Mar 21, 2008

Investing in a 529 Plan for My Non Existent Children

So I'm looking for creative investment ideas once I max out my Roth IRA for the year. One option is a SEP IRA or a Keogh Plan, but I don't really want to save that much for retirement right now. I'm in my 20s and yes, it's important to put away a lot of money for retirement but I feel like on my salary $5000 a year is enough. (Maybe I'm wrong, but regardless, that's my current thought.)

The stock market, as we all know, is a giant toilet bowl right now, and it feels like putting money in it is just as bad as walking into a Vegas casino and flushing your money away. The hope is that it will go up over the long term. And it probably will, though no one can say what the rate of return will be, of course.

Besides starting an HSA Plan (which I should do, like, yesterday -- but figuring that out is a whole other blog post-o-fun), I'm thinking that it might be a good time to start saving for my kid's college education.

What kids, you say?

OK, so I don't actually have any kids yet. I don't plan on having kids until I'm 30, and that's 6 years away.

But college prices are so expensive... and if I have kids at 30, they'll be going to college when I'm 48 (wow, I can't even imagine being 48). Anyway, that's 28 years from now. Putting money away now to compound for that long will probably eek out a nice return, especially if I invest in some basic Vanguard index funds.

I'm also considering going to grad school at some point. So I'd start a 529 Plan in my name and if it turns out I never go to grad school, I'll put the money towards my kid's plans when I have kids. If I don't have kids, well, then I'll just give the money to my sister's kids. If she doesn't have kids, I'll give it to my cousin's kids. I'm sure someone in my family can use it!

Does this seem like a silly idea? I'm trying to find out more about 529 Plans.

The government site explains them a bit...

http://www.sec.gov/investor/pubs/intro529.htm

There are fees and expenses associated with 529 plans, and I won't jump into the investment without fully understanding them. Right now it all seems like a bunch of jumbled numbers to me.

Some interesting points from the gov site...

"Under current tax law, an account holder is only permitted to change his or her investment option one time per year."

"While each educational institution may treat assets held in a 529 plan differently, investing in a 529 plan will generally reduce a student’s eligibility to participate in need-based financial aid."

"Before you start saving specifically for college, you should consider your overall financial situation. Instead of saving for college, you may want to focus on other financial goals like buying a home, saving for retirement, or paying off high interest credit card bills. Remember that you may face penalties or lose benefits if you do not use the money in a 529 account for higher education expenses. If you decide that saving specifically for college is right for you, then the next step is to determine whether investing in a 529 plan is your best college saving option. Investing in a 529 plan is only one of several ways to save for college. Other tax-advantaged ways to save for college include Coverdell education savings accounts, Uniform Gifts to Minors Act (“UGMA”) accounts, Uniform Transfers to Minors Act (“UTMA”) accounts, tax-exempt municipal securities, and savings bonds. Saving for college in a taxable account is another option."

Plenty to think about. I really should be saving for a house. But it just seems like it couldn't hurt to start saving for grad school and/or my kid's college education. Right?



6 comments:

Shuchong said...

I looked into this a tiny bit a little while ago (post is here), and I think it makes sense as long as

a) You're sure you don't need the money for anything else (house, retirement, emergency fund etc.)

b) You have at least a few years before you want to go to school (if you're planning to use it for yourself)

Also, look into the plans administered by your state. Some states make all money you put into a 529 tax deductible if you're a resident.

And finally, make sure you check out the fees attached to the plan. Some of them are pretty high, esp. compared to index fund investing.
Saving For College can tell you the asset-based expense ratio of most plans.

Best of luck!

SavingDiva said...

I contribute about $9,000/year to my retirement accounts, and I make about 66% of your total income. However, our retirement plans may be different.

While the 529 sounds like a good idea, what if your plans change and you don't have kids? Or don't go back to graduate school?

I (personally, not like I'm any sort of person to take advice from in financial matters) would not invest in a 529 plan until I actually had a kid or decided for sure that I want to go to graduate school.

Also, if you contribute a lot to your retirement accounts right now, you will be able to contribute less later (when you have kids) and will be able to fund 529 plans.

Dana Seilhan said...

Pro argument:

You can change the beneficiary of a 529. So say you never have kids, or your kids decide to do something else with their lives, or if the worst should happen, you can give that money to someone else instead. Nieces, nephews, cousins... I believe you can even use the money yourself, although it would be subject to a 10 percent penalty and income taxes if you didn't use it for school.

Con:

The government weighs a prospective student's assests more heavily than it does the student's parents' assets when it comes to qualifying the student for financial aid. If you set up any financial assets in your child's name, they will pay for it later in terms of being responsible for more of the tuition. So by all means speak to a tax advisor about this before you dive in. In a perfect world your child/ren would qualify for scholarships anyway and save you all a pile o' dough, but you know how that goes.

Anonymous said...

I live in Virginia and didn't invest in a 529 until my son was in second grade. I'm very glad I did it as his entire college tuition and fees is now paid to any state school and it only cost me $15,000. He is now in 8th grade and college is only 4 years off, but I don't feel any panic about it at all. However...as I understand it...you have to name the child you are giving to and I don't think you can change it unless that child gets a scholarship or something untoward happens.

I think you should save for a house until you actually have a child.

stackingpennies said...

I save about $5000 post tax, $6000 pretax, and get a match of about 4000 pretax, which is about 15k for retirement (though not that much when you consider taxes).

But, this is the pf world, so most people are saving a lot. Many "experts" recommend saving 10-15% (or up to 20%) for retirement.

Anyway, I can't quite understad why this 529 is a priority over saving for a house, or even retirement, unless you are sure graduate school is in your future.

DogAteMyFinances said...

I just opened a 529 for my non-existent child as part of my long-term preparation for adoption. If you plan on adopting, I don't think it's possible to overfund.

Adoption aside, I think it's a great place to put some extra cash. Worst case scenario, you can change the beneficiary later.

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