529 Investment Account: Saving For College

College. Right below buying a house, it’s likely the largest single expense you’ll ever have. After a bit of research I came up with these approximations for a undergraduate four year degree(tuition and fees only):

  • In-state: ~$40,000
  • Out-of-state: ~$100,000
  • Private: ~$125,000

Now, of course, this varies. For Harvard, published Tuition and Fees is $240,000. I will now give you time to hyperventilate.

529 Investment Account: Get a hold of yourself!

OK. Back with us? Good. There is some good news. That news’ name is 529.

A 529 Investment Account is a tax-sheltered investment account for education expenses. The gains realized therein will be tax-free. Depending on the state there may also be tax benefits on the deposited money.

Do I have your attention? Now it gets good.There are number of reasons why this would benefit you:

  1. Free from capital gains. Of course most people will consider the 529 Investment Account because of its ability to grow tax free. This does have the small caveat that one must use the funds deposited for education purposes. But for those individuals looking to go to college themselves or to begin saving for their children this is a small and less important matter.
  2. Immediate tax benefits. Now depending on where you live, your state may offer tax benefits if you invest with them. ~30 states, as of May 2018 have some type of write off. I live in Washington and have none. That being said some state programs have terrible fees and investment options. Which brings me to the most important point…
  3. Choice to invest in any state. While some people may question placing Choice as the most important reason for getting a 529 Investment Account, I would argue that the free market has a tons of benefits here. You have the ability to compare each state’s investment plan and choose at will. You can maximize the gains that you can realize depending on your situation. Those of you that have children going into college soon may not care as much about investment growth, but would care significantly more about the getting a tax break on the funds you deposit. Those of you who are perhaps beginning to save for your children even before they are born, maybe more interested in large gains and low fees. These different choices give you the most amount of flexibility to benefit yourself and your family in the long run.
  4. The account holder stays in control of the money. This means, unlike other accounts whose beneficiary takes control once they come of age, you can maintain control of the money and make sure that it gets utilized for the correct purposes. You can split your plan at any time(once a year) to cover more than one child. Some argue that it is better to have a plan for each child. I would argue to wait until the children are closer to going to college to save on fees and maintenance costs.
  5. Friends and Family can contribute. The 529 plan can help you spread out the cost of college over a much larger time period. It also gives friends and family, who wish to help contribute to that effort, a place to donate. This can act as a focal point, keeping you honest in your progress.

Now let’s cover some things to consider.

  1. As of January 1, 2018, tax-free withdrawals may also include up to $10,000 in tuition expenses for private, public or religious elementary and secondary schools (per year, per beneficiary).
  2. Contributions to a 529 Investment Account are post-tax, and are not deductible from federal taxes. As stated above, your state may offer some tax incentive.
  3. Qualified expenses include tuition and fees, books and materials, some room and board, computers and related equipment, internet access and special needs equipment for students attending a college.
  4. If your student doesn’t need or use all of the 529 you can always set a new beneficiary(even yourself).
  5. Your contributions will never be subject to tax or penalties. These can be withdrawn even if not being used for qualified expenses.
  6. Investment gains will be subject to taxes and penalties if withdrawn for non-qualified expenses.

 

So in conclusion, I am starting one of these TODAY. My grandparents had put some money away for me when I was born. 20 years is a long time in an investment account, and if invested well, can show a ton of growth. I want my children to have the same, or even better, benefit.

My plan is as follows:

529 Investment Account over 20 years

  1. Start a 529 plan and begin monthly deposits of ~$300-$500.
    • *Note* I stopped eating out in January so I could max out my 401k contributions. At the moment my expenses/income within a month are at parity. I will need to drop my expenses some to make up the difference.
  2. I will designate myself as the beneficiary until I have children.
  3. Ask friends and family to contribute to the account for major milestones instead of purchasing items I don’t need.

The above deposits should result in an account valued between $70,000-$120,000 before average returns. Adding in investment gains of 8%, I am looking at between $175,000-$300,000.

That should cover the cost of college for at least two children. Hopefully. I mean shouldn’t it? COME ON?!? Dang college is expensive.

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