Have you ever wondered how to open a 529 college savings plan, what the heck it is, or why you should invest in one for your children?
My babies were my motivating force to get my ducks in a row financially. Not being able to spend as much time as I wanted with my second baby after he was born was the driving reason for me to pay off my student debt and chase financial independence.
Now, I want to set him up financially so that he doesn’t have to be as burdened by student debt as I was.
Thanks to him, I learned about the importance of starting early when it comes to compounding interest. This is because compound interest is an exponential curve, not a linear one. It rises at a slow pace initially but then really skyrockets after a couple of decades.
So, I started him and his brother a 529 this year. I would have done it earlier but I was too busy trying to pay for my own education first. Now, I can focus on saving for theirs.
When it comes to saving for college, 529’s are an excellent choice.
What is a 529 College Savings Plan
529’s education savings plans are basically investment accounts that are meant to invest for future educational expenses. Each state has its own 529 plan. But, 529 ESP funds can generally be used in a state at any college. There is also an entity called a prepaid tuition plan that is specific only to certain colleges, but those are rarer.
Tax Benefits of 529 Plans
The federal government incentivizes contributing to 529’s by not taxing the growth of our investments in these accounts and making withdrawals tax free when funds are used for qualified education expenses.
As of December 2020, qualified expenses include costs of higher education, computers, up $10k annually in K-12 education, and student loan payments and costs of apprenticeship programs.
Some states provide breaks from their taxes as an incentive to save for college. New York, where I live, offers a $10,000 tax deduction from state taxes for couples married filing jointly ($5000 for individuals) for contributions to their 529 plan. Each state has it’s own plan and some are better than others. We’re lucky that NY is one of the best plans when it comes to investment options. But anyone can invest in a NY plan, if they desire.
Additionally, a couple can contribute up to $30,000 per year married filing jointly ($15,000 if single) without triggering federal gift taxes. Or, a single $150,000 contribution can be made married filing jointly ($75,000 for single) as a one time contribution that’s treated as if it was made over a 5 year period.
Contributions must be made by the end of the calendar year, so we’ve got about 2 weeks left this year to get it done!
My Little Scholar
Ownership of 529 Plans
Another big benefit of 529’s are that they are considered the property of the parents, not the children. The children are the beneficiaries, but the parents maintain control of the assets so the kids don’t blow the money on booze and drugs.
Also, if the original intended beneficiary doesn’t end up needing the money, the beneficiary can be changed to a subsequent child or grandchild.
As you know, we also started UTMA’s for the boys this year. That’s their money to do with as they like. I sure hope I will teach them better than to blow it on something stupid, but they earned it and they chose to invest it, so it’s theirs. But, 529’s are specifically and only for education.
529 Plans by State
It is a bit annoying that each state has its own rules and fee structures. Here’s a tool to help sort out what plan might be best for you. Our decision was easy because we live in NY and NY has a great plan. But, you may want to talk to your accountant about what might be best for your situation.
How to Start a 529 College Savings Plan
Often, getting started and over the hump of the unknown is the hardest part! So here is what it looked like when we actually started the account. It was very easy.
I went to nysaves.org and clicked on the “Open an Account” button below.
It then asked me to create a profile. Here is the info I needed, basically names and SSN’s.
Then, it asks you to choose investments. I chose the age-based target-date funds because I don’t really consider 529’s part of my overall retirement portfolio.
I invest in individual funds across my retirement accounts so I can rebalance manually at the end of the year.
But, the 529’s are their own thing for the kids, so I just picked the aggressive age-based option that starts at 100% stocks and adds more bonds as they age. And that’s it, I was done.
The aggressive growth portfolio in NY includes 60% Vanguard total stock market index fund and 40% Vanguard international stock index fund, which are what I would have chosen anyway given their low expense ratios and broad representation. NY’s low-cost Vanguard options are a big reason they’re considered to be the best.
There are also moderate and conservative age-based plans available for those who want to take less risk.
Once the funds are transferred, that’s it. They sit and grow on their own. We put in $10k over this past year and thanks to the solid growth in the markets recently, that money has already made $1.1k.
Other Perks
Other aspects that I plan to utilize in the future but haven’t yet:
Friends and family can contribute the the kids’ 529’s by sharing their unique u-gift codes in the party invitations. That’s pretty cool.
Grandparents can also open accounts for the kids on their own.
Other Caveats
Anytime we invest in the stock market, growth is not guaranteed. It is expected but there is a chance that the market will go down for a time period. Most of the time, it bounces back, especially if we’re in it for the long haul.
Some people worry about how a 529 plan may affect the student’s ability to qualify for financial aid. Here is a good article explaining how that works and doesn’t impact the student negatively in most cases.
So that’s how 529’s are opened. There’s really nothing to it.
In other news, I’m thanking my stars that my last couple of COVID tests have come back negative. We had an outbreak in my clinic and we’ve had several positive cases, including the amazing nurse who roomed patients for me recently. Thankfully, no one is severely ill yet. Here’s hoping we all hang in there until we can all get a vaccine!
Stay frugal, y’all!
Disha
Standard Disclaimer: Not meant as individualized financial or medical advice.