Your skills intimidate me! You're so money hip!!! Xxxx
Excellent post! Love your blog, Lisa!
Pinned for sure, man!!
So helpful! I was just talking to my brother about this last week. I was not a beneficiary of any such college savings plan, but it makes so much sense to help your kids out if you can! Great to know about its ability to transfer amongst a variety of relatives too, if circumstances change. Future post idea--how do you plan to teach your kids about money, saving, spending, borrowing, budgeting? What, if anything, is allowance tied to? Maybe it'd be fun to get a variety of moms' perspectives on this!
Great comment! I actually just wrote two posts about allowance and savings accounts for children. They should pop up in about a month.
Actually two months... I'm building up a buffer.
I was going to say, Lauren is so all over that!
This is awesome Lisa! I have one question:We have lots of savings bonds relatives have given to our kids. Any thoughts on those? It seems like a kinda lame way to save, since as far as I understand it, you can't get the full value for 30 years.
Hey Colleen, here's an article about using savings bonds to pay for college: http://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10074
Great post, thanks! A follow up question I have is that I have heard about something some friends are doing for their children, which is a life insurance policy for them PLUS college savings as well - it's like all bundled together. Do you know more about this that you could share?
Hey Whitney,I'm not an insurance expert, so I did a little research and what I found matched my gut feeling that any sort of insurance policy is going to have relatively high fees compared with other investment accounts. That being said, there is more flexibility with what you could use the money for and you don't endanger your kids' chances at financial aid like you might with a 529 plan. But like I said, that flexibility comes at a cost. The takeaway I got from what I read is if you need life insurance for them (to cover funeral costs or something***), then buy insurance). If you want to save for college, then save for college. Some of these "two-for-one" deals ends up costing more in fees than you would have otherwise paid. The insurance salesman may make it sound great, but that might be related to the high commissions they get for selling such policies.Here are some articles to check out:http://www.bankrate.com/finance/college-finance/life-insurance-or-529-for-college-savings-1.aspxhttp://www.bhg.com/health-family/finances/work-insurance-wills/life-insurance-for-kids/http://www.finaid.org/savings/lifeinsurance.phtml***I could go on about insurance--my personal position on any type of insurance is to only insure what you can't afford to lose. Consequently, we have hefty life insurance on my husband, but none for my children. A child's funeral costs would be tragic and unwelcome, but we keep enough cash on hand that it might empty out our emergency fund, but it wouldn't break us.
Thank you for your response! That is helpful info.
Great post Lisa! So do you always get a federal deduction for contributions and federally exempt earnings coming out (assuming for qualified expenses) but the state deduction varies by state, plan, and the way it's used? Do most states at least allow it to grow and be used tax free or is it taxed earnings going in as well as coming out? Hopefully my questions make sense but I am trying to better understand their are general state tax considerations or if they completely vary by state.
Hey Ben, great questions. Contributions to 529 plan are made with after-tax dollars (meaning no federal deduction, although some plans and states allow for state deductions and/or credits). And yes, if used for qualified educational expenses, the earnings are not taxed for federal and currently almost never for state (my understanding is that Alabama does not always conform and therefore may be taxable--random, in my opinion). So yes, each plan and state has different rules. For example, California does not offer any sort of state credit or deduction for contributing to their plan. However, Utah allows a Utah state tax credit for contributions to their plan (limited, of course). If you're interested in comparing the state tax treatment of plans, Savingforcollege.com has a great way to compare features: http://www.savingforcollege.com/compare_529_plans/index.php?page=select_plan_questions&plan_type_id=
This is very helpful! I have always wanted to understand 529 plans and received mixed comments from various people. So if you compare this with a 401k or traditional IRA, the difference is many states will provide you different incentives (credits, deductions, etc.) if you meet certain requirements under their 529 plan? However, a 529 plan might be more limited in the investment options as you follow the state's plan and investments. Otherwise they seem pretty similar if I understand correctly.
You could compare a 529 plan to a retirement account, although I think it would most resemble a Roth, in that there's no deduction for contributions, but the earnings and withdrawals are not taxable (when used in qualified ways); however the biggest differences are the purposes of these accounts and the rules for getting money out. There are obviously always ways to cash out of retirement plans, but there are rules and penalties designed to encourage you to leave the money in until retirement. But mostly likely, you will need money for your kids' education well before retirement, which is where 529 plans come in. So it's like apples and oranges. My personal opinion is that 529 plans are for people who are already well-funded for retirement, as in maxing out on their retirement plan contributions limits (see Question #8) and looking for tax-advantaged ways to put additional money aside for college.It's true that your investment options with 529 plans are more limited than with other investment accounts where you can pick and choose from a larger array of investments, but even 529 plans have different types of investments within a plan (you can select how aggressively you want to invest). To me, the biggest drawback of a 529 plan is it can affect the student's ability to qualify for financial aid. But my personal financial philosophy (which is somewhat pessimistic, but mostly just realistic) is that it's more important and predictable to prepare for the future relying on my own savings, rather than on any sort of government assistance (e.g. Getting any sort of social security when I retire would be neat, but I'm certainly not counting on it to be my sole source of retirement funds--so much can happen to our government before then). I guess I figure if my husband and I are smart enough to save a lot for retirement, to the point of having decent 529 plans, our unmarried kids most likely won't qualify for that much financial aid anyway so we're better off saving for college than counting on financial aid.Great questions! Let me know if you have any more. Thanks for checking out our blog, Ben!
I heard once that 529 plans have to be used for a school in the state they're for? Like if I opened an Oregon 529 plan and then send my kid to school in Texas those expenses wouldn't qualify. Is that totally wrong?
Hey HolliJo! You should be able to use distributions from your 529 savings plan for qualified education expenses at any accredited college in the US. Some vocational and international schools also qualify. Here's a handy little lookup tool to make sure the school you're thinking about qualifies (http://www.savingforcollege.com/eligible_institutions/). This article Lisa wrote was talking about 529 savings plans, and not a pre-paid tuition plan, which is quite different. Those are made to be used at in-state schools in your particular state. Check out this article for more information if you want (http://www.finaid.org/savings/529plans.phtml). Maybe we'll do an article on the difference between the two in the future.
Thanks Lauren! I must have been getting pre-paid tuition plans and 529 plans mixed up. It's been awhile since I looked at either of them!! :)
Lisa! So glad I found you in the blog world. Thanks for stopping by my blog. I can't wait to hear about your birth story! I am loving this blog. My husband and I have a get out of debt plan and have had lots of chats about saving for kids, retirement, investing... we know nothing! I can tell this is going to be so helpful. I might even need you to come do a post over on my blog. ;)
Lisa, this is such a great post! I am currently trying to figure out the best 529 plan for my daughter. Thank you for the information!
Glad you found it helpful, Debbie. Congratulations on your doctorate degree, by the way!