Do you recommend 529 Plans?

[MikeK]

I am considering opening a 529 plan (or two or three) for my family. I've done some investigation but would like to get some expert opinion from this board.

My situation is that my wife wants to return for her MBA and I expect my young kids to attend college (age 6 and 7). I am in a high tax bracket (33% Fed and 9% California). I have considerable investments/savings ($2+M) and don't expect my children to get any college aid.

I'm intrigued with the 529 for the following reasons:

• I keep control of the money -- doesn't default to my children
• The funds can be easily transferred between my wife and children
• The money can be used for my wife's education
• There is no income limit
• I can do a significant, one-time contribution
• And, of course, the tax benefits

Please let me know any advice you might have before I open the account.

Thanks in advance,
Mike

[grumpy]

Mike,

There are substantial differences in the 529 plans of the various states. Be sure to compare them to determine which makes the most sense for your situation. See this web site:

http://www.savingforcollege.com/

Grumpy

[LOL!]

We have 529 plans for our kids. We only got them after we had maxed out all possible retirement plans and after building up taxable accounts to financial independence.

If you don't get a state income tax deduction, you must stay with a plan that has an expense ratio under about 0.8% or it will be better to just invest in a tax-managed way in taxable accounts.

We use the Utah plan because we don't pay state income tax. Another low expense ratio plan is the Ohio plan. Both use Vanguard funds. There are several plans which use Vanguard funds, but different states tack on different fees, so they are not all created equal. I am not familiar with the plans available in California.

Anyways, given the info you wrote, I'd recommend you do it as long as your retirement plan is maxed out (self-employed >$44K, employed $15.5K). Given your tax bracket, I'll guess you are not eligible for Roth IRAs.

[samclem]

Our daughter will start college next year, and we live in Ohio. We didn't open a 529 plan until 2006. Instead we invested in tax deferred accounts and tax-managed accounts for our own retirement. We have one child (i.e. no alternate recipient), and her college plans change frequently. So, we decided not to go full-tilt into the 529 plan. Instead, we'll plunk all the funds for each year's schooling and allowable expenses into the 529 and then draw it out almost immediately. Ohio offers a state tax deduction for the first $2000 invested in the 529 plan each year, and you can claim amounts in excess of $2000 in future years (no limit). I figure I'll be getting a small state tax credit for about 50 years.

Also, there's some talk about a federal tax credit for tuition spending--I'm waiting to see if anything comes of that, and don't want to be sorry I put $$ into the 529 ony to find out I could have gottten more tax benefit by waiting to contribute my pound-o-flesh..

Overall, I think the 529 plans are better than any other college savings mechanism for most folks. Lots of flexibility and minimal hassle. Just go for one with low costs, if such is available in your state.

[mb]

MikeK,

I'm in a similar situation only a couple of years ahead of you. Kids are 13 and 15 and we have had been in the CA 529 plan for a couple of years now for the reasons that you site.

It was recently transferred from TIAA-CREF to Fidelity.

The CA plan has several investment options including age based funds in which they invest in fidelity's stock and bond index funds and the AA is gradually shifted to a less volatile mix as your child (or spouse in your case) approaches college.

MB

[Spanky]

We have two 529 accounts with Vanguard. They have good investment options including age-based. The only disadvantage with a 529 plan is that money not used for education will incur a 10% penalty. http://www.sec.gov/investor/pubs/intro529.htm.

Thus, make sure not to put too much money into it. This can happen when your kids receive full-ride or significant merit scholarships.

[cute fuzzy bunny]

Since you're in a higher tax situation, it might not be a bad idea. When I looked at the variety of education savings options there was always at least one catch or clause that made me look elsewhere. If we were expecting to pay more in taxes 14-15 years from now, i'd have thought harder about the 529. Decided to just pay for gabes schooling out of our regular taxable account and pay the taxes on it, and keep the flexibility. Heck, he might decide he wants to start a business or get married and buy a house or something completely unforeseen. By not tying myself into a plan I can, at my discretion, help with all of those options.

[MikeK]

Thanks for everyone's recommendations. I've done some investigation and am planning to invest in the Fidelity California 529. The index funds have low expenses (I'm a huge fan of Vanguard and have all my non-retirement funds invested there).

I already max out all possible retirement, tax-free options with my 401K and IRA (using after-tax money).

I figure the worst thing that could happen is my kids get a scholarship and I use the money for myself and my wife. I love to learn and taking classes in retirement could be lots of fun.

The future tax situation does concern me. But truthfully, this will impact much more than my 529 -- I'm most worried about tax rates when I start withdrawing my 401K.

Mike

[cute fuzzy bunny]

Mike...check out the plan details...IIRC if your kid gets a scholarship you can withdraw equivalent funds from the 529 without penalties...dont recall the details but there is some stuff in there to not punish a good student.

[martyb]

That sounds like a good deal! My kids are past that point now, but still sounds good to me. I hadn't heard about that particular feature, & it may not be available in all states.

[cute fuzzy bunny]

That was the case with the TIAA-CREF plan that preceded the fidelity offering here in CA. Just confirmed that with the paperwork I had from them that any scholarships awarded allow you to withdraw the same amount without penalty or tax. Make sure thats still the case with fidelity, but it should be...they just took over the CA Scholarshare plan and the plans specifics should be the same.

Do note that as of the time I checked, using a california based 529 offered no specific state tax benefits, so you could conceivably buy a 529 plan based in another state (like vanguards plan) and not be out anything. Double check that this is still the case.

[Barnstormer]

Mike,

About a month ago I happen to stop in and talk to a gentlemen about college financial aid. I leaned things I had no idea about and I thought I knew quite a bit about 529s, etc. Basically, it was a service for high asset/net worth individuals and how you can "restructure " your assets to qualify for aid. It was very enlightening and it wasn't very expensive $1500/child and they didn't accept you as a client without showing you how much financial aid they could help you acquire. One thing he did mention is that 529s are way oversold to the public and and can hurt a high income earner come college time. Check out the link below. Good luck.

http://www.centralmasscfa.com/index.html

[Spanky]

Quote:

Originally Posted by Barnstormer Mike, About a month ago I happen to stop in and talk to a gentlemen about college financial aid. I leaned things I had no idea about and I thought I knew quite a bit about 529s, etc. Basically, it was a service for high asset/net worth individuals and how you can "restructure " your assets to qualify for aid. It was very enlightening and it wasn't very expensive $1500/child and they didn't accept you as a client without showing you how much financial aid they could help you acquire. One thing he did mention is that 529s are way oversold to the public and and can hurt a high income earner come college time. Check out the link below. Good luck. http://www.centralmasscfa.com/index.html

I think the only way to restructure your assets to qualify for financial aid is shift your non-retirement savings or assets to a primary home.

[FinanceDude]

Quote:

Originally Posted by Cute Fuzzy Bunny Mike...check out the plan details...IIRC if your kid gets a scholarship you can withdraw equivalent funds from the 529 without penalties...dont recall the details but there is some stuff in there to not punish a good student.

This is true, and mandated in all plans. You have the flexibility to transfer to other people, even yourself or a spouse, or a niece, if one of the kids in the family has a greater need or your kid turns out to be a deadbeat............ :P

The 10% penalty is ONLY on the GAINS in the portfolio.