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529's-are they worth it?

cal0302cal0302 Registered User Posts: 54 Junior Member
My spouse and I disagree on the merits of 529 plans. Our oldest goes to college in 2006, the next two follow 3 years apart. By living below our means, we've saved about 30K in each kid's 529 account. I would like to keep contributing, esp. before we start paying college bills on the oldest. He thinks we are hurting any chances for financial aid by putting so much in our children's names, and should just invest that money in our own accounts. I think that my child won't qualify for any financial aid anyway, since we make ~100K together/year, and I like the idea of having money stashed away to be withdrawn tax free. So much of what I've read on this subject is conflicting. It seems that parents are penalized for saving for college. Any opinions?
Post edited by cal0302 on

Replies to: 529's-are they worth it?

  • jamimomjamimom Registered User Posts: 3,278 Senior Member
    Right now they are worth it as they are considered family assets, not assets for the child specifically and are assessed at about 5-6% rather than the 35% of saving for a child. But you should keep your ears open about changes in that front. Some schools are eyeing that as assets for the child, and you may want to look into how the account should be named.

    Also, do make sure that you and H are well cared for in that you are putting maximum amounts in your own 401k and other qualified pension plans. Also the Roth IRA is something you may want to examine. By having some of that money stashed away gives your family all kinds of flexibility. Yes, you may lose out on some financial aid, but saving nearly always trumps. You have some choices with the money. Also, be aware that there are some great loans such as the PLUS loans for parents that spread out each year's tuition over 10 years. If you have money stashed away for yourself, that can be used to pay such loans giving you even more flexibility.It is not wise to count on financial aid. Many families are unhappily surprised out how much a private college can cost and how little financial aid kicks in and how much of it are loans.
  • itstoomuchitstoomuch . Posts: 1,745 Senior Member
    As in any financial considerations, there are MORE THAN ONE scenerio that can satisfy your dilemma(s).

    I'm sure you have heard the following but it bears repeating for those who haven't heard it. The obvious goal is to fund your children's education. This leads to a series of questions: What school do they/you intend to go? Private/ public? Your contribution portion?When is the expected attendence? And finally your tolerance /intolerance for Risk.

    New variables has been added in in GWBush adminitration which really conplicates matters.

    1. Expect scholarships to decrease because there is less money and because there are more kids.

    2. Expect financial aid in the form of Staffords and PLUS loans to be more expensive because interest rates are creeping up to more historic levels and because the government in its effort to balance the budget to limit the subsidizing of interest.

    3. Tax laws has dramatically changed! a) Investments (stocks, Mutual Funds, Bonds) have a cap on the tax of capital gains of 15% when held for +1 year, even if your marginal tax rate is 32%. Capital loses are still fully deductible.
    b) Dividends (not interest on savings accounts, bonds) are also taxed at a reduced rate and will virtually disappear in a few years. (see a qualified tax advisor)

    4. Specific programs for Post HS education as 529's and Coverdells, enjoy tax advantages, these advantages only, however, apply to gains, dividends, interest. If your 529, Coverdell DECREASES (alot of them have) in value-too bad, so sorry, SOL.

    A 529 can be extremely advantageous if your kid is within 1 year or in college. In Oregon's case, where you (not through a financial advisor) contribute up to $2000, there is a straight deduction off of your income, wheather or not you itemize. Oregon as a fairly flat tax rate of 9%. If you place $2000 in the money market fund (a real conservative but extremely safe) you would immediately enjoy a 9% return on investment even if held for just 1 day; amd 4.5% for 2 years. In our case, the money stays in the account for of less than one week, moving from our personal investment accounts to the 529, back to us, then to the school. The money that we earmarked for our kid, we enjoyed LT gains at reduced tax rate, taxfree dividends, and a deduction on our income, with a minimum amount of risk and have access to the money incase of emergencies or better opportunities.

    I think you would need to make sure your savings and investment portfolio is in line with When you need the money. Your oldest kid, should have the least risk portfolio, with a greater risk tolerance for the younger kids. Keep savings/investing money. Keep the money fluid.

    There are people of some highly respected firms that do a very comprehensive and complete financial analysis for you at no cost. Whoever you choose-GET more than one opinion-generally from a person that has an opposite view (which could be tough to find)

    You are both correct. And you can accomplish nearly all scenrios if you keep an open mind and the money accessible. Although the system is advertised for the encouragement of the middleclass to save for education, The system is really gamed to those who has money and who takes advantage OF the system. It is unfortunately not for those who really need the money.
  • itstoomuchitstoomuch . Posts: 1,745 Senior Member
    BTW- Look at the FAFSA. Fill one out on paper or online to find your eligibility. I tell everyone that you should be aligning your and kids money two years prior to formally submitting the fafsa. (No one listens.) Only the lastest FAFSA and submitted FAFSA is looked at.
  • itstoomuchitstoomuch . Posts: 1,745 Senior Member
    529 Short answer: Yes, No, Maybe.

    I've made money and lost money in 529's, Coverdell, minor IRA's, and nonqualified investment accounts.

    As for 529's: I've lost the most money in the Oregon College Savings most conservative fund (at the time, blend of bonds, large cap, and mmkt.) Got so upset that I personally told the Oregon's head guy that in a environment of increasing interest rates the riskiest investment is the conservative fund and the safest the aggressive fund. I've made the most money in the riskest portfolio (aggressive). Got the biggest bang by buying the money market and holding for just 1 day for the tax gimmick.

    Good luck. You need it.
  • itstoomuchitstoomuch . Posts: 1,745 Senior Member
    Savings penalty. Yes. Because you are middle income. You wouldn't care if you have wealth or if you are lower income.
    Conflicting opinions. Yes. Because the authors are writing to different audiences.

    We took a stance very early on that in no way, no how, could we ever earn and save enough for the type of school we wish our kid to enjoy. We then took an approach that is conservative, in that we took some very big risks within and outside of qualified plans. (An aggressive approach would be to save in savings programs and EE Bonds, this is because the rates of return is less than the increases of tuition costs. We would have to fund the programs at ever increasing amounts or to enormously overfund in the beginning.)

    There is no subsitute in HAVING the money to enable to kid to go to the school of his choice verse having NO money and letting the school and government make the decision.

    As a side bar. We did use EE Bonds which has worked out quite well in the past 5 years and in conjunction of a 529. We just didn't put a whole lot of faith in their return rate. The laws changed which made bonds more attractive at the time and now. I would again use bonds for only a minor portion of the portfolio.
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