I am not an expert on this savings plan, so if I say something that you know is incorreect, please point it out and tell me what the correct position is.
I am looking into investment options for college for my child. Putting it away in the bank seems the safest way, but there is no chance to keep up with inflation with interest rates for savings accounts around the 1% mark. So, my bank suggested I look into the 529 savings plan as a real option.
I got a phone call from a company that works with the bank, and they basically tried to sell me the idea on a 529. As I listened and asked questions, it seemed to me that this investment company was basically repackaging a 401k savings plan… Oh you can have some tax savings, I was told, but when I asked if my money was guaranteed (not any money gained from a good year of interest, but the actual dollar amount I put into the account over the years), the answer was “of course not!” Yes, that’s right… Now that the middle class has been burned by losing untold billions in their personal wealth because of the stock market collapse, reducing 401ks into smaller versions of once proud balances, which will keep many working beyond their original retirement goal (assuming they will still be employed, a big assumption), the investment world and the government have come up with another way to dangle the big money carrot I front of us, with no guarantees.
I know that was a long sentence. but the question remains. Is this exactly what the 401k offered (I’ll assume there can be minor tax benefits). The end result, however is the same. I could invest money over the next 18 years and have LESS money in the account when I’m ready to use it. Sure, I could get a 15%-20% return, but who are we kidding? The likelyhood of that happening is not good, especially if you believe, as I do, that the country is still headed for major problems, and the chances that our money printing and money borrowing strategy will actually work is close to zero.
So, am I correct in my assessment? The 529 is just a 401k repositioned to help your children go to college (or use the money however they choose) after x number of years? Why on earth would I roll the dice with my child’s collee money? I might as well go to Vegas. At least I’d have a good time while the college fund flies out the window.
Um, getting higher returns requires higher risk. That is just a basic tenet of investing. If you are too risk averse to invest in a 529, then get a long term CD at whatever interest rate is being offered now. You’ll probably have to periodically get new ones with progressively shorter maturation periods so the money will be available when you kid goes to college.
I wouldn’t call the tax advantages of a 401k minor though, unless you are in a really low tax bracket. The tax advantages of a 529 are not fully realized until the money is used for qualified education expenses of course.
When you invest, there is always the possibility of losing money. There were no plans like that when my daughter was little, so I put some money each month in the stock market and hoped I was choosing wisely.
It sounds like the guy was honest with you. If you find someone who promises his investment in the stock market can’t go down, run.
A 529 plan is indeed an investment account like a 401(k). With both types of plan, you decide what level of risk you’re comfortable assuming, and you shop for plans that offer investment strategies to fit your comfort level. No investment that offers any rate of return above that of banks is going to be guaranteed or insured, so if you’re really that pessimistic about the economy and the market, you may want to accept a (much) lower rate of return. CDs or money market accounts are probably the best way to go if you’re looking for guaranteed returns, but those returns will be low. Most 529 plans offer investment strategies that range from very adventurous to very conservative. Talk to more than one financial adviser if you can; credit unions are sometimes a good choice for people who are really risk-averse.
Finally, if you do decide to go for a 529 account, shop around. I personally invested money in my state’s 529 plan that turned out to be one of the very crappiest in the nation, and even though we rode out the financial crisis until the market came back up, we would have done almost as well stuffing our money under the mattress. Other 529 plans have done way, way better. As always, the more time you have between investing the money and drawing it out, the better your chance of getting a decent return. Don’t dismiss the tax benefits if you have a decent income; factor that in when you look at other investments. Remember that if you choose a 529 plan, you generally still have at least some control over the type of investments you’re making. And, as always with everything, YMMV.
Absolutely agree with both of the posts so far. Yes, risk is a part of investing, and to make a higher return, you must be willing to take that risk.
I guess what is really eating at me is that so many people are jumping into these without thinking about them. Sort of how I started investing in my 401k way back when… A large investment company is managing the assets, why should I worry about it? And that worked, right up until the whole system went down at the same time. I have less money now in my 401k than I did 15 years ago. I wasn’t investing in North Korean world domination stock either. I was investing in mutual funds that had many blue chip companies, and smaller, strong growth companies. I’m not an idiot when it comes to investing… I understand how it works.
I also understand this. Ever since the 2008 crisis, I’ve learned a lot more about the way Wall Street runs, and how it really was (and still is) a house of cards. I don’t think people realize how close things came to going belly up, and those 11th hour deals to keep AIG and other companies afloat were just smoke and mirrors. Putting a band-aid on a bullet hole. But I suspect that this balloon is going to pop. Since many middle class investors have stopped or severely curtailed their 401k investing, they hae to find new sources of revenue. This education plan seems to me to be just that: a way to get the money people are putting away, calling it something else, but at the end of the day, it is the same train riding on the same rails.
I have another question along the same lines. If I put money into a CD (or a number of CD’s) and the money reaches over $250k, I am no longer insured by the FDIC FOR THE MONEY OVER $250k. But Jan 1, that limit goes down to $100k, correct? So, I hae to find another place to invest any money I have over $100k come jan 1, right (or risk losing itif the banks fail.)
I’m not sure what a safe investment is anymore. Maybe a big iron box out in the desert. Fill it with gold. When the Chinese pull our plug and we can’t borrow anymore, the whole rotten system will collapse from the inside out. I’m starting to wonder if this is not one of the reasons why the FDIC is dropping the insured amount back to the $100k level.
Correct me if I’m wrong, but if I buy savings bonds (series EE) the investment is doubled after 20 years. Is that correct, or do I have my timeline off? (Is it 30 years for a bond to mature?)
The $250,000 limit was made permanent in 2010, so as long as you don’t have over $250,000 in a single bank, you should be fine.
Yes, savings bonds do double after 20 years (maturity), but continue to pay interest for the full 30 years.
FYI, overall retirement accounts have recovered from the 2008 crash. The Dow Jones is higher today than it was at its 2008 peak. You are correct that there is no 100% safe investment, if you factor in the effect of inflation. But throughout history, there never has been a safe investment. You just need to decide for yourself what you’re comfortable with.
I am sold on the 529. Our current income is too high for our son to qualify for aid, or for any means-based loans as our dependent. Circumstances could of course change, but if they did, we would adjust the amount that we invest accordingly.
I would suggest that you speak with the investment advisor about your current and reasonably projected financial circumstances. If you believe that your child may qualify for financial aid and loan packages, you probably shouldn’t worry much about a significant investment (and NO investment is fine if you have other debts to pay).
What sold me:
*Earnings on investments are tax free so long as funds are used for education purposes
*if our son does qualify for scholarships, we can withdraw the amount covered by the scholarship tax-free;
*We chose the level of risk we are comfortable with. He is only six, so we chose an age-based investment plan that is very aggressive right now, and tapers off into lower risk options as he gets closer to college age
*We can choose when and how we invest. Our own retirement funds and having adequate savings are a higher priority for us right now, so when we anticipate upcoming expenses, we can throw that money into a regular savings account, and then funnel it into the 529 as fits our circumstances
The only real drawback we see is that if he decides not to go to college, trade, or vocational school … we are faced with significant penalties upon withdrawal. And it would have been nice to be a pre-tax investment like our retirement accounts, but the anticipated tax-free returns are powerful incentive as a stand-alone reason to invest now.
Actually, these exist (for certain values of “investment in the stock market”). Google “guaranteed investment contract” for one example.
As to the OP . . . some of your language indicates you may be beyond help here, but it may interest you to learn that the broad US stock market has returned 10% per annum over every rolling 20-year period since the great depression. So, as you said, 15-20% is unlikely, but 10% isn’t.
The definition of a “school” or whatever is really really broad–it includes lots of post-high school training that’s not a traditional college. Odds are your kid is going to get some kind of education after high school.
You can transfer the money to yourself and a sibling without the tax and penalties (maybe other people too, not sure). So, you could learn to fly or sail or weave baskets or whatever with the money.
I think the penalty is 10%, which ain’t all that bad–the tax deferral makes up for that.
What I’ve seen with 401ks and similar: people cash it out, don’t realize the ramifications, get hit with 5 figure plus tax bill come April. Also, CA for one assesses an additional state penalty on 401ks. Not sure if they do it for 529s too*.
I think I had a 529 in college, but we didn’t invest into it - I did well on a test or some such thing.
Unless I’ve missed it, there’s also two different senses of “insured” here.
Most investments aren’t going to insure the investment itself; e.g. you’re not going to get any money back if the stock you bought decreases in value over time. There are a few exceptions, but they have pretty poor returns in general, or require extremely large initial outlays, or both.
However, in many cases, the account itself will be insured. If the bank/broker/lender holding the cash goes out of business or has a run on the accounts or is shut down by the feds for standard business practices, you’ll still own your actual investments and cash, and be able to get them back. Sometimes this is FDIC (usually for the cash parts of the account), and sometimes it’s private insurance or some other program. Check around if you want this; I know I do. Usually there’s a dollar limit, as with FDIC.
Basically, you if you want to insure against your own investment choices, you have to do it yourself using covering options. But the government and/or the financial institutions’ insurance companies will often insure against other people’s mistakes.
That’s an issue people often don’t think of when they set up a 529, especially if they do it at birth: if the child isn’t going to college. The most obvious example of this is the child’s death, and some of the earlier funds locked up the money to the point where the parents could not access it because they needed it to pay for the child’s funeral. Equally likely, if not more so, is having a child who does not have the intellect for higher education, and this is not always apparent until the child starts school or even later.
It’s the government, but they’re not that cruel! If the participant dies, the penalty doesn’t apply.
But quite frankly, this kind of program works because the participants are self selecting. A child who has little chance of going to college isn’t going to generally have parents who would consider or even know what a 529 is. There are of course exceptions, but in general. Especially since intellect is not often the problem with children of smart investors, but a host of other things.
Not that I necessarily think a 529 is the best investment. It may or may not be for any given person.
As mentioned upthread, the definition of ‘education’ admits of wide interpretation for 529 plans. I have clients using them for higher ed, grad school and so on, surely. But I also have one elderly client who contributes to it for the tax advantage and takes a number of what he calls ‘fun learning’ classes. I’ve also seen them used for trade and beauty schools. So just because a beneficiary isn’t up to higher ed doesn’t mean they can’t be used.
Also, if the beneficiary dies, there’s a strong likelihood that the money can be withdrawn penalty-free. There are several instances (death, disability and so forth) in which the penalty is waived.
The Florida prepaid plan is a 529 plan, but it’s the tuition-credit type. The benefit is that it’s guaranteed by the state. The downside is that the plan only pays the median in-tuition cost for a Florida public university, so if your kid goes to Harvard is covers like 20% of tuition.
I just found out about this in the past few months. We were lucky enough to have our older daughter win a full-ride scholarship (books and all), so we decided to save the entire (laughably small) amount in the 529 for our younger one. Who also won a full scholarship. So we figured maybe someone would need it for grad school, but the older daughter got into a PhD program that’s paying her a decent salary and covering all costs. Now we’re waiting to see what happens with the younger one (who has some really excellent plans for getting her master’s paid for). We can’t decide whether we should yank some or all of the money out now and just pay taxes on it or whether we should wait to see how much she’ll need for grad school in two or three years.
Or, hey, look who could finish her degree after all, in her retirement years! I really, really wish we could transfer it into our 401(k), since we essentially took money that could have gone there to put it into the 529.
All of this, of course, falls under “Problems Everyone Should Have” and I’m very, very thankful.
Thank you; I hadn’t realized (or perhaps retained) option #2.
Hell, I’ve always yearned for a PhD in Applied Necromancy
Seriously, though: I love taking personal interest classes at our local community college. I’ve attended some truly fun cooking classes, creative writing, a Yoga class (and a spinning class that I attended once and couldn’t bring myself to go back to). I would be severely depressed if I was paying for these classes because my little guy decided that getting high and flipping burgers (not necessarily in that order) was a nifty life choice for him, but the funds wouldn’t go entirely to waste.
Yeah, they’re all under section 529, just some states have pre-paid, some have savings, some have both. I believe that 0 states have neither.
With your example, I know of someone who would’ve gotten a free ride to a state school, and his dad was very much encouraging that, but he wanted to go to Stanford. This is not a 529 though, and transferable 0%, but I’d imagine he got some scholarships otherwise.
Sure, but was she promised a full ride for 5 or so years? Or “as needed” basis? If her dissertation doesn’t work out right away, she could find a semester or two without immediate funding.
Equally likely, if not more so, is having a child who does not have the intellect for higher education, and this is not always apparent until the child starts school or even later.