I recently received the following email from a reader:
My wife and I recently found out we are having our first child. We are very excited! I am 27 years old (and my wife is near that) and we are doing OK financially. The only debt we have right now is our mortgage. I was wondering what people's advice is for what we should do financially. We want to start saving for college and we want to make sure we are making the right financial decisions for our baby's future.
Advice...thoughts?
I asked for a few more details to be sure we all had a decent picture of where they stood financially and he provided the following:
Well, we were both lucky that our parents paid for our schooling, so we don't have any of that school debt. Yes, we do have an emergency fund and it is pretty well funded. I invest in a 401k through my company (they have a matching problem). The only major financial issue we are facing is the prospect of buying a new home (gotta sell ours first!).
I think our only specific goals are to start putting money away for college. We own both our vehicles outright, but also want to keep paying into a new car fund for if/when one of our cars breaks down. And we also want to keep making sure we don't fall behind in our emergency savings...but at the same time...keeping some money aside to use to keep us sane during the infant years. We know nothing about 529's...We did have investing in the E-Trade S&P 500 index fund before they canceled it (which lost us a fair amount of money. I am still VERY upset about that.)
Knowing this, what are your suggestions for this family?
Congrats on all your accomplishments. I am in a similar situation. I'm 30, married with 1 boy. Our modest house, cars, and everything else we own is paid for. Currently are contributing max gov't allows in 401k, Roths's etc... I suggest doing that first. In addition we opened up a Iowa 529 when our son was born and starting funding $25 a check(automatic). Nice Vangaurd funds to chose from so we put our money in bond funds mostly and a target date fund. My thinking is that he can use whatever ends up in his 529 - and then we'll help with the rest via savings and retirements(most likely Roth) - if he needs it.
Posted by: Matt Goche | October 09, 2009 at 10:49 AM
Congrats on the upcoming birth! You'll hear it over and over, but your life will never be the same, but, parenthood is the greatest!
Similar to Matt above, I am just gonna be turning 30 and we have two, one just turned 4 and 1 soon to be 2 year old... Since their births we have been buying just plain old savings bonds for them as this is how my wife partially financed her own college, but recently we started 529s for them as well. With us living in Ohio, the OhioAdvantage fund is rated one of the best and thats whom we went with. Starting with an initial $25 and with some of the bonuses they have right now we are already up to $75 in one account and $100 in the other... also they have a deal going with an additional $25 for setting up automatic deposits. We went very conservative right now with the Vanguard funds as well.
Good luck!
* i can get you an additional $25 if you choose the OhioAdvantage fund, just contact me!
Posted by: Dan Ketcham | October 09, 2009 at 11:30 AM
What happens to a 529 if your child doesn't go to college? My in-laws started working right out of high school and a couple of my friends joined the military, what would have happened to their parents' 529 if they had one? Just a what-if question, not wishing anything on anyone. :)
Posted by: Crystal | October 09, 2009 at 11:32 AM
Crystal: You can change the beneficiary no problem. Pretty much as long as *somebody* you're related to ends up going to college, it should work out fine.
Posted by: Mike Piper | October 09, 2009 at 11:38 AM
Also, what if the child gets a full ride or multiple scholarships that pay for everything?
In our case, my in-laws had a general college fund for my husband. They ended up not using it since it crashed when he started (2001), but it was there for him as downpayment help for our home in 2007 (it covered 4/5 of our 20% downpayment). I think they took out a home equity loan instead for college expenses...it was some kind of loan that they paid off pretty quickly. Yes, my husband is a spoiled only child, but we are very and truly thankful to them.
I received a few scholarships that covered alot. I also worked part-time jobs all the way through to cover as much as I could. My parents covered my first year food and housing and $8000 in costs I couldn't cover over the last 3 years (about $13000-15000 total). I am also very thankful.
My little sister got even bigger scholarships for when she started this year, so my parents are putting in similar amounts for her overall (she doesn't have to work, which is good since she has to study more in Engineering...Business seemed a little easier).
Would my parents have been able to cash out the remainder in a 529? They didn't/don't have one for either of us, but I just thought it was an interesting question.
Posted by: Crystal | October 09, 2009 at 11:47 AM
Mike, what happens when you run out of beneficiary college kids?
Posted by: Crystal | October 09, 2009 at 11:50 AM
Crystal: You can make grandchildren, nieces, nephews or cousins beneficiaries as well. My wife and I do not have kids yet so I do not know all the ins and outs, but the rules on who you can use it for are somewhat lenient.
Posted by: CPA Abroad | October 09, 2009 at 12:01 PM
Thanks!
Posted by: Crystal | October 09, 2009 at 12:41 PM
Crystal - look into an ESA (Education Savings Account). The downside with an ESA is that you can only contribute $2000 per year, and you do have to spend the money on qualified education expenses or gift it to another family member before age 30 (there is no age limit on the 529). Like a 529, the money grows tax deferred and is tax free as long as it is spent on qualified education expenses, and like a 529, the assets are not considered your kid's assets, as long as the account is set up properly (generally with a parent as custodian for the benefit of the kid). Also, if you have a very high income, there are limits on the ESA, not on the 529.
But on the upside - you can invest the ESA assets in anything you want, whereas a 529 is limited to a bunch of state-run plans, some of which are pretty good but some of which are absolutely awful (some mutual fund run by the governor's kid or something similar). Also, with the ESA, if you ever enroll your kid in private school K through 12, you can use ESA money for that, which you can't do with the 529.
Posted by: Bad_Brad | October 09, 2009 at 01:42 PM
If you haven't maxed your Roth IRA, I would do that first. It gives you flexibility because you can access what you contributed in an emergency or use it for your own retirement if it is not all needed for College.
Posted by: Roy | October 10, 2009 at 07:31 AM