Saving for kids' college

I have one young one and another on the way. Currently I have a 529 account. Are there other tax advantaged ways to invest/save money for college?

I am somewhat familiar with series EE and I bonds, but bond rates are pretty sad these days.

529 is what my dad started for me. Warning though, it isn't always the best way. I've now graduated and have about $16k left that I cannot access. It either goes to a graduate degree, which I'm not sure I want, or else my future kids college, which will be good, but right now I'd really like that money for my upcoming house purchase. Good problem to have, but still annoying. I shouldn't have paid for as much of my college as I did; I should have funded my IRA 3 times.

We were advised against having a 529, because basically a 529 is the first thing that the school's FA department will look at, and deduct that amount right off the top of whatever they would have offered you.

We just saved, and then redistributed assets into ways that made them more or less invisible to FA.

Duke wrote: We were advised against having a 529, because basically a 529 is the first thing that the school's FA department will look at, and deduct that amount right off the top of whatever they would have offered you. We just saved, and then redistributed assets into ways that made them more or less invisible to FA.

Good point--my family (and I) were in a position such that the only financial aid we could have gotten was a low-interest loan. That annoyed me to hell--I worked from the time I was 13 and saved like crazy. Because of that, I didn't need help. Everyone who spent their summers goofing off with mom and dads allowance needed help. Not people who actually worked.

I probably won't be able to start to save for the kids college until they have reached double digits and I have paid off my student loans.

yeah, 529 is a bit rough because the money is locked into 'school only', and it actually may get locked into the kids name. (ie. what if your kid decides not to go to college at all? Or -not trying to be awful but it happens- has a falling out with mom and dad but still gets to legally keep the 529 fund?)

I would advise to just start saving and put it into an individual investment account. Sure, maybe its not the most tax beneficial way to do it, but the flexibility is worth the tradeoffs in my mind.

We have an ESA, but it's TINY and I'm not sure of the benefits versus a 529.

I think there are 'free' withdrawals from some retirement accounts, but I am unsure of that also.

Fueled by Caffeine wrote: I probably won't be able to start to save for the kids college until they have reached double digits and I have paid off my student loans.

Ouch.

You're missing the 10 best years to save for their college. Even $10/week is significant after 18 years. Money generally doubles due to compound interest every 7-10 years. So every dollar you save before they are 2 years old is more like 4 dollars at college age, and every dollar you save before they are 8 is more like 2 dollars at college.

I'm sure this isn't news to you though.

I think some reading on the 529 plan rules are in order for many of you. The money in 529 belongs to the parent still; the beneficiary is the child but they do not control the funds. So in the event of a falling out, an shiny happy person parent could withdraw the funds and keep them - the child doesn't have any control over the funds.

You can "access" the funds for any reason but you pay a penalty for withdrawing them for a non-qualified reason. That's 10%. On top of that you pay ordinary income tax on the earnings portion of the withdrawal. But again, that money belongs to the parent and not the child/beneficiary, so the person withdrawing it would be the parent. Whether they want to give it to the child is up to them.

Duke wrote: We were advised against having a 529, because basically a 529 is the first thing that the school's FA department will look at, and deduct that amount right off the top of whatever they would have offered you.

AFAIK that's only the case if the money is in the child's name. The "correct" way is to keep it in the parents' name and the child is the beneficiary.

Another option if said child is working before going to college is to put money into a Roth IRA in the child's name. Retirement assets are off-limits to college FA departments, but it's still possible to withdraw the contributions (not earnings) from the Roth if necessary. But in order to qualify the child would need earned income during the time of the contributions.

Also, the Coverdell ESA that tuna55 mentioned up there is worth looking into as well.

I'll definitely be watching this thread. Helping my kids with college, in every aspect, not just financially, is a huge concern of mine.

I would like their experiences to mirror those of MTN, and be as different as possible to my own. We discuss career paths almost daily. My daughter loves insects and being outdoors so she has decided she wants to be an entomologist, I fully support this. My son is completely obsessed with vehicles (like a deep GRM level obsession, not the "normal" 8 year old boy stuff) and has fantastic mechanical aptitude, so I'm gently pushing him toward mechanical engineering.

Right now I'm socking away around $50 per week, sometimes less, sometimes more. There's only about 8 years left before the oldest reaches college age...YIKES!!!

The_Jed wrote: I'll definitely be watching this thread. Helping my kids with college, in every aspect, not just financially, is a huge concern of mine. I would like their experiences to mirror those of MTN, and be as different as possible to my own. We discuss career paths almost daily. My daughter loves insects and being outdoors so she has decided she wants to be an entomologist, I fully support this. My son is completely obsessed with vehicles (like a deep GRM level obsession, not the "normal" 8 year old boy stuff) and has fantastic mechanical aptitude, so I'm gently pushing him toward mechanical engineering. Right now I'm socking away around $50 per week, sometimes less, sometimes more. There's only about 8 years left before the oldest reaches college age...YIKES!!!

Jed, feel free to send me a PM off the board and I'll fill you in with what I know (and post stuff here that is "general" knowledge and not quite so personal). Having a brother with a mechanical inclination but little math ability, be careful--my brother flunked out of his ME major. If your son really does want to do that you might consider supplementing his Mathematics curriculum at an early age.

Robbie wrote:

Fueled by Caffeine wrote: I probably won't be able to start to save for the kids college until they have reached double digits and I have paid off my student loans.

Ouch. You're missing the 10 best years to save for their college. Even $10/week is significant after 18 years. Money generally doubles due to compound interest every 7-10 years. So every dollar you save before they are 2 years old is more like 4 dollars at college age, and every dollar you save before they are 8 is more like 2 dollars at college. I'm sure this isn't news to you though.

I'm paying for private school and for my wife's two masters degree's while she stays home to watch the kids.. I'm going to get out of 1 kids private school soon. I'd prefer to pay off my student loans and fully fund my retirement before I give them some cash.

Thanks for all of the feedback.

I'm not too concerned about implications for financial aid. Household income is too high for my kid(s) to qualify for it as long as they are my dependents. I'm over it.

I also won't be too sad about the ten percent hit if my kids get scholarships. Better over prepared than under.

In reply to pushrod36:

Its ten percent plus normal tax rates. I dunno if 529s qualify for the same 'long term capital gains' as regular gains, but if they don't that could be adding an additional 15ish% penalty.

If your kid has the 'smarts' or whatever to get into a private, ivy league type school and you show any financial need, the school will cover it because they generally have a big endowment. I speak from experience: one daughter went to Duke, they covered all costs after my $$ ran out (about $150K in all), the other went to a state school and we owe about $30K in loans. State budgets used to cover about 85% of the costs of a state school, now they cover about 10%. Really no difference between state and private institutions anymore, except the private schools have $$ to help and the state schools don't.

The taxes only apply to the earnings. So if you've deposited $15,000 and it's earned $10,000, then you pay the 10% penalty on the entire amount ($25,000 x .10 = $2,500) and the income taxes on the earnings ($10,000 x .15 = $1,500).

The most important thing to me is to pick a savings method, get started on it now, and stick to it. As they say, the best time to start was yesterday. The second best time to start is now.

Waiting until you fully fund your retirement means it will never happen. I understand if that's your choice but make sure it's what you and your wife want to do for your children. I've decided to contribute to a 529 for my kid; right now at the max state write-off amount of $2,000/year.

dculberson wrote: Waiting until you fully fund your retirement means it will never happen.

I meant to say maxing out my contributions to a 401K and Roth IRA.. which will happen this year for the first time ever.. So.. Extra cash goes to kids college and pay down my college.

Pay yourself first, your kids can always get loans. You can't get a loan for your retirement. My big pile of student loans( which is less than $50K for three masters degrees) is my motivation to keep driving my career forward. So, It has done a lot of good.

Gotcha - that makes more sense. I also maximize my retirement contributions. And then some.

Fueled by Caffeine wrote:

dculberson wrote: Waiting until you fully fund your retirement means it will never happen.

I meant to say maxing out my contributions to a 401K and Roth IRA.. which will happen this year for the first time ever.. So.. Extra cash goes to kids college and pay down my college. Pay yourself first, your kids can always get loans. You can't get a loan for your retirement. My big pile of student loans( which is less than $50K for three masters degrees) is my motivation to keep driving my career forward. So, It has done a lot of good.

I'm exactly there. Hoping to max out those within a year or so and then start funding tuition again.

I'm watching this with interest (no pun intended)

We have a savings account we're putting cash into for our kids. The reason we decided "cash" over the 529 is because we wanted to give all that cash to our kids AFTER they graduated or completed a 4-year enlistment in the military. Besides, I'm a pessimist and figure a program like 529 wouldn't exist unless it benefited the gov or a big business more than it'd benefit me/us (like I said, pessimist)

dculberson mentioned the penalties, but in his example the payout was still higher than the cash invested amount. So I have to ask: Can I put money into a 529 account and still cash it out in the event my kid doesn't go to college?

OR! Say my kid does go to college and I want to cash out what's left, can I do that? (with penalties of course)

Thanks guys

Fund your own IRA and 401k to the max. Generally, withdrawls for education are tax free, and schools don't look at those as assets for financial aid.

You can start and fund an IRA for a child, even without any earned income I think you can still contribute something like $300 per year. Check with your tax professional. $300 x 18 years + interest is some amount of money. And like your IRA, it can't be factored into the Financial Aid equation.

Consider transferring assets- but you have to do it in advance of whatever the "look back" period is for financial aid. It might be 3 or 5 years. You can transfer up to (IIRC) 14k per person per year as a "gift". Of course, this requires trustworthy people who you can count on.

Also remember: Student Loan interest is only tax deductible up to (IIRC again) $3,000 per year. Home Equity interest is 100% deductible (up to some amount I think, but it's obscenely high). Home Equity interest rates tend to be better, too.

Yes, you can pull the money out of a 529 as long as you pay the penalties.

dculberson wrote: Gotcha - that makes more sense. I also maximize my retirement contributions. And then some.

Yeah.. It feels nice to finally hit the contribution limit. Now I gotta get my wife into a public school so she gets a pension.