D23 will be attending college this Fall 2019. We have a VA Pre-paid account and an Invest where I moved Stock Index fund to an FDIC Fund this past summer. D has been accepted to a few VA colleges and waiting on more. Not much return FDIC fund obviously. FDIC fund used for other college expenses such as room, board, fees, etc.
Should I stop contributing (or just a minimum) to FDIC Fund and just add to our Ally Bank Savings where interest rate is now 2%?
FDIC is not a fund. It is an insured account, just like your checking account is insured at your bank. If the bank fails, the FDIC will pay you the amount in the account (up to $250k). No risk, but very little gain at 1% interest. The bank can set any interest rate it wants, the FDIC doesn’t set the rate.
The Ally bank account may be FDIC insured also, or it may be a broker account where you could lose all in the account if the market drops. It’s up to you if you want to take the risk. Sometimes there are other tax benefits so that it makes sense to continue to put money into a 529 even if the funds aren’t generating much interest.
The Ally Bank savings account is FDIC insured and currently offers 2% APY on all deposit amounts.
Look at the costs associated with your 529 fdic funds. If you create a CD ladder with ally you can take advantage of higher rates, 1 yr is 2.75 and upwards from that, you can also look at the no penalty CD for the money you need soon as that is 2.10 if your balance is adequate. If there are no tax benefits and actual costs with the 529, then this is a good time to look at the math. How much do you save a month, and how much time does your 529 balance buy you in college costs? If you have enough in the 529 for the shorter term, you can afford to tie up current and future $ in longer term CDs (you can be flexible with multiple minimal amounts should you need to break one here and there, 3 months interest penalty for a 1 yr with no minimum contribution).
With your short time horizon, the only real advantage of a 529 would be the state tax deduction. Tax free growth is nice but the return is going to be fairly small anyway and, as others have pointed out, fees may be higher in the 529. You can probably beat the return of most 529 ‘safe’ cash offerings with a CD ladder or even the Ally account, although the difference may be relatively small after taxes. In the end the state tax deduction may end up beating the return of anything else in the short term.
Buy the CDs through a Coverdell and you won’t have to pay income tax on the interest income if you use it for approved college expenses.
Unfortunately you can only contribute $2K/year to a Coverdell. Just thought I would put it out there for readers with younger children, though.
Thanks for all the info. I will contribute enough to the 529 FDIC account to take advantage of the tax deduction in VA. The main issue is whether it matters if I plow $2k/month in the Ally account (be it savings or the step up CD) vs all that monthly money into the 529 FDIC.
Again we don’t qualify for any need based aid. My D wants to go to med school so trying to save as much as we can during the 4 years she is undergrad.
Are your retirements and HSA and (backdoor) roths optimized/maximized?
If you optimize the 529 contributions to get the tax advantage, then it's just down to the math of rates vs costs. I looked at our 529 FDIC and it is less than 2% plus there are some costs (and it is a Utah plan so it has lower costs than many 529s). So at present the CD ladder is a better option for contributions. Obviously it would have been better to have just been able to leave it in a VTSAX as long as possible until the correction occurred, Dunno what options you have in your 529, if you are not needing to access it soon and have years of contributions to continue, look at the bonds vs the FDIC if you are a little tolerant. 2k a month is still a big contribution. As sensible premed parent and students wants as close to free undergrad as possible, hopefully your savings have a while yet before you need them.
Again, there is no ‘FDIC fund.’ There is no ‘FDIC 529’ account. The FDIC is not a bank and doesn’t set up accounts, take deposits, or set interest rates at banks. The FDIC insures against loss if the bank fails. That’s it.
It is semantics, we know what the conversation is about. Lordy, pee and weetabix.
@sybylla and @politeperson . Thanks!
Yes, you know where I am coming from…Agreed that the CD options such as the ladder/no penalty CDs, etc. may be the best option at Ally…
Yes, all retirement options are maximized.
Sybylla- lots of people who are not the OP end up reading threads and getting advice (good, bad, inaccurate) from old threads. I commend Twoinanddone for always striving to give accurate financial information even when posters ignore her very sage and experienced commentary.
You’d be surprised at the amount of financial mis-information that’s out there; even from allegedly reputable sources.
Continue…
Not sure if Twoinanddone provided me any accurate information…but thanks to all others.