529s (Saving for your child's education)

kvh22

None of us are financial advisors so DO YOUR OWN RESEARCH and talk to a financial advisor about what makes sense for you. A general rule of thumb is that you should be contributing to your retirement BEFORE funding for your child's education, but even if you can't start saving now, others can contribute to your child's 529 if you set it up.

What is a 529 plan? (source: https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html)

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. 

There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. 

Education Savings Plans. Education savings plans let a saver open an investment account to save for the beneficiary’s future qualified higher education expenses – tuition, mandatory fees and room and board. Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at non-U.S. colleges and universities. Education savings plans can also be used to pay up to $10,000 per year per beneficiary for tuition at any public, private or religious elementary or secondary school.  

A saver may typically choose among a range of investment portfolio options, which often include various mutual fund and exchange-traded fund (ETF) portfolios and a principal-protected bank product. These portfolios also may include static fund portfolios and age-based portfolios (sometimes called target-date portfolios). Typically age-based portfolios automatically shift toward more conservative investments as the beneficiary gets closer to college age. If you are using a 529 account to pay for elementary or secondary school tuition, you may have a shorter time horizon for your money to grow. You also may not feel comfortable taking on riskier or more volatile investments if you plan on withdrawing the money soon. Because of these things, you may consider different investment options depending on when you plan to use the money that is invested.

All education savings plans are sponsored by state governments, but only a few have residency requirements for the saver and/or beneficiary. State governments do not guarantee investments in education savings plans. Education savings plan investments in mutual funds and ETFs are not federally guaranteed, but investments in some principal-protected bank products may be insured by the FDIC. As with most investments, investments in education savings plans may not make any money and could lose some or all of the money invested.

lovelybabybumpz

Good info @kvh22 I need to look at some of this more closely. Like, I didn't realize there's a 10k cap per year for a savings plan?

I posted this in another thread, but I think it's useful enough to re-share. It helps to identify which 529 plan might suit you best, depending on which state you live in. 
https://clark.com/education/clarks-529-plan-guide/

Also not advocating for this either way, but I know some people are fans of using a Roth IRA as a college savings vehicle. It's more flexible if your kid doesn't end up going to college, but contributions can still be withdrawn tax-free. Here's an article on that https://www.cnbc.com/2014/02/03/roth-iras-can-be-a-better-way-to-save-pay-for-higher-education-costs.html.

kvh22

@lovelybabybumpz the $10k cap doesn't apply to college, I believe, just if you want to use it for primary/secondary school (aka not daycare I'm pretty sure but any schooling up through high school). There shouldn't be a cap on college or trade school expenses which was the traditional usage for these funds. They just recently made it able to be applied to earlier schooling, and that's what has the cap, I believe. We also have a Roth IRA set up. Our plan is not to be able to fully cover all tuition with the 529s, but figure that some if not all of our children (this is #2 but planning on 3 at the moment) will go on to some form of education that won't end up being full scholarships (although one can dream about a full boat). And hey, if they want to go to culinary school, I'll help them out as long as they're serious about it, and the 529 would still apply. My parents had a 529 set up with the thinking that they wanted to be able to pay for 1 child's college tuition for 2 years with it to help when my brother and I were both in college at the same time (2 years apart).

DH did some research and although we live in CA, we chose Nevada for DD's plan after looking at various info and return rates. I've also heard people like Utah's. Don't necessarily consider those an endorsement as we set it up over a year ago but just calling out to do your research. Any financial institution you chose to get one through will be associated with a particular state's plan.

chloe97

So does anyone use a 529 A through a financial planner? I mentioned this on Monday Bitchfest, but I set up a 529 with my best friend and my FIL set up one through the state. Obviously, the stock market tanked this year, but his account for DD got -5% while my BF's account was down -20% + they draw out a 5% fee on top of it. I am done depositing money into that account. I have been doing a research study with DD through a local university and depositing all of the money we get into that account, so she has like $2000 in it with gifts from family.

This LO will be Illinois Bright Start from Day 1. 

lovelybabybumpz

@chloe97 5% is highway robbery!

lovelybabybumpz

@chloe97 5% is highway robbery!

lovelybabybumpz

@chloe97 maybe you can roll over into another qualified plan without penalty. I started investing in a Roth IRA that had exorbitant fees. I transferred it even though I had to pay a small penalty because I didn’t realize how outrageous it was.

kvh22

@chloe97 we didn't go through a financial planner for ours, personally. This article seems helpful but others might have some experience. The main points seem to be if there are certain tax beenfits within your state and you could play around with the different options across your portfolio and also if you have a financial planner for everything and want it all in one place. We don't have a financial planner. I have someone who manages my investments with Charles Schwab and have talked to people at Fidelity (which is where my company does their 401(k)). DH plays around with investing the rest of our money that isn't in 401(k)s, that charles schwab account I have, my ESPP stocks, etc. and is very into researching options and pretty savvy. While we're in a pretty good spot, eventually it will likely make sense for us to get a financial planner.

https://money.usnews.com/money/personal-finance/mutual-funds/articles/2014/08/07/should-your-529-plan-be-direct-sold-or-advisor-sold

DuchessOfCambridge

@chloe97 I called the state we live in and the one we want to move to's plans and they both explained them pretty well. The one we want to move to has a waaaaay better plan than the one we live in now so we went with that. A friend of mine works in investments and she has her kids' plans in Nevada as well! So I can for sure say Nevada's is a good option. She confirmed the one we decided to use is good too.

merrylea

@chloe97 - that 5% fee is INSANE and is going to eat up any gains that the fund makes over time. Let’s say the normal return for a year is 6%, you are only going to get one. I would not invest any more money with your friend. When I had brought up with my money managers doing the college fund with them (I think they charge 1.5% to actively manage my investments) they said I would just be better off in the long run doing it myself.

chloe97

Thanks guys- so it's 5% of what we put in with NO fees afterward. So let's say we had put in $2000, it was like we really put in $1900. But over time if it makes 6% every year, we will get the full 6% and not 6% - 1% in fees. My BFF told me that this is what she does for her own kids, but I don't know if that is true or just a sales job. Honestly, I wish I could trust her to tell us to do the right thing, but I am not sure I can.   

ETA My bigger issue is the fact that these funds are down 20% in 2018 when the general stock market is only down 6% (and the state's plan down 5%). I know that the idea is to not be conservative when you have 18 years to go in the investment, but my 401k is not at all conservative and it's only down 6% this year. 

minnemiska

We set one up ourselves through Vanguard for our son. It's easy for other people to contribute to as well. Will almost certainly do the same for #2. 

bpietronicco

We have Illinois bright start 529 - we have it set up based on age- I need to look it up and see what it has done. 

misskimsue

Does anyone have any insight into this "maybe it works for non-US universities" aspect? DH is French and, even though I'm American, I went to college in the UK. So it's pretty likely at least one, and maybe even all, of my kids will go to college abroad. Does it work as long as the university has a FAFSA code? Sorry, not looking for legit financial advice from anyone here... just wondering if anyone knew anything off the top of their head, or knew of a link with more info.

DuchessOfCambridge

@misskimsue it looks like it's fine: https://www.savingforcollege.com/article/can-you-use-a-529-plan-to-pay-for-study-abroad

Neither H nor I studied abroad but I'm all about my kids doing it for a semester or two or doing it for their entire higher ed careers. I'd seriously love if my kids wanted to stay near home for school but would also love if I had fun places to visit!

jarethinafrock

Kind of off-topic, but we are a May baby group and this thread reminded me of this: https://www.southcarolinaradionetwork.com/2018/05/29/5-29-birthday-could-give-sc-babies-parents-jump-start-on-college-savings/

They have similar deals in different states.