College Confidential was very helpful to me as a parent when my son was applying to college, so I wanted to return here to share some advice for parents anticipating the process.
529 plans made college payment so much less painful than we’d anticipated. When my son was born, we started one and asked both sets of grandparents to do the same. All three sets of adults are comfortably well off but not super rich- four out of six of us were employed by public schools, one sold insurance, one was a therapist. But we all prized education above all else and set aside 529 money for an education for our son/grandson from the very start.
My son went to a top liberal arts college where we were paying full tuition plus room and board, followed by a top law school where he has a 50% scholarship and we pay the rest plus his apartment etc. We never needed more money than we had in the 529’s! They paid for his entire education.
He has been getting a great education. As a parent, it has been gratifying to hear how much he has been enjoying these wonderful intellectual experiences and to listen to his process as he has developed his academic and career interests.
This week, we stopped putting money into our 529 because we realized we already have enough for the final year of law school next year.
We thought paying for college would be painful and we’d have to tighten our belts. We did not. We did not have to drain our savings account. We were able to keep putting the maximum into our retirement accounts. And this was all because of the 529’s!
To any parent reading this who has a small child at home, or anyone who has a relative with a small child at home, be sure to start a 529 plan! If your child is older, start one now anyway; it still will help. It is one of the most important investments one can make.
Good luck to your child(ren) in their college process!
Yes, starting early helps. Almost no danger in overdoing it. We possibly over did it with first 2, maybe roll over to second 2 or to grandkids. Also able to take out 35k roll over into IRA
I know people who have found it 'tacky" when a nephew, cousin, etc. suggests contributing to the kids 529 in lieu of birthday and holiday gifts. I think it’s great. Does a kid need yet one more stuffed animal, Duplo set, piece of plastic which will end up in a landfill after a week? I’m happy when a family member of close friend suggests the college fund instead of those wretched baby registries on Amazon filled with $500 high chairs and $200 size newborn parkas (which will fit for a month).
Great post, Grey King. And even if the 529 isn’t enough (we had to augment a bit) it sure helps. We had a job loss at one point with two kids in college-- and although we were happy to do the belt tightening on our daily expenses, not having to ask a kid to take a semester off for financial reasons was truly wonderful.
Great post, and if there was one message I wish we could have communicated more clearly to grandparents was “buy a few less random toys that they will forget in 3 months” and put that money to a 529. Or maybe their financial advisor communicating to them.
Similarly, now, at 18 with d24, they are talking about “giving some money to help,” which will certainly be appreciated, but gosh, the time value of 1,000 compounding 18 years is tough to beat.
Nice to see you again, @TheGreyKing, and thank you for sharing this important message. We are also very grateful that we received the advice to open a 529 account when our son was still very small. We were lucky to catch a strong stock market during those early years, so that more than half of what is in the account today is gain. The account funded our son’s undergraduate education and is now covering his graduate education as well. We also have an account for our daughter, and that is covering her college education. We retired last year, and it gives us great peace of mind that we don’t need to worry about these expenses. We are likely over-funded and will have to think about what to do with that over time. Neither of our kids have married yet, but if they do have kids, we would probably change the beneficiaries on the 529s to the grandchildren. It would be nice to be able to be able to give our kids the same kind of peace of mind we are experiencing - especially as neither of them is aiming at a high-paying career. There are only a few negatives to the way these plans operate. I never really liked any of the age-targeted options and always picked my own investments from the available funds. The available funds themselves tend to be rather generic, but they have been OK (and I think the age-targeted options would be fine for someone who doesn’t want to hassle with this). The fact that you can only change the investment mix twice a year can also be challenging in uncertain investment climates, but that only matters if you are picking your own portfolio. The lessons we learned from this - especially, start early - have now led me to encourage both kids to establish and fund a Roth IRA while they are still in school and not yet paying taxes. They don’t have a lot to contribute - maybe a couple of hundred dollars a year, all of which could be directed towards more immediate fun - but I showed my son what $1000 might look like in twenty years, and he was persuaded.
I agree, 529s have been great for us. We get a state tax break too, which is nice, but the most important thing is just arriving at this point (our first is applying) knowing we are well-prepared.
We also have not been too concerned about overfunding. I will say I personally believe you should prioritize tax-protected retirement savings. But if you would have otherwise taken the savings that went into a 529 and put it in a taxable account (or just spent it), I don’t think it ending up in a 529 is bad even if you don’t immediately need it for college.
So for those who started and then fully funded college with 529 accounts…how much did you contribute to these accounts from the time your child was born?
I will add, if I had it to do over, I would have put DHs annual bonuses into 529 accounts. It’s advice I’ve given to others since.
We started off at $1000 a month, slowly ticking up over the years until we were over $2000 (we initially had just the NJ plan but later added NY after discovering the tax benefit).
But in retrospect, we realized our savings would have grown quite a bit more in an equity portfolio even after accounting for taxes (thanks to some great bull years in the post 2008 era).
With S24, I think we started with $600 a month ($300 for each spouse into two accounts). It wasn’t quite at birth, a few years after. Eventually we ramped that up to the full gift tax amount each year–I’d have to go back to figure out the exact track. Then recently we have done both gift tax amounts (aka the full married amount). That is a lot of money but then so is college. Not at all coincidentally, we are at the point where if we choose, we can put in one more amount this summer to equal whatever is the four-year cost of S24’s actual college (we are using the Pennsylvania Guaranteed Savings Plan at this point, which more or less should track his costs).
With D30, we started right away, and also started very close to the single gift tax amount. She is therefore tracking considerably ahead of where S24 was at this point. So we may not need to do those double gift tax contributions toward the end, and of course could potentially be transferring over some from S24 (although he seems personally committed to avoiding any reduced costs).
One question for us will be whether we want to keep contributing for S24 to get the state tax break. But we need to know what his actual college costs are looking like before sorting that out.
The examples are a lot of money per month for many families early in their marriages…and especially for those of us who have kids in their 30’s now.
I think having a plan for paying for college is important, but putting $20,000 a year or so in a 529 just would not have been possible for us early on.
We were fortunate to be able to fund college out of current earnings for our kids. My whole salary paid college costs, an DHs paid all the other bills. At the same time, we also fully funded both of our retirement plans and that was important as well.
I do think parents should look at 529 investments and figure out if that works in their financial plan. And I completely like the idea of having money go to those instead of random gifts. Our grands bought savings bonds…the old way to give this sort of gift to the grandchildren.
Yeah, it is tricky figuring out how to invest a 529. We were in equities early on (Utah for S24, D30 is in West Virginia), and then we transitioned S24 to the PA GSP (which tracks tuition).
We actually got lucky with S24 in the sense that we caught the stock market run up, and then avoided the combined stock and bond crash. But of course it could have worked out the opposite way.
The one helpful thing is we do a sort of integrated financial planning where because S24’s 529 can be used for a safe amount of income in coming years, we have taken more risk (i.e. invested in more equities) with our retirement savings. So even if equities had continued to do well recently, we would have got the benefit of that in other accounts.
In other words, we have tried to make sure our 529s were not really affecting the way we invested our savings overall, we are just trying to make reasonable use of the tax benefits.
Yes, we are recreating why people (rightly) observe that 529s amount to yet another tax benefit that mostly goes to relatively high income families.
As I mentioned earlier, I think this is the exact right priority.
To me, 529s make sense for the sort of families with college-bound kids who max out their tax-protected retirement savings and then still have the means to also put long-term savings into a taxable account. And the tax-protected retirement amounts are already quite a bit annually. If in fact you do only that for most of your career, and invest it sensibly, those amounts are well-calculated to lead to a good financial position in retirement.
So having even more savings on top of that is not really necessary to make all this work out. But if you do have more savings, then OK, you can put some of those extra savings, maybe a lot of them, into a 529 instead of a taxable account.
So personally, I agree being positive about 529s should never be taken as meaning 529s are a necessity, or a priority over retirement savings. But they are an interesting tool if you get to the point you can generate savings at that level.
Same for us. We started out contributing about $1000/year to the 529 and then gradually increased the amount until our D was in middle school. Then we made the assessment that we could get more return in other investment portfolios, and my parents took over investing in the 529. We had planned on having to pay full private school COA so it was a bonus for us that not everything was in the 529 since our D chose to go to a state school.
We plan on starting a 529 if our D has children some day, and maxing it out for the grands every year.
Yes! I was responding to the part about switching over to our investment portfolio as the primary vehicle for funding college, not the amount of money being invested, all though we did rapidly bump up that amount.
Yes, absolutely! Never sacrifice retirement savings for education savings (we didn’t). You can always get a loan for college, but not one for retirement.
We started at 1K per month for each of the two kids when they were under a year old, and at some point went up to $1.2K.
I agree it’s tricky to balance things, and of course not all families can contribute that much (we were older when we had kids, and both had good careers, were done with MBAs, etc). We did max out our 401Ks too, which if push came to shove would have been the priority.
For us, we have both Maryland 529 prepaid trust and investment plans. We used the prepaid trust to pay for tuition for our oldest, who is current in-state university and continue to contribute into the other plan for our younger one.
So far the benefits are tax deductible every year, lowest pay out tuition, and this force us to save for my children education along with 401K.