Children's College Savings accounts

[Dexman PE]

I'm looking to start a new job here in about a month, and with it comes a bump in pay. Like most salary increases, the added funds go straight into some form of savings account (rainy day / vacation funds) or are used to pay down the principal for some of the more expensive things (student loans, car, credit cards, etc). The fact that my oldest son is starting kindergarten this fall got me thinking that it's probably in my best interest to start some form of a savings account for college (if they choose to go that route).

I have several online accounts through ING, but honestly the interest rate on their savings accounts really blows right now (1.1% APY). I have absolutely ZERO experience with stocks and mutual funds and the only bonds I have experience with are the $50 ones you can buy at the post office. Lastly, I really don't want to get involved with brokers because I really don't trust them (the lack of trust extends to before this last market crash) and I think the stock market is a :mf_followthroughfart: .

Additionally, my grandfather setup a separate trustfund account for each of my 2 kiddos (he did it for all the great-grandkids) through Edward Jones which includes a handful of mutual funds.

What are some of you doing for this?

 

[Ble_PE]

I opened up a 529 plan for Mini-Ble not long after he was born and have put a little money into it so far. The one I'm using is a direct-sold plan which means I don't go through a broker. I believe every state has a plan available, but you don't have to necessarily use the plan for your home state. Here's a good website with info about the 529 plans.

Edit: Congrats on the new job! Have you officially accepted yet?

 

[Master slacker]

I haven't read up too much on 529, but isn't there some snags when wanting to go from one state to another? What if the child doesn't need it... can you roll it over into your IRA or 401k?

My approach was to put away money first to our Roth IRAs and max them out each year. If there's any money left over within each 12 month cycle, that would go towards college savings (529, money market, CD, etc...). The kids can pay for college with scholarships, jobs, loans or whatever, but the missus and I can't retire with the same options.

 

[Dexman PE]

I opened up a 529 plan for Mini-Ble not long after he was born and have put a little money into it so far. The one I'm using is a direct-sold plan which means I don't go through a broker. I believe every state has a plan available, but you don't have to necessarily use the plan for your home state. Here's a good website with info about the 529 plans.
Edit: Congrats on the new job! Have you officially accepted yet?

Thanks for that info, I completely forgot about that program.

I have not officially accepted because they have not officially offered it yet. I have received a verbal offer pending the completion of my drug screen and background check. My first day wouldn't be until June 21st (mostly because of the wife's surgery and the Vegas trip I already had planned), so I have time. I was planning on sitting down with my current manager tomorrow (he's been out of the office all week) to let him know of the offer simply because once you subtract the time missed for the surgery, trip, and holiday it ends up being ~2 weeks of notice

 

[Dexman PE]

I haven't read up too much on 529, but isn't there some snags when wanting to go from one state to another? What if the child doesn't need it... can you roll it over into your IRA or 401k?
My approach was to put away money first to our Roth IRAs and max them out each year. If there's any money left over within each 12 month cycle, that would go towards college savings (529, money market, CD, etc...). The kids can pay for college with scholarships, jobs, loans or whatever, but the missus and I can't retire with the same options.

That's one of my concerns too. I'm hoping to find an option that has some liquidity so incase Mini-Dex ends up with a full-ride or decides to go to a trade school, or no college at all, I still have the money available.

 

[benbo]

What are some of you doing for this?

I know zip about $$$ but here goes-

First, I'd get rid of the debt. The highest interest you'll earn anywhere these days is getting rid of your debt.

IMO the stock market is going nowhere unless you really know what you're doing and have some time. CDs are even worse.

Nevertheless, I have money in both of those things, in a diversified way. Some stocks, some bonds, some precious metals, some cash (CDs).

My financial advisor (free one at my CU) recommends good bonds (like tax-free municipals) and stocks that pay dividends. I have some of these things in mutual funds. He's pretty young, and he showed me his accounts, and he's pretty rich so I guess he knows what he's talking about.

Of course, anything you can do to get a tax advantage.

 

[Ble_PE]

I haven't read up too much on 529, but isn't there some snags when wanting to go from one state to another? What if the child doesn't need it... can you roll it over into your IRA or 401k?
My approach was to put away money first to our Roth IRAs and max them out each year. If there's any money left over within each 12 month cycle, that would go towards college savings (529, money market, CD, etc...). The kids can pay for college with scholarships, jobs, loans or whatever, but the missus and I can't retire with the same options.

That's a good approach to max out retirement options for you and the wife. We're doing that as well, and then saving what we can for college. For instance, I put almost all of our tax return in the 529 this year.

The 529 savings plan is good for any college or university in the country (as long as it's accredited) and can also be used internationally. If the child doesn't need it it can be rolled over to another dependent or it can be cashed out for a penalty. Here's what I found about the penalty:

Only earnings are subject to a withdrawal penalty
Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. (Distributions are allocated between principal and earnings on a pro-rata basis.) An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship.

All earnings will be subject to income tax

What could be worse than the penalty is the fact that the earnings portion of a non-qualified distribution that comes back to you, the account owner, will be subject to tax as ordinary income at your tax rate. (Some 529 plans allow you to direct the withdrawal to the beneficiary, which would presumably keep it in a low tax bracket.) In addition, if you were able to deduct your original contributions on your state income tax return, you will generally have to report additional state "recapture" income.

Excess funds? How to minimize the penalty...

You can change the beneficiary to another qualifying family member at any time in order to keep the account going and avoid (or at least delay) taking non-qualified withdrawals when the original beneficiary doesn't need those funds.

 

[neabob]

I agree wholeheartedly to go to your bank and ask about free investment counseling. That's what I've done with my dad's money and it's doing really well. We started 529s for our boys when they were born but have stopped putting money in there - I didn't like not having control over it, and there were too many "what if" questions involved.

Congrats on kindergarten - we're right there with you. Crazy that my little baby is a kid now, you know?

 

[MA_PE]

I could be wrong, but I believe that a 529 plan MUST be used for education and cannot be used for anything else. The recipient can be changed in the event that the originally intended recipient doesn't need the funds for schooling, but the end expenditure has to be schooling.

A relative set up a UTMA account for my kids for a college account. It's a trust acount and in the event that they end up getting cholarships they can use the money for something else (car?). The link can provide some more info.

custodial accounts

HTH

 

[Wolverine]

I have a Georgia 529 (my state) and a Utah 529 competing with each other (Utah had the best overall plan).

But if I may step off topic and get on my soapbox for a minute, if you're serious, I would recommend you get focused and throw away the shotgun approach in favor of the laser guided missile approach:

#1) Attack and clear all your miscellaneous debts (credit cards, car loans, student loans).

#2) As the Master said, max out your 401k, or Roth, or retirement investment vehicle of choice.

#3) Then and only then start putting into a 529.

The logic being that when you have no debt bleeding off your paycheck each month, you will be able to build far more wealth out of your income. I know, I know, mathematically, a better return on savings investment than debt should add up over time, but in practice that mostly fails. For example, if you had no debt , you might not even NEED a 529 because you would be able to cash flow college.

Anyway, I paid most of my way through college and plan to pay my own way through retirement. I choose that over paying my kids way through college and counting on them to take care of me in retirement.

 

[Ble_PE]

Yea, that's one of the downfalls of the 529 plan, but it can be withdrawn with a 10% penalty on the earnings if it is not used for school. Also, if your kid gets a scholarship, the money can be withdrawn penalty free. The one downfall about the custodial accounts is the fact that the kid can use the money for whatever. I'd like to think I've raised my kid well enough to use the money wisely, but knowing my luck it would be used on hookers and blow.

 

[Master slacker]

I'd like to think I've raised my kid well enough to use the money wisely, but knowing my luck it would be used on hookers and blow.

So you're contradicting yourself in the same sentence?

 

[MA_PE]

Yea, that's one of the downfalls of the 529 plan, but it can be withdrawn with a 10% penalty on the earnings if it is not used for school. Also, if your kid gets a scholarship, the money can be withdrawn penalty free. The one downfall about the custodial accounts is the fact that the kid can use the money for whatever. I'd like to think I've raised my kid well enough to use the money wisely, but knowing my luck it would be used on hookers and blow.

not to mention that the account if with drawn is subject to taxes at the rate of the investor not the benefactor. Kind of defeats the purpose of the account then. but of course that ths intent of the penalties.

Of course kids can't take advantage of a custodial account they have no knowledge of.

 

[Master slacker]

Nor can they take advantage of hookers and blow they have no knowledge of.

 

[Ble_PE]

Yea, that's one of the downfalls of the 529 plan, but it can be withdrawn with a 10% penalty on the earnings if it is not used for school. Also, if your kid gets a scholarship, the money can be withdrawn penalty free. The one downfall about the custodial accounts is the fact that the kid can use the money for whatever. I'd like to think I've raised my kid well enough to use the money wisely, but knowing my luck it would be used on hookers and blow.

not to mention that the account if with drawn is subject to taxes at the rate of the investor not the benefactor. Kind of defeats the purpose of the account then. but of course that ths intent of the penalties.

Of course kids can't take advantage of a custodial account they have no knowledge of.

There are some 529 plans that allow for the taxes to be assessed at the benefactor's rate (mine doesn't).

It's my understanding that the custodial account is the property of the kids once they reach a certain age, so they'll have to know about it eventually. Is this correct?

As far as I'm concerned, I'm not planning on saving a ton of money for mini-ble to go to college. I'm going to try to provide him with enough to cover tuition and then he's going to be on his own for the rest, with help from us as needed. If he doesn't go to college, then I'll transfer the funds to the next mini-ble. If no one ends up going to college, I guess I'll just have to eat the penalty.

 

[Dexman PE]

The current idea I've been discussing with a couple of my more financally savvy co-workers is like a few have already mentioned:

Focus on the "bad debt" first. Things like car, credit cards, and store cards (Sears, home Depot, etc). The interest rates on these are so much higher than most traditional savings plans (savings, CD's, mutual funds), that you will end up "paying yourself" more by paying off the debt. There is no real advantage to paying off the student loans. The interest rate is locked in at a really low rate, the payments are really low, the interest is tax deductible, and the loans actually provide a great positive to the credit score/report. Additionally, the loan-carrier is very flexible. If something comes up, they provide the ability to defer payments (within limits).

When we go to buy a house (early next summer) purchase with a 30 year loan, then make payments as if it is a 15 (or however many years before the kids start college). The reason behind this is that it provides flexibility in the budget. If something comes up, you're only responsible for the lower payment and can apply the over-payment money to your emergency. Plus, it gets you into a set budget where you're used to paying the same amount, but once the house is paid off you can then directly transition into paying for college (or dumping this extra money into a retirement fund).

Then once the bills are paid off and I'm comfortably paying for the house, focus on using something like a Roth IRA for retirement.

 

[Ble_PE]

^That sounds like a great plan. Always pay yourself first, and definitely pay down the high debt. One technique you might try is Dave Ramsey's debt snowball. Instead of going after the highest interest rate, start with the lowest debt and pay it down and then gradually work your way up. Seems to work great for a lot of people. Good luck!

 

[benbo]

Then once the bills are paid off and I'm comfortably paying for the house, focus on using something like a Roth IRA for retirement.

That sounds right to me. Also, always contribute to the 401K up to the match at least, if you have a match. I would always pay off high debt before contributing more than that - unless the debt is at a really low interest rate and the tax benefit from the 401K is irresistible. I think there is an added psychological benefit to paying off debt.

 

[Dexman PE]

As far as debt is concerned, we really don't have that much. We'll have a couple grand on the credit cards after the wife's surgery, but they have already been budgeted to be paid off by the end of the year. I think the one thing I wasn't entirely sure of was if it was better to start peeling off a couple hundred a month off for some sort of college savings fund.

My only thing about college for my kids is that I don't want money to be the driving force when it comes to where they go or what they want to study. I know that typically kids will respect the degrees they have to work for and earn versus those kids who don't have to pay for anything, but I don't plan on giving my kids a full ride. I just want to make sure that the schooling is taken care of, they're on their own for room & board and any spending money.

 

[Dexman PE]

Was just re-reading the benefits package for the new job. They provide a 401(a) pension plan which I become fully vested after 5 years. They contribute exclusively to that. They also offer two different 457(B) deferred compensation plans. I have no idea what the differences are between the two plans offered except that they are both pre-tax retirement savings plans.