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You seem to know a lot about investing as it is, do you mind if I ask where you picked up this knowledge? I would love to be savvy.
Not sure what state you are in, but I just read an article published yesterday that our GET program is once again out of danger (for now..) and after a year of uncertianty, is soundly backed up by our state government (WA). When we set up our first batch of investements in July we were strongly discouraged from getting into GET and instead, recommended 529's. It's only been two months but I've watched our $65k of initial deposits (we opened many investments) drop. I understand that 2 months isn't long, but at the same time, my husband likes to buy individual stocks and his Tesla has given us like $5k in the same time frame....
Reading this makes me even more weary of 529's (and our financial planner). I'm probably going to reduce our direct deposits our 529's (but not get rid of them completely) and buy into GET.
Also, when it comes time for my kids to go to school, I'm probably not going to do it the traditional way. My husband was a graduate student and then a university professor, so unlike when I was in university, I kinda understand how the system operates and how to deal with it in a whole new light. For example, I'm going back to school part-time at a community college for nursing and many of the younger classmates are whip sharp, but are there because their parents are saving a buck not immediately sending them off to the flagship/private schools. They get their lower-division courses out of the way, have time to get a feel for the collegiate environment and once ready, transfer. I think it's brilliant. In hindsight, I wish my parents had given me that kind of opportunity as I wasn't ready to be in a dorm 3 hours away from home. We also have many high school students taking college coursework via a program called Running Start. Not sure what options you have near you and the aptitude of your student, but it's an excellent program for some students (not mine, unfortunately.. just being real.. LOL). It really depends on the individual and the family and the expectations. I don't want my kids to have the typical American university experience of rushing and football and other frivilous activity. I don't want to underwrite that expense. I'm not everyone, so if that's important, it should be planned for. Get what I'm saying??? I think I'm trying to say, you might not need as much as you think you do (certainly less than what you are told you do). As a community college student (half time), I'm only paying about $7k a year. I think I read getting my whole RN program would cost about $28k. That's a lot less than the $250k I've read in the 529 literature!
I have a major distrust of 529 plans, mostly becuase I live in Illinois where we have had some notorious scandals surrounding 529s and connected insiders putting the money into terrible funds.
Vanguard is a good firm and I really like their Total Stock Market Index -- it trades as VTSMX and is easy to track. My hunch is that you could keep even 60% of the proceeds of the sale in that with little real worry. The other 40% can go in the Total Bond Market Index. I have less faith in the hybrid "portfolio" type offerings as I have no idea how you track them -- if some negative event happens how do you track that?
I would also make sure you know the rules about getting money moved between funds -- especially in a student's last two years of high school any big financial melt down is going to be awfully hard to recover from and if things move negative in a big way you need to be able to move to ulta low risk / cash equivalent type fund pronto...
Actually, IL's Brightstart 529 is pretty good. The problem there was an Oppenheimer fund that invested in something that was higher risk than it actually was and didn't properly disclose that, for which the IL AG went after them IIRC.
IL's Brightstart 529 plan has an indexed equity option that is a combo of 3 or 4 Vanguard equity index funds, and we currently have a bunch of $ invested in there. There's a small annual fee for doing this ($5 or $10, would have to look it up).
To the OP, we have a combo of the 529 noted above along with an ESA invested with Vanguard in the VTSMX fund (actually their "admiral" fund of that, VTSAX, which has a slightly lower expense ratio). College is still a decade away, so I feel comfortable with that level of potential volatility. Given that college costs have historically been considerably higher than inflation, I feel the likelihood of higher returns over that time frame makes it worth it. YMMV.
Location: Chapel Hill, NC, formerly NoVA and Phila
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Quote:
Originally Posted by flyingsaucermom
You seem to know a lot about investing as it is, do you mind if I ask where you picked up this knowledge? I would love to be savvy.
Not sure what state you are in,
I majored in business (finance) in college, but it was well before there were 529 plans! I also have a pretty strong interest in personal finance and read a lot about it in Money Mag, on here, etc. I often have discussions with my dad and my brother about personal finance. For my dad, it is a hobby, but my brother actually works in the business as a financial planner, but he's often inaccessible and has a much greater tolerance for risk than I do. And my dad doesn't know much about 529 plans because they weren't around when we went to college.
So I do have a good basic background, but most of my savings thus far have been either long term (retirement) or more open-ended (buying a house). With a set timeframe and a large lump sum, I'm a little more perplexed. As I said, I'm willing to take on some risk, but not sure how much. Was just curious what others' thoughts were or how much risk they were undertaking.
It's really a hard question to answer. Yes, the college savings time frame is very short and you don't have recovery time if something happens. Most people I know tend to use the age based programs many 529's have and then hope for the best. Also, don't discount current income as a source of funding their college. Many people overlook that aspect. It may or may not apply but after scholarships and what not, many people that are financially savvy can pay out of pocket for the remaining costs for college, unless of course you have your heart set on a 60K+ school for her. I bring this up because sometimes putting those funds into an unrestricted vehicle, mutual fund or whatnot, is your best route because you may find you don't need the extra funds for college. Yes, you can take those fund out, pay your taxes and penalty and then use them for whatever, but is the penalty more than the tax savings, etc.
If she chooses not to attend college of any type, the money can be used toward a trade school also. I cannot imagine that she would do neither of the above because we would strongly encourage one or the other. But in the slight chance that happens, the money can be transferred to a sibling (she has two younger ones, ages 6 and 8). Worst case scenario, I transfer it to myself and go back to school. But I'm not too worried about that aspect of the savings.
Seven years does not seem too long to me.
I may have read wrong, but I thought that I read that 529s are only for accredited college – junior or 4-year. That's why I went looking and discovered the Coverdell ESA, which can cover private school before college and any type of accredited vocational program after h.s., and up to any age (there is an age limit for using the college fund in 529s, I believe). The problem with the Coverdell is that you can only have contributions for one beneficiary at $2K or under, total (all contributors to that one beneficiary combined). You might look into it if you and anyone else it contributing $2K tops per year. Fund grows tax-free and withdrawal tax-free for qualified expenses, same as 529s.
I'm a new grandparent of twins. It's going to be a stretch for me to contribute for both of them, and I'm concerned about preserving principal if I'm going to make this special effort at this stage. I've thought about the risk involved in most ESAs and don't know what to do right now, but I want to get started (they are 6 months old). Now I'm thinking a regular bank CD (I can get a 2% at my credit union) with them as beneficiaries. The returns from the ESAs are lower than that. Of course the advantage is the tax-free benefit.
Here's one more thing I found – College Choice CD (Indiana) – principal is preserved (these are FDIC cd's) www.collegechoicecd.com/products.csb (You do not have to be a resident of any particular state to open any state-sponsored ESA) This plan has all the benefits and tax advantages of a 529. This is the one Im thinking about: www.collegechoicecd.com/investsure_cd.asp
BUT...the rates on all these ESAs are so low that I go back to the idea of a regular CD at my local credit union (2% for 5 yrs) and eating the small amount of tax each year. I'm in a lower retirement income tier so maybe the taxes wouldn't add up to that much. Then again, at maturity time in 5 years who knows what that rate could be, probably a lot less. The again, who knows where any of the 529s will be in the future, for all the reasons that some people shy away from them.
Anyway, I too would appreciate advice, starting from scratch putting $1000 into each of the two accounts and $50/month into each one till they are 18.
Last edited by RiverBird; 09-19-2013 at 07:49 AM..
Location: Chapel Hill, NC, formerly NoVA and Phila
9,779 posts, read 15,790,796 times
Reputation: 10886
Quote:
Originally Posted by newenglandgirl
I may have read wrong, but I thought that I read that 529s are only for accredited college – junior or 4-year. That's why I went looking and discovered the Coverdell ESA, which can cover private school before college and any type of accredited vocational program after h.s., and up to any age (there is an age limit for using the college fund in 529s, I believe). The problem with the Coverdell is that you can only have contributions for one beneficiary at $2K or under, total (all contributors to that one beneficiary combined). You might look into it if you and anyone else it contributing $2K tops per year. Fund grows tax-free and withdrawal tax-free for qualified expenses, same as 529s.
I'm a new grandparent of twins. It's going to be a stretch for me to contribute for both of them, and I'm concerned about preserving principal if I'm going to make this special effort at this stage. I've thought about the risk involved in most ESAs and don't know what to do right now, but I want to get started (they are 6 months old). Now I'm thinking a regular bank CD (I can get a 2% at my credit union) with them as beneficiaries. The returns from the ESAs are lower than that. Of course the advantage is the tax-free benefit.
Here's one more thing I found – College Choice CD (Indiana) – principal is preserved (these are FDIC cd's) www.collegechoicecd.com/products.csb (You do not have to be a resident of any particular state to open any state-sponsored ESA) This plan has all the benefits and tax advantages of a 529. This is the one Im thinking about: www.collegechoicecd.com/investsure_cd.asp
BUT...the rates on all these ESAs are so low that I go back to the idea of a regular CD at my local credit union (2% for 5 yrs) and eating the small amount of tax each year. I'm in a lower retirement income tier so maybe the taxes wouldn't add up to that much. Then again, at maturity time in 5 years who knows what that rate could be, probably a lot less. The again, who knows where any of the 529s will be in the future, for all the reasons that some people shy away from them.
Anyway, I too would appreciate advice, starting from scratch putting $1000 into each of the two accounts and $50/month into each one till they are 18.
It's true that you cannot use a 529 plan for private school before college, but you can use it for most post-high school trade and technical schools. We already do the ESA and have for years. This is the first time we have the money available above the $2000 per child to invest, which is why we're looking into the 529s. I still haven't bit the bullet yet. I'm trying to read as much as I can about them still.
We actually bought ESA CDs for our children when the rates were about 4.5% at our credit union. Each year, we are allowed to add to them (until they mature), so we've been lucky with the rates. Of course at the time, I thought they were awful!
If you open CDs in your children's names, they probably won't have to pay taxes on the earnings. I believe they have to make a minimum in interest before they would need to pay (something like $945). Of course, then you have no control over the money, if they are technically in their names. And you wouldn't be able to change your mind and use it for yourself. If you put it in your name, you'd have to pay taxes on it but you'd have control over it. Of course, taxes would be pretty low regardless since the earnings would be pretty low with 2% earnings on $1000.
Anyway, thanks for your input and good luck figuring it all out. And congratulations on your new twin grandchldren. How exciting!
It's true that you cannot use a 529 plan for private school before college, but you can use it for most post-high school trade and technical schools. We already do the ESA and have for years. This is the first time we have the money available above the $2000 per child to invest, which is why we're looking into the 529s. I still haven't bit the bullet yet. I'm trying to read as much as I can about them still.
We actually bought ESA CDs for our children when the rates were about 4.5% at our credit union. Each year, we are allowed to add to them (until they mature), so we've been lucky with the rates. Of course at the time, I thought they were awful!
If you open CDs in your children's names, they probably won't have to pay taxes on the earnings. I believe they have to make a minimum in interest before they would need to pay (something like $945). Of course, then you have no control over the money, if they are technically in their names. And you wouldn't be able to change your mind and use it for yourself. If you put it in your name, you'd have to pay taxes on it but you'd have control over it. Of course, taxes would be pretty low regardless since the earnings would be pretty low with 2% earnings on $1000.
So with the "safe" ESA options yielding so low (best I saw current is 1.5%, the CollegeChoice investsure CD), why opt for one instead of a regular credit union CD at 2%? Of course you cannot add to those, but the principal is preserved. Another downside is 5 year terms. There are 10-year CDs but they're not earning enough more to tie up funds for that long.
Location: Chapel Hill, NC, formerly NoVA and Phila
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Quote:
Originally Posted by newenglandgirl
So with the "safe" ESA options yielding so low (best I saw current is 1.5%, the CollegeChoice investsure CD), why opt for one instead of a regular credit union CD at 2%? Of course you cannot add to those, but the principal is preserved. Another downside is 5 year terms. There are 10-year CDs but they're not earning enough more to tie up funds for that long.
I'm not an accountant, so I don't want to steer you wrong. Perhaps someone else can chime in. I believe that children can make non-income earnings without paying tax up to a certain level (according to this article it's $1000 in 2013 ).
And then it appears they pay at a kiddie tax rate from $1000 to $2000 and then above $2000 in non-income earnings they pay at their parents' highest tax rate.
Some people may already have money in their children's names and college savings would be above and beyond that which would push them over the $1000 earnings threshold. For us, we've been putting $2K away every year for our daughter since 2002, and at 4.5%, she is already over that $1000 earnings threshold, but ours is in an ESA. She does have some non-college money that is in her name earning interest also, so I never thought to put her college money in a non-ESA account.
But I think if you are doing small amounts, then you or your twins may not have to pay taxes on the earnings. But you should check with someone else and make sure there won't already be money in their names. And I'm not sure how it works for grandparents. I'm guessing it would be a gift to them (which if under $14K per year wouldn't be taxed).
The downside is that they could withdraw the money at anytime for any reason and not use it for college. They may want to take a trip to Rio, and they could withdraw it, and you could probably not prevent that.
ETA: I just realized that my MIL is doing something similar for my children. She put $1000 (I think) into an account when they were born. And she puts in $10 per month and $50 on their birthdays. It's not necessarily for college. But in any case, my children don't have to pay taxes on those earnings, and neither do we because they only make $100 per year or so in interest.
I'm not an accountant, so I don't want to steer you wrong. Perhaps someone else can chime in. I believe that children can make non-income earnings without paying tax up to a certain level (according to this article it's $1000 in 2013 ).
And then it appears they pay at a kiddie tax rate from $1000 to $2000 and then above $2000 in non-income earnings they pay at their parents' highest tax rate.
Some people may already have money in their children's names and college savings would be above and beyond that which would push them over the $1000 earnings threshold. For us, we've been putting $2K away every year for our daughter since 2002, and at 4.5%, she is already over that $1000 earnings threshold, but ours is in an ESA. She does have some non-college money that is in her name earning interest also, so I never thought to put her college money in a non-ESA account.
But I think if you are doing small amounts, then you or your twins may not have to pay taxes on the earnings. But you should check with someone else and make sure there won't already be money in their names. And I'm not sure how it works for grandparents. I'm guessing it would be a gift to them (which if under $14K per year wouldn't be taxed).
The downside is that they could withdraw the money at anytime for any reason and not use it for college. They may want to take a trip to Rio, and they could withdraw it, and you could probably not prevent that.
ETA: I just realized that my MIL is doing something similar for my children. She put $1000 (I think) into an account when they were born. And she puts in $10 per month and $50 on their birthdays. It's not necessarily for college. But in any case, my children don't have to pay taxes on those earnings, and neither do we because they only make $100 per year or so in interest.
Since by the time my grandtwins are ready for college the tuition will be completely out of sight, I know that anything their parents or I contribute over the years will, comparatively, amount to a hills of beans. But we'll do it anyway.
Apparently if the 529 or other ESA is neither in the child's name nor the child's parents' name, that money is not counted in the figuring of college financial aid (I think I read this right). In either the ESA or a standard bank CD then, the child would be the beneficiary, not the owner or joint owner. If this is the case, the account would be a taxable "gift" and can only be up to $14K in one year—during all the years of accumulation over that amount, or just at withdrawal time in the year money is withdrawn?
Do you have other kids? If so, the other kids can use that 529 even if it was originally for the kid in the original post. With that, then you may be able to take on more risk - if the funds are low at the first kid's college time you don't have to cash them out. If you have your own mutual funds (not in a 401(k) or IRA), you can gift those funds to the first kid, she cashes them out at her tax rate (not yours) and you can hold the 529 funds for your younger kids.
"most 529 plans will allow you to change beneficiaries. So, if your child decides not to attend college, you can transfer the 529 plan account to a new beneficiary who is directly related to your kid (including cousins, step-relatives, and in-laws)."
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I also have a pretty strong interest in personal finance and read a lot about it in Money Mag, on here, etc. I often have discussions with my dad and my brother about personal finance. For my dad, it is a hobby, but my brother actually works in the business as a financial planner, but he's often inaccessible and has a much greater tolerance for risk than I do. 
And my dad doesn't know much about 529 plans because they weren't around when we went to college. 
