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A List of Suggestions
By Rick Kahler MS CFP® http://www.KahlerFinancial.com
When it comes to 529 college savings plans, the best strategy is to start early and start big. Don’t wait to set up an account until your teenager is starting to wonder which schools might offer skateboarding scholarships.
These accounts are excellent vehicles to save for college, in large part because of the tax-free growth they offer. Here are some suggestions for getting the most benefit from a 529 plan.
The List
1. Start as early as possible. The best time to start a 529 plan is at birth. Well, maybe a few weeks later; you do need to wait until the kid gets a Social Security number. The earlier an account is established, the more years of growth it will provide. Ideally, the plan and the child will grow together.
2. In the early years, invest more aggressively. It would be a shame to open a plan for a two-year-old and put everything in a money market fund or bonds; the goal in early years is growth. It’s a good idea to invest heavily in equities for about the first 10 years, then gradually move to bonds and other low-risk options. Many plans have an age-based option that does this automatically.
3. Fund the plan as much as you can when the child is young. Obviously, this can be a challenge for young families. If you can, however, it’s good to start with higher monthly amounts even if you need to taper off your contributions as the child gets older. The goal is to get as much into the plan as you can.
4. Consider using the five-year option. If someone has the ability to put a large amount into a child’s 529 plan all at once, it’s possible to contribute as much as $70,000 that is considered a contribution in advance for the following five years. The five-year period is to minimize federal gift tax purposes. This option might be most applicable for grandparents as part of their own estate planning.
5. Pay attention to fees and performance. Many 529 plans are sold through investment firms, and the commissions paid to those firms vary. Some offer mutual funds with relatively high annual fees. Fees are required to be clearly disclosed. It’s also a good idea to look at the performance of the fund managers. As an example of how to find this information, the South Dakota 529 plan has a FAQ section on its website with details on fees, performance, and funds.
6. Compare several state plans. While some states do offer tax breaks for residents who use their 529 plans, you aren’t limited to the plan from your own state. You can open new accounts in or move existing accounts to other states.
7. The more plans, the better. One child can be the beneficiary of several plans, perhaps set up by parents and both sets of grandparents. Or grandparents, say, could contribute to accounts opened by parents. The potential disadvantage here is that the money then belongs to the owner of the account.
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One Last Point
Don’t get so excited by the idea of maximizing a 529 plan that you forget one essential guideline: Parents should fund their own retirement accounts ahead of funding college accounts for the kids.
Assessment
There are many places to find a little extra money for kids’ 529 plans. A few possibilities are cash gifts from relatives, contributions from grandparents, tax refunds, or bonuses. But the worst place to find that money is your own retirement fund. It isn’t wise to sacrifice a healthy retirement plan in order to create a healthy 529 plan.
Conclusion
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Filed under: Funding Basics | Tagged: College 529 Plans, college funding, rick kahler |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Are 529 Plans Really the Best Way to Save for College?
The flexibility and broad selection of a regular investment account could outweigh the tax advantages of a 529 plan for funding higher education.
http://www.financial-planning.com/30-days-30-ways/are-529-plans-the-best-way-for-clients-to-save-for-college-2690173-1.html?utm_campaign=30%20days%2030%20ways-aug%2018%202014&utm_medium=email&utm_source=newsletter&ET=financialplanning%3Ae2954669%3A86235a%3A&st=email
Just another viewpoint.
Monty
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I told you so
Obama Proposal to Cut 529 Plan Tax Benefits Meets Opposition.
http://www.msn.com/en-us/money/taxes/obama-proposal-to-cut-529-plan-tax-benefits-meets-opposition/ar-AA8pJdX?ocid=iehp
Monty
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Monty,
Obama just dropped this misguided 529 plan initiative.
http://www.msn.com/en-us/money/taxes/obama-drops-proposal-to-tax-529-college-savings-plans/ar-AA8EpJs?ocid=iehp
Charles
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Forget about 529 plans
James Heckman PhD, the Nobel prize-winning economist, has done research that shows spending money to put children into high-quality early childhood education offers the greatest bang for the buck in their adult years.
Link: http://heckmanequation.org/about-professor-heckman
The reason is from age 3 to 8, children develop traits like conscientiousness, perseverance, sociability, and curiosity.
And, these qualities matter more to ultimate success than SAT prep courses in high school or what college your children go to.
Video: http://heckmanequation.org/content/resource/why-early-investment-matters
So, forget the numbers 5-2-9; and remember the numbers 3 – 8 years old.
Lita
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Shifting tuition payments to retirement savings?
College graduation is obviously a cause for celebration. When the graduate is the youngest child, some parents have an extra reason to rejoice: no more tuition payments.
At the end of the college years, many parents who have chosen to fund their kids’ education find themselves behind on funding their own retirement. One popular solution is to plan on diverting the tuition payments to retirement plans as the kids leave college.
On paper, it’s a great solution. No change in lifestyle or cash flow is required. Whatever has gone out for college tuition, gas, housing, and books now is just diverted to a 401(k) or IRA. What could be simpler and less painful?
The problem is this rarely works. Over some 35 years of helping people plan for retirement, rarely have I seen parents actually shift tuition payments to retirement savings.
This is because saving is an emotional rather than cognitive activity. We don’t think our way to saving, we feel our way to saving. This is confirmed by Nobel Prize winner Daniel Kahneman’s research, which found that 90% of all financial decisions are made emotionally.
Several emotional factors get in the way of couples’ intent to focus on their own retirement savings when they become empty nesters.
1. By the time the kids start college, if parents haven’t already built up college funds and made a good start on retirement funds there are likely to be deeper emotional reasons they are not saving. Many who retire comfortably began planning for their retirement as soon as they finished college themselves and started saving for college when their kids were babies. Those without that early habit of saving are less likely to start in middle age.
2. Parents who have focused on helping their kids through four years of college may find it extremely challenging to stop. The emotional habit of helping can easily find ongoing expenses to pay. Kids may want to go to graduate school, need help until they find permanent jobs, or want to buy homes. The list is endless.
3. Parents who can stop helping their kids often have a hard time not rewarding themselves when the tuition payments end. Even though they planned to divert the funds to their retirement account, there often is an unanticipated pent-up demand for unmet needs placed on hold during all the children’s college years. Sometimes the new spending isn’t unanticipated. How often have you heard someone say, “When the kids are gone, we’ll be able to afford . . .”? What would a vacation to the Bahamas or a new car hurt before going back to the austerity budget? In reality, once the dam of newfound discretionary income breaks, it’s rarely reconstructed.
The best time to break this spending pattern is before it’s created. Here are some ideas:
1. Remember, research has found it costs children much more to take care of a parent in retirement than fund their own college education. Taking care of your own retirement first may well be in your kids’ best interest as well as your own.
2. It doesn’t have to be either/or. Consider options like only funding part of the college bill. Your children won’t implode if they must work their way through. One Berkeley study actually found that kids who worked 20 hours a week had higher GPA’s than their counterparts who got a free ride.
3. Finally, be willing to look at your own emotional issues around money. Resolving your own emotional barriers to saving may be the best investment you can make, not only for your own future but for your children.
Rick Kahler MS CFP®
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