There were some interesting comments to my post titled College Saving Reality Check: What You Can Do to Save Enough for Your Kid's College Expenses and How to Pick the Best 529 Plan starting with this one:
I signed up my daughter for the indexed Utah 529 plan and my son for the managed Nebraska 529 (hey, no reason for two plans other than it was after the stock crash and I got really paranoid about diversifying financial stuff.)
Nope, I don't live in Utah or Nebraska. I wanted plans that were well-run, and that could support my child's decision to go to any school in any state. My home state has no state income tax so I didn't care about any state tax advantages.
I went right to the state plan Web sites and set them both up. Was very simple, no broker needed, have been pleased with my choices.
My only question: people worry about the 529 "counting against me for aid" because the financial aid plans will expect a large percentage of those assets to be counted in the aid formula.
Well, DUH, that's why I saved the money, not to try to get more than my fair share of aid further down the road by squirreling it away elsewhere.
As I previously posted, Utah and Nebraska have two of the top-rated 529 plans.
That said, here's another take on 529s:
I am not too impressed with 529 plans. There are far too many restrictions placed on what can be done. States offer 529 savings plans that are good for tuition at public schools, or you can prepay tuition. However, private institutions are only allowed to provide tuition prepayment. Why would someone want to limit the opportunities available to their children? How certain is your child that he/she will want to get a degree and from where?
This is what is good about Coverdell ESAs. However, there are extreme funding limits. From the time your child is born to the time they are going to head off to college is about 18 years. From the time you are born to the time you are eligible for various retirement benefits is about 60 years. Now, it is unrealistic to think that you would be saving for retirement until you get into your 20's, so we can safely say that you have about 40 years to save for retirement. That is the problem with Coverdell ESA limits. You have less time to compound your returns, but you are extremely limited in the funds you can contribute.
This all brings me back to the idea of hiring your children in a home-based business (even a side business) and having them fund a Roth IRA. Up to $5150 is tax free for 2006, without other possible deductions. The Roth IRA limits are at $4000. And with all the tax incentives available for hiring your children, you can completely avoid paying payroll and income taxes on these funds. The contributions to a Roth IRA can be withdrawn for any reason without tax and penalty, and earnings can be withdrawn without tax and penalty for higher education needs. This allows you to contribute twice as much as a Coverdell ESA, and lets you keep any unused funds for retirement, whereas penalties are in the works for funds not used by the age of 30, in a Coverdell ESA. Plus, you still have the $2,000 you can contribute to the Coverdell ESA, for a total of $6,000 in 2006 when these two methods are combined. Absolutely zero taxes on these funds, ever. What a great concept. Plus, funds in a Roth IRA are not counted in financial aid!
I have mixed thoughts on this comment. Yes, 529s can be restrictive (they don't have to be used for one school or a small set of schools -- I'm not sure if this is what the commenter was implying), confusing and expensive. That's why you need to do your homework before you invest in one. I love Coverdell ESAs, but there are very low annual limits on them.
On the issue of 529s only being good for public institutions, here's a response from Saving for College:
There's a misconception that state-sponsored 529 plans are only geared to families that send their children to a state school. That's just not true. There are two general types of 529 plans: prepaid programs and savings programs. The states offering prepaid tuition contracts covering in-state tuition will allow you to transfer the value of your contract to private and out-of-state schools (although you may not get full value depending on the particular state). If you decide to use a 529 savings program, the full value of your account can be used at any accredited college or university in the country (along with some foreign institutions).
The business idea from the commenter is a good one in theory, but not really in practical terms (at least for most people). First, you have to have a business where you generate enough to pay your child. Next, the child needs to do meaningful work that justifies his/her salary -- you can't just "give" them a salary and call it work. So even if you have a business that generates this kind of income, it's likely that your child won't be able to earn a salary like this until he's at least 12 years old (if not older). You need to be saving for college well before this age.
We end with this comment:
Don't forget to have Junior get in on the college savings, too, in two ways:
1) Kids who are old enough to get a job (or entrepreneurs who start their own businesses) can contribute to their own savings before and during their college years.
2) Kids who get decent grades and participate in school and out-of-school activities increase their opportunities to win scholarships (as well as learning valuable skills, making friends, networking, etc.).
Kids whose hard-earned money helps pay for their education will value that education all the more. I teach at a community college, and I can tell you that my most serious students are those who have either been out in the world a while and are coming back to school, or who are working part-time (or full time!) to put themselves through. These students know that when Boss says, "Do," you "do," and they apply the same principle to their studies.
I agree! Our plan is to pay for half of our kids' education. They can earn their portions by working, scholarships, grants, etc. Both my wife and I paid almost all of our college tuition ourselves, and while making our kids pay so much seems a bit over the top, we do think they'll value the education more if they have to work for it.
So, what do you think? Care to chime in with you two cents?
One of the best things my parents ever did for me was pay for my college. I came out with a degree and nothing else, which is a lot more than most folks. It took me a long time to appreciate this. It's one of the main reasons I've been able to come as far as I have. I understand the point about valuing the education, but if/when I have children I'll do my best to do for them what mine parents did for me.
Posted by: Dave | April 25, 2006 at 11:43 AM
An important thing to remeber about 529 plans is that their Federal tax exemption is set to expire in 2010, unless renewed. So if your children (like mine) are not currently in high school, you are better off first contributing to an ESA, which have exemptions that are not set to expire (you can invest in both).
Posted by: Katherine | April 25, 2006 at 12:16 PM
I think it's a good idea to have the kids pay for part of the education, such as book money, fees, and for clothes, and other "household expenses". But no more than that. Their primary function in college is to get an education, and having the time to pursue internships, research/work in their field, or the time to really concentrate on their grades is extremely important. Consider: most people today go to college, so the competition for jobs is fiercer than what it was in years past when a degree was a bonus, not a requirement. It's not enough just to "get the paper" if you want the good job/graduate program that follows -- this is already the case, and will definitely be so by the time your children go to school. This means that it's important to have good grades -and- experience in the field if the student really wants to succeed. By the time your kids get to school, that combination may be a minimum requirement. So school should always come first.
The point of saving for a child's education is to ensure that they get one. This is difficult when you work and go to school, depending on your field and if your job will even accommodate your schooling. Most unskilled jobs don't pay a lot, which means students have to work longer hours than what they might have done when you were in school. This competes with time that can be spent studying. There are always campus jobs, but those may not cover the expenses needed if the child is meant to pay most of their own way. Also, don't underestimate the demands of classes -- it's not like high school, where a student could work and still get good grades. It's the difference between the housecat and the lion -- a college student may really not be able to _successfully_ balance the two.
In my opinion, if not working means the child can't attend college, then it's probably a better idea to have the child defer college until the money is saved so they can really focus on their studies. As a parent, you want to maximize the investment you put into the child, and it's important to know what your priority is: teaching the child responsibility at 18, or preparing them to achieve in school.
It would be helpful to evaluate the true demands of a college education and then plan accordingly. As far as the responsibility, it's hard to start that at 18. Start small...let the kids use their allowance money to buy school supplies, clothes for school when they are younger, etc. Work on time management, and budgeting with them early so they learn to minimize cost. But don’t ever forget that it’s their success in college that’s important, not just the fact they attended.
Posted by: annab | April 26, 2006 at 11:21 AM