to put the first $2000 into an ESA before contributing it to a 529. And if you are saving more than $2000 per year, then use the 529. I like having more control over how my money is invested.

By: Jennifer @ Money Saver 101

Jennifer @ Money Saver 101 — Fri, 24 Apr 2009 01:35:18 +0000

I’ve been meaning to set up college funds for my boys. I looked into it when I was pregnant with the first, and researched it like crazy, and then he was born – fast forward 4 years later and I haven’t done it. Things tend to come up. LOL

I’ll have to look into this option. thanks for the info.

By: todo es bien

todo es bien — Fri, 24 Apr 2009 00:23:19 +0000

If you happen to be of a certain age, a Roth can be a good option, offering more flexibility. Specifically, if you will be of retirement age when you kid goes to college you have more latitude. Sadly, I am in that group. : (

By: dave

dave — Thu, 23 Apr 2009 23:14:50 +0000

What happens when you pcik the plan for a certain school prepaid and your kid cant get in to that school / wont go to that school? What is set up for this situation?

By: alex

alex — Thu, 23 Apr 2009 23:13:56 +0000

my question is, when you start saving in this and your child decides not to go to college, can you still get to it? what happens then?

By: Sarah

Sarah — Thu, 23 Apr 2009 22:03:30 +0000

Whoops–scratch that last point. I see my mistake.

By: Sarah

Sarah — Thu, 23 Apr 2009 22:02:47 +0000

Maybe I’m missing something, but if you already have your retirement covered from elsewhere, then why not just put the money in an ordinary investment account? Getting to “take out the full amount I contributed, tax and penalty free” is meaningless–you’ve already paid taxes on that amount, so you could accomplish that by sticking the money under the mattress. Meanwhile, the withdrawal of earnings from a Roth for that purpose will be taxed as ordinary income, whereas it should be fairly easy to arrange that the bulk of the earnings in an investment account are taxed as long-term capital gains. And, of course, you have the ultimate flexibility to use the money exactly how you choose.

The parental assets/financial aid point might be a good one, except that if you’re actually on track to retire without any reliance on 401(k)s, you are probably earning too much for much financial aid, anyway. But that’s more complicated to know and probably varies a lot based on individual situations.

Finally, “or for anything else they need help with if they don’t end up going to college”–I don’t think that’s right. I don’t see any general exemption from penalties in there for people just helping their kids travel round the world or start a business or whatever.

By: Mike

Mike — Thu, 23 Apr 2009 21:33:36 +0000

You all might want to check out this new article released today at http://news.morningstar.com/articlenet/article.aspx?id=287783

By: Sarah

Sarah — Thu, 23 Apr 2009 20:32:00 +0000

I’m a 529 beneficiary, and it has helped me out SO much. I would have gotten free tuition at an Illinois state school, but I’m at a private school now. My dad paid 1997 admission prices for me to attend 2007-2011. It’s actually cheaper to go to a private school with the scholarships I got (plus, I didn’t like U of IL).

One word of caution – if you attend out of state/private, College IL pays by the credit hour. Full time is 12-18 credit hours, with 15 as the average. So, they assume one year equivalent tuition for private schools is 30 credit hours. I’m getting out in three years and am taking 18 credit hours a semester, but may end up using up a four year policy anyway.

By: Genevieve

Genevieve — Thu, 23 Apr 2009 18:02:30 +0000

Also, and I could be wrong about this, I don’t think the parents’ retirement accounts are taken into account with financial aid formulas so that would be another advantage for the Roth over the 529.

By: Genevieve

Genevieve — Thu, 23 Apr 2009 17:59:23 +0000

I think the Roth IRA is an excellent alternative to a 529 because it offers more flexibility. I’ve been maxing out mine and my husband’s Roth IRAs since several years before my kids were born and will be able to take out the full amount I contributed, tax and penalty free, when my kids need help funding college or for anything else they need help with if they don’t end up going to college. We plan to cover our retirement needs from other sources (social security, our government pensions and 401ks) so anything left in the Roths after our 2 daughters are educated will be just a bonus for us. Granted, not everyone will have access to pensions and 401ks, but if you can fund retirement from other sources, I think Roth IRA contributions could be a good alternative to 529s for paying for the kids college expenses.

By: Sarah

Sarah — Thu, 23 Apr 2009 17:31:06 +0000

Not necessarily true, Thrifty Momma! As I understand it, if your withdrawals exceed your lifetime contributions, the excess will be taxable even if used to pay for higher education expenses. In other words, earnings on Roth IRA contributions effectively are not distributed tax-free for higher education expenses. However, since the rule is “contributions out first,” if you can manage to spend only your contributions and hang onto the growth until retirement, then you can get the distributions tax-free as you normally would.

So, how likely is that to happen? Tuition, room, and board at top schools is already nearly at $50K/yr. Even assuming that this cost increases only at the rate of inflation (which historically hasn’t been true at all), your total joint contributions to a Roth IRA for the kid’s entire pre-college life won’t cover the cost by itself (~$200K vs. ~$180K). And, you know, that’s assuming you have complete alternate funding for your retirement.

Also, if your kid doesn’t go to college, then the Roth IRA money can’t be used to fund his alternative endeavors without paying the usual penalties and taxes, so in that sense it’s no better than a 529 when it comes to supporting him. Yes, Roth IRA money can be used for your retirement if he doesn’t go to college, at all, ever. It is definitely more flexible in that sense. But since you can change beneficiaries on the 529, that money can go to your grandkids, your nieces…whoever.

I’m not convinced the Roth IRA is that great an alternate vehicle for college savings unless your retirement is entirely funded from elsewhere and you think your kid almost certainly won’t go to college or have kids himself (which I suppose could be the case for some special-needs kids).

By: Matt

Matt — Thu, 23 Apr 2009 17:09:36 +0000

I was wondering, if someone were planning to go to college after say 5 years, would it be beneficial to use something like this to start saving or would the return/benefit be too negligible?