I have a 14 and 2 month old and I'm about to start some form of savings for their future. Nothing crazy but I'd say the max is $2k per kid per a year. I did about 10 minutes of reading on the MPACT site and still don't have a great grasp on what the cost is or what the big change that was made in 2013. I've had people tell me it's not near as good as it used to be but again, not exactly sure what that means. My small financial investment mind sees some limitations with MPACT mainly being that you're limiting yourself. Another option that I know even less about (but I got a guy) is some sort of RothIra, ETF, UGMA, or 529 but I see some potential limitations in those also. In a perfect world I'd like to have a low risk account I can throw money in monthly (and sometimes extra when it's feasible) and let it grow for 18 years. When my kids are college age if for whatever reason the fund paying for their college isn't important, I'd like to just keep rolling that bad boy. Lord willing I live 40 more years and can continue to grow that account it could be a sizable nut for them one day. What say ye pack?
OT: Saving for children discussion
- Thread starter FreeDawg
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I looked into multiple options and settled on a 529 through MS. You can do a 529 through any state, but the best ones have higher initial deposits. In MS you can start one with as little as $25. I liked the options that came with a 529 because you can give it to basically anybody if your kid doesn't end up going to college. Grandkids, nephews or nieces. I think you could use it on yourself. You also aren't locked into the colleges in one state like if you do the prepaid tuition.
A 529 was the best option for us but isn't the only option. I am just putting in some small potatoes until we get rid of our student loans. Whatever you choose you will have saved money for your kids and they won't have to pay it back like I have had to do. Every little bit helps their future.
A 529 was the best option for us but isn't the only option. I am just putting in some small potatoes until we get rid of our student loans. Whatever you choose you will have saved money for your kids and they won't have to pay it back like I have had to do. Every little bit helps their future.
Echoing what TMG said, 529 is definitely a great way to do the bulk of the heavy lifting for college savings. Even if both kids go to college on scholarships, you can either roll the money over tax free to a relative, or just do a straight withdrawal for only a 10% penalty, which is a paltry amount compared to the compound return it should accumulate over 18+ years.
An additional benefit of the 529 that happened just recently is that you can also use it on K-12 private school tuition and supplies now, if you choose to do so. That was part of the GOP Tax Reform plan that just passed.
An additional benefit of the 529 that happened just recently is that you can also use it on K-12 private school tuition and supplies now, if you choose to do so. That was part of the GOP Tax Reform plan that just passed.
529
1. You control how much you put in. No set schedule
2. You can, with penalty, get it back out if you had an emergency
3. If you ever need it for private school before college you can use it
4. You oversee your investments and not the state of ms
5. You can choose any states 529 plan
1. You control how much you put in. No set schedule
2. You can, with penalty, get it back out if you had an emergency
3. If you ever need it for private school before college you can use it
4. You oversee your investments and not the state of ms
5. You can choose any states 529 plan
I signed one kid up pre-2013 and one after the change... it was about 60% more for the same plan after the change was made. We went ahead and signed up the second one anyway because my in-laws offered to pitch in a sizable chunk for it - but I may have looked into something different on the second child if it weren't for that.
I wouldn’t say “with penalty”
We opted for the 529 plan too, but if you need the money you just pay regular taxes on it. If you deposit money in the 529 you don’t pay tax on that. So if you withdraw for a reason besides paying college tuition you just pay what you would have payed.
We opted for the 529 plan too, but if you need the money you just pay regular taxes on it. If you deposit money in the 529 you don’t pay tax on that. So if you withdraw for a reason besides paying college tuition you just pay what you would have payed.
WRONG. 529 plan contributions are NOT deductible. If money is withdrawn and not used to pay tuition, the earnings only are taxed. under the new tax law, 529s may be used for private schools pre college.
MPACT contributions are deductible for MS only.
We did MPACT (my daughter is a soph at State) and it was great...paid in a little over $17,000 for five years at a 4-year institution. In 2008, I cashed in some really ****** variable universal crap a buddy sold me that I bought as a favor...it had around $12,000 in two policies combined. I gave that money to a money manager and when she started school in Fall 2016, it had ~$45,000 (we add $200/month to it) in it. She also had a savings account that my wife auto deducts $125 from her paycheck every two weeks...it had ~$28,000 when she started school. As it stands, she should have more than enough to pay for her college and have a little left over to start her life after school...assuming her mutual funds don't totally tank.
All that sounds right, especially #4. Follow up question: Let's say I do the 529 and in 18 years they earn full scholarships or I'm in a place financially by then where I can just pay out of pocket... Is the 10% penalty worth withdrawing and starting a new fund that's more long-term nest egg type for them?
I hope she know how lucky she is. Student loans are a heavy burden to bear and a lot of graduates have them nowadays.
Probably not worth paying the 10%. It can be used for grandkids under this circumstance. That's one of the benefits. You aren't locked into the original beneficiary.
Short answer, yes. Lets say you invest just $10,000 in a 529 now, and never pay anything more into it. Your return should really be no worse than around 7% per year on average. With that return, in 18 years, that $10,000 will have turned into about $33,700, and that also accounts for inflation of about 3% per year. Take 10% out of that ($3,370) as your penalty for withdrawal, and you have still more than tripled your money. That’s obviously way better than you can do with any savings account, and also better than you can do in the stock market in general when you account for capital gains taxes. The juice is well worth the squeeze.
I'm not an expert, but i think the 10% penalty is ON TOP of the taxes you'll have to pay on the capital gains growth of the investment. Most of those would be at the long-term capital gains rate though. The bottom line is this. If you use the money for qualified education expenses, then you get all of the growth for free and pay no taxes. If you withdraw it for other uses, then you have to pay the capital gains tax, but this is really a moot point because you would've had to pay that same tax had you invested it outside of a tax-sheltered account. And then you'll pay the 10% penalty on top of that. But I invest in 529's for my kids. To me, even if they end up as scholarships and you pay 10% penalty on those investments, just look at it as getting 90% of something back you thought you'd have to spend.
One other piece of advice. Consider your age. If you are expecting these funds to be needed for your kids after you are 59.5 years old and you are NOT currently maxing out your retirement accounts (Roth IRA, 401k, etc.), then I would think about maxing those out first before putting any $ into kids college funds. There's nothing that says you can't pay for your kids college out of those accounts. So why not max out there and guarantee yourself flexibility? The issues there is the age cap. If your kids needs the college funds when you're 55, you'll get socked for early withdrawal penalties there. I think there are some considerations though that Roth IRA money has to be invested for at least 5 years though. So you would have to start somewhat early to go this route. But if you have retirement money in these accounts too, it's probably not a big deal in the end.
One other piece of advice. Consider your age. If you are expecting these funds to be needed for your kids after you are 59.5 years old and you are NOT currently maxing out your retirement accounts (Roth IRA, 401k, etc.), then I would think about maxing those out first before putting any $ into kids college funds. There's nothing that says you can't pay for your kids college out of those accounts. So why not max out there and guarantee yourself flexibility? The issues there is the age cap. If your kids needs the college funds when you're 55, you'll get socked for early withdrawal penalties there. I think there are some considerations though that Roth IRA money has to be invested for at least 5 years though. So you would have to start somewhat early to go this route. But if you have retirement money in these accounts too, it's probably not a big deal in the end.
Looks like you are right on that. The earnings aren’t at a capital gains rate. So that’s another place they ding you.
I have a 529 for each of my 2 grandchildren, and contribute to each monthly. Mine's with American Funds, which has the advantage that it can be used at any school in any state. So be careful ... some don't have the flexibility and have to be used for a particular state. It's also my uderstanding that gains you receive on the investment are not taxable as long as the fund is used for college. If you use if for something else, there's tax plus some sort of penalty.
Yep. Non qualified withdrawals are taxed as ordinary income plus a 10% penalty. Plus repay any state tax deductions you took along the way with a 529. I personally have not opened one.
I like the flexibility a traditional brokerage account affords. I can hedge inflation with commodities, buy stocks, pick whatever mutual fund my heart desires. If I remember my series 66 correctly, you have a very narrow mutual fund offering in 529's and can only make 1 trade per year. That means you are probably going to be much more conservative on your portfolio than you have to in a different account. When it's all said and done the 15% capital gains tax is likely to be offset by better returns and traditional tax deductions of paying for college "out of pocket."
Most importantly I like the flexibility of being able to access the money penalty free if my kids earn full scholarships like their mom, use the GI Bill like their dad, or join the carnival like they currently seem to be leaning towards.
Sorry but that is bad advice. If you don’t know what you are doing you are missing out on money
You don't have to jsut use the 529 money for tuition. It can be used for any school-related expenses ... room & board, supplies, incidentals, etc. Even with scholarships, kids will have plenty of other expenses.
Frankly, I’d do a Roth Coverdale savings if 2k is your max. Petty much same benefits as 529 but you can invest in anything of your choosing, grows tax free, use for private high school if you like. Easy to set up. I’m surprised more don’t use those.
Long... Sorry.
Maybe. Maybe not. The argument that I have is the tax advantage of the 529 is offset by other factors. Such as the ordinary income tax rate and 10% penalty for non qualified distributions(for those households in the $77-$165k range that is 22%+10%.) Compared to a capital gains tax of 15% plus a $4,000 deduction off ordinary income taxes even if you don't itemize.
Let's say you put $25k in a brokerage account when a child is born and never add or withdraw for 18 years. Assume 8% annual return and you have $99,900 in the account in 18 years. That's $74,900 of earnings that will be taxed at 15% or $11,235. But if you withdraw over 4 years and take the $4k deduction each year. That's $16k of deductions at 22% or $3520. That is a net tax of $7,715.
I also hate the limitations on the account. One fund family and one trade or rebalance per year is not good for creating options for active management. The trade situation means you will have to drop out of equities significantly further from withdrawal time than if you have unlimited trades.
I personally am a big fan of passive investing. This means I look for broad index funds at super low fees. This will be real challenging in a 529 environment due to the fund isolation and program fees. In Mississippi it looks like asset based fees are in the 70 basis point range and they are in the same range or higher in Texas where I live (.58-.98.) Which is quite a bit more than the 5 basis points I pay with Vanguard.
Going back to the previous example, we assumed an 8% earnings on the brokerage account. Whether it's through active management gains by being able to trade at anytime or access other funds, stocks, bonds, ETFs, etc... I think it's fair to say an investment advisor or sophisticated personal investor can get better returns with more options. For passive investors, it's easy to get the 65 basis point spread between the Mississippi 529 and Vanguard fund I love (VFIAX.)
Using this math, I feel it would be fair to assume the 529 version of my $25,000 would earn 7.35% instead of the full 8%. So in my 529 version after 18 years I have $89, 614 of tax free money. But that is less than my $99,900 less the net tax liability of $7,715 or $92,185 in my brokerage account. I live in a no state income tax state, so I have ignored the effects of state income taxes... So with those factored in let's call it a push.
This example explains the advantage of the brokerage account and taxes with a lump sum. In a situation where most people are making annual contributions, your original investment makes up a greater percentage of the total account value thus lowering the tax liability of the brokerage account even more since only gains are taxed.
This is just one scenario, but I think it's real easy to see that if you feel you can earn 50-100 basis points more annually in a brokerage account, you can effectively match or out perform a 529. I don't think it's a stretch to make this assumption for most people. Add on to that the ability to access the cash for any reason without penalty and I am not signing up for a 529.
Now the biggest advantage of the 529 is that the money is locked away from grubby hands. No boat purchases or lavish vacations are coming with those penalties. I also love it for grandparents. It keeps the money from that idiot son or daughter in law and gives it to the grandkids.
regardless of age, you shouldn't put anything into a 529 unless you are maxing out at least your Roth and of argue 401k also. If you put 5500 per parent per year into a Roth for twelve years, that's $132k you can access for college if you need to. The only thing you give up is your state tax deduction, which is well worth the tradeoff for the additional flexibility.
Id argue the same applies for the 401k, because if you ever change employers you can roll that to a Roth and access it if you need to, you'll just have to pay taxes to do the rollover. But if you never change employers, then you'd be unable to access it, but really if you do the Roth every year, you should be fine unless you have more re than 2 kids.
Your withdrawal scenarios will only work if you're over 59 1/2 years old. Otherwise there is 10% penalty on withdrawals plus the income tax.
You can withdraw the amount you've contributed to a Roth at any time with no income tax liability or penalty (because you've already paid the income tax on this). Only withdrawals in excess of contributions are subject to the 10% penalty. Also, there is no 10% penalty for distributions used to pay for college expenses (you still have to pay the income tax though).
Please don't post about these things unless you know what you're talking about.
A Roth in your kids names is the absolute best bet. Especially if you're retired or close to it when your kids are headed to college. If you're living off of your investments in retirement and not working, you want your kids to be able to qualify for grants and other scholarships that are available as well to maximize your savings and their lives. Be careful where your money is, otherwise the government will penalize you for doing the right thing and saving for your kids. Start a Roth in their name, and pull out 25% of the contributions in year one of college, withdraw 25% in year two of the contributions, etc. this will set them up for college and give them a nest egg in their Roth that they can start maxing out.
Will the IRS allow a kid or any other person for that matter to make an IRA contribution with no earned income? Asking for a friend.
I’m not sure where you guys are seeing one rebalance per year on a 529. In Alabama’s fund you get at least 2 per year (I know because I did it last year). That’s more than enough. Truthfully, you shouldn’t need to rebalance except for every 2-3 years at most to gradually get more conservative as your kids get closer to college age. That is what all the target date funds do anyways.
Also, the state tax deduction is nice, but it is relatively a nonfactor unless you live somewhere like NY or California where state income tax is through the roof. Therefore, you shouldn’t let that be the deciding factor in which state’s fund you select if you live in a low income tax state (like most states in the southeast). If you decide you want to use Virginia’s 529 plan and live in MS, by all means do it if you think you’ll get 1% higher return or more. That will definitely offset the additional couple hundred bucks you get back in taxes from, say, a $5000 contribution annually.
Also, the state tax deduction is nice, but it is relatively a nonfactor unless you live somewhere like NY or California where state income tax is through the roof. Therefore, you shouldn’t let that be the deciding factor in which state’s fund you select if you live in a low income tax state (like most states in the southeast). If you decide you want to use Virginia’s 529 plan and live in MS, by all means do it if you think you’ll get 1% higher return or more. That will definitely offset the additional couple hundred bucks you get back in taxes from, say, a $5000 contribution annually.
Yeah, I can see this being a good option for the miniscule portion of the population that this applies to, but how many people are literally on the brink of retirement when their kids are 17-18 years old? I was 32 when I had my son (which I feel is way later than most people have their first child), so I’ll be about 48-49 when he’s college age. Even under the best financial circumstances, I’d still be at least 10 years away from retirement and I feel like I’m someone who has saved a fair amount over my working career thus far.
I agree. I guess you can wait until the kid is 14. Make em get a job 2 years before they can drive. Contribute $5500 per year into a Roth. By the time they start college if you were ballsy enough to bet it all on equities and earned 10% for the entire 4 years... You would be able to save a grand total of $801 on Federal taxes... That's some hardcore hate on Federal taxes right there.
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