Why a 529, and not just a good old bank acct?

[PMJ]

So I'm doing some research on setting up a 529 acct for DD. Needless to say, I know nothing about financial stuff, so need your advice here.

Background - we have decent income and of course will / and have been saving $$ for Education.


Our thoughts on 529:
DH is slightly against the 529 b/c he says, 'what if something happens, medically w/DD, and we need to use the $$ for that?" Good point, but does that outweigh the tax benefits from setting up 529, I don't know.

My hesitation about 529 is that it is based on Stock market...What if it continues to go down, then what.?? Do you lose the $ you initially put in there?

Bank thoughts:

Bank seems to always go up, even if it is at a slower rate. More of a sure thing.
Maybe set up a Money market or ING acct?

** FWIW - we are both disciplined with $ and would not 'dip' into Dd's educ $, unless it was a true Medical Emergency, even then we would have savings and would of course use that first. She is now 2 yrs old.

Thanks so much for your help.

[s7714]

Well, just like all stock market based investments, there are options that are more stable with slower, more consistent growth rates and more risky, quicker to gain (or lose) rates. And of course the longer you're planning on having the investment, the better your chances of coming out ahead plus some in the long run. What is your current risk tolerance as far as investments in your IRAs? If you're comfortable with that level, then most likely you could find similar investment packages in some 529s. A good financial planner would be able to steer you in the right direction on that.

Our 529s have early payout options. So if one DC decides not to go to college (or like you said, money is needed for an emergency) we do have options. I was concerned about that as well, so our financial planner made sure to scout out 529s with that option.

I guess we're of the opinion that since we're planning on having the 529s for at least 17-18 years from the initial opening we're not overly worried about losing our investment. My older DDs 529, which we've had for almost 9 years now, has more than recovered the total amount we've paid into it, despite the past dips in the market. Even with your DD being 2, you'd still have a good 16 years to build on!

[blisstwins]

The advantage is that I get a deduction on my state income taxes now and any profits made will be tax free if used for education when the time comes. We have a conservative , age-based portfolio and both accounts have made money over the last seven years (not every year, but our account totals are higher than the priciple we put in). The average for the last 5 years is 4%, which is not at all bad in this economy. There is a risk, but most accounts do let know take the money out or transfer it to another family member if the person it is set up for does not go to college or gets a scholarship, etc. DO your research. I am very glad we set up ours.

[KrisM]

Within a 529, you can choose what to do with the money. There are riskier and less-risky places to put the money. Do you have a 401k? It's very similar to that. A 529 grows tax free, which is nice.

A bank account is safe, however, you'll effectively lose money since inflation rates are much more than interest rates. But, that is the trade-off with risk. Banks are low risk and therefore low return.

[TwinFoxes]

Within a 529, you can choose what to do with the money. There are riskier and less-risky places to put the money. Do you have a 401k? It's very similar to that. A 529 grows tax free, which is nice.

A bank account is safe, however, you'll effectively lose money since inflation rates are much more than interest rates. But, that is the trade-off with risk. Banks are low risk and therefore low return.

:yeahthat:

I believe you can still access the money with penalties, but you should check on that. Using a regular bank account just seems like throwing money away because the rates are so low. Plus there are zero tax benefits. It doesn't make sense to me to have thousands and thousands of dollars earning 2% interest when historically the market has performed so much better. The plan DDs are in starts out moderately risky, and then goes to safer investments as the time to go to college gets closer.

[o_mom]

A couple other reasons....
- a 529 is considered a parental asset for financial aid, so it is not expected to be used to the same level as assets in children's names.
- A 529 is in the parents control - no blowing the college fund on a sports car at 18.
- You can always withdraw the principal with no penalty - there may be state tax implications if you took a state tax deduction, but you don't have to pay any penalty or federal tax on principal withdrawals.
- It can be transferred to another family member if that child does not go to college/higher education.
- You can withdraw without penalty if they get a scholarship.
- There may be state tax credits available for using your state plan. Ours is 20% up to $1000 per year.

[georgiegirl]

We can deduct up to 2600 per person per child (so over 10,000 for both kids) on our state tax return. So thats close to $1000 back a year.

[NJ_Mom2011]

A good compromise is an Coverdell educational savings account for your child. It is like an IRA, in that you can open up an account for your child at any broker, and choose any kind of investments, such as a bank CD (unlike a 529 plan that only has a small # of funds to choose.) In addition to paying for college, the account's funds can be used to pay for elementary and secondary school expenses. The investment gains from the account are tax free. Unfortunately, a child can only receive $2,000 a year in her account.

[wendibird22]

We don't have a 529 yet. Keeping think about it. Was talking to my boss who has 1 kid in college and another going in 2yrs. They had many investments in 529 and others. They lost just about everything in the crash a few years ago. He said he would have been better off putting the $ in his mattress. So, yeah, the risk is something to consider.

[KrisM]

We don't have a 529 yet. Keeping think about it. Was talking to my boss who has 1 kid in college and another going in 2yrs. They had many investments in 529 and others. They lost just about everything in the crash a few years ago. He said he would have been better off putting the $ in his mattress. So, yeah, the risk is something to consider.

But, he probably has gotten most of it back now. I know my IRA dumped back then, but now the balance is higher than it was in 2004 when I stopped contributing (converted 401k).

[jgenie]

Great question OP. We have regular savings accounts for our DC for much the same reason you do.

For those that have 529s for your kids, is there an income level that negates any tax benefit? TIA

[ssjarrett]

We just opened 529s and I wanted to share this resource for evaluating your options:

http://www.clarkhoward.com/news/clark-howard/education/clarks-529-guide/nFZS/

FYI Clark Howard is a finance expert with a syndicated radio show from Atlanta and features on the HLN tv network.

This may answer some of your questions and will point you to the best options for a 529...apparently most of them have high fees and you should be careful about which one you pick.

Just thought I'd share! Good luck with your planning!

[knaidel]

edited: never mind, my state is listed on his "Honor Roll"

[TwinFoxes]

We don't have a 529 yet. Keeping think about it. Was talking to my boss who has 1 kid in college and another going in 2yrs. They had many investments in 529 and others. They lost just about everything in the crash a few years ago. He said he would have been better off putting the $ in his mattress. So, yeah, the risk is something to consider.

If I had a kid going to college in just a few years, I'd have most of my money in conservative 529 investments. Just like a 401k, you can invest in high risk investments (like foreign stocks) early on in your savings, and low risk (like cash) as your withdrawal date nears. Now, since I have 15 years before DDs go to college, the money is in higher risk, higher return investments (although none are very high risk). I wonder what he was investing in...I don't remember hearing stories of entire states' 529 investments being wiped out even in the darkest days of the downturn.

[kijip]

A bank account at low interest may not even keep up with inflation.

[BabyBearsMom]

A bank account at low interest may not even keep up with inflation.

:yeahthat: In reality, most bank accounts have rates that are at or below the current rate of inflation. Most college tuitions are growing by more than the rate of inflation.

We have DD's 529 invested in a fund that adjusts the risk level as she gets older. So right now, when we have 16 years to save for college, the investments with the funds are skewed primarily toward equities and as she approaches college age they gradually move so that they are mostly in lower risk fixed income securities. That way, we have less risk that the bottom will fall out of the market when she is a senior in high school.

I like the 529 due to the tax benefits for our state income taxes and the fact that the interest earnings on the fund are not subject to capital gains taxes (so long as we use them for eligible expenses). Also the eligible expenses are really varied, and aren't just college tuition in a lot of states (I believe ours can be used for books, required technology, tuition, room and board, fees etc.). Also, at least in my state, if you have an emergency, you can always pull the money out of the 529 account although you would have to pay some penalties for doing so.

After the last 5 years that we have seen in the stock market, it is easy to be scared of market performance in coming years. However, since the start of the stockmarket, I believe that there have only been 2 or 3 other periods like these past 5 years. In other words, these kinds of losses are fairly rare although there is, of course, the risk of those losses. However, in a normal market structure, a diversified portfolio should be able to weather the normal ups and downs. I would recommend that you seek out a financial advisor who could help you better understand the types of investments that are appropriate for your income and your level of risk aversion.

[georgiegirl]

Glad to see my state on deans list with honors.

[wendibird22]

If I had a kid going to college in just a few years, I'd have most of my money in conservative 529 investments. Just like a 401k, you can invest in high risk investments (like foreign stocks) early on in your savings, and low risk (like cash) as your withdrawal date nears. Now, since I have 15 years before DDs go to college, the money is in higher risk, higher return investments (although none are very high risk). I wonder what he was investing in...I don't remember hearing stories of entire states' 529 investments being wiped out even in the darkest days of the downturn.

I'm not sure where he had his $. His daughter is a freshman this year so 3yr ago when everything kind of bottomed out I don't think it was on his radar yet to move $ around to low risk. I'm sure he wishes he did it now. He said his ILs also had accounts set up for his 2 kids and both now only have $1K each in them after taking big hits. I'm guessing everyone hoped to ride out the wave or that it would be a quick rebound.

[o_mom]

I'm not sure where he had his $. His daughter is a freshman this year so 3yr ago when everything kind of bottomed out I don't think it was on his radar yet to move $ around to low risk. I'm sure he wishes he did it now. He said his ILs also had accounts set up for his 2 kids and both now only have $1K each in them after taking big hits. I'm guessing everyone hoped to ride out the wave or that it would be a quick rebound.

Ours is set to adjust risk every five years or so. Once they get within 3-5 years of college age, it is mostly in low risk at that point. We are 10 years out from college, so it is something like 80/20 stocks/bonds.

[AnnieW625]

We got one for DD1 when she was a baby because our bank said it was better than a savings account. We only put in $50 a month, so not much, but we have about $3000 in right now, maybe more. We have made money on ours. Some states have different advantages to them. We went to get one for DD2 at our bank and now their thought is that they don't offer many 529s, but offer another product that works kind of like a 529 but doesn't have the tax advantages. I can't remember the name of it; I didn't like the financial advisor at our bank then either so the information went in one ear and out the other. I am not sure that I will get another account though esp. if the market decides to crash again.

We ended up getting DD1 a savings account at our local credit union, but last year she made $26 in interest on that account and we had to pay $8 in taxes on that money, but I do like the flexibility of the savings account, so right now that is all DD2 has.

[scrooks]

Our state has options that are age based so as the child gets closer to college age the investments move from aggressive to less risky.

[TwinFoxes]

Ours is set to adjust risk every five years or so. Once they get within 3-5 years of college age, it is mostly in low risk at that point. We are 10 years out from college, so it is something like 80/20 stocks/bonds.

Same here. I don't even have to do anything. That's why I'm not especially concerned about Wendibirds's boss' scenario. It's funny I'm totally willing to play around with my 401k investments, but for the 529s I'm leaving it in expert hands. :)

[lablover]

We ended up getting DD1 a savings account at our local credit union, but last year she made $26 in interest on that account and we had to pay $8 in taxes on that money, but I do like the flexibility of the savings account, so right now that is all DD2 has.

Just curious as to why you had to pay taxes on her savings account? It is my understanding that if a child has unearned income under $950 no tax return needs to be filed.

And as for the original question I agree with others who said that with a bank account you will in actuality be losing money due to inflation. With such a long time horizon a 529 is the way to go.

[bcafe]

What about the idea of putting $ into a Roth IRA? You can pull out the principle tax free and then if you as a parent needed the money, it would be there.

[KrisM]

I'm not sure where he had his $. His daughter is a freshman this year so 3yr ago when everything kind of bottomed out I don't think it was on his radar yet to move $ around to low risk. I'm sure he wishes he did it now. He said his ILs also had accounts set up for his 2 kids and both now only have $1K each in them after taking big hits. I'm guessing everyone hoped to ride out the wave or that it would be a quick rebound.

It also sounds like he panicked and 'sold low', which is exactly opposite of what you want to do. I didn't sell anything after my IRA dropped and it's been back to where it was for a year or so now. But, if I had moved things to super safe after it dropped then I'd still be low.

[KrisM]

Just curious as to why you had to pay taxes on her savings account? It is my understanding that if a child has unearned income under $950 no tax return needs to be filed.



:yeahthat: Double check that you needed to file for her. My kids got interest and do not need to file taxes on it.

[mypa]

For those of you putting money away in 529's, how did you decide how much to put in?