Since part of what we do at Blueprint is modular planning (addressing a specific concern) we often get questions about college savings plans, specifically 529’s and Coverdell’s. Let me take a minute to explain my viewpoint on saving for college and 529’s in particular, or you can read the Bloomberg article posted below, it encapsulates my views as well.
As a parent of nearly two year old twin girls, the prospect of saving for college is no longer a theoretical, spreadsheet based approach. It’s emotional, it’s visceral. You want to do the right thing for your kids, make the right decisions, and put them in a position down the road to have the most options available. In order to make good decisions you need to be informed and I think the financial community has done a woeful job in doing so. Here are some lowlights/highlights of 529’s:
- Don’t use an advisor to set up a 529, go to https://www.oregoncollegesavings.com. It is an unnecessary expense unless you need help deciding how much to save or how to set up account ownership. (see #4)
- 529’s have limited investment options in the plan and the investments are pretty expensive compared to a Vanguard account or ETF’s.
- State tax deduction (in Oregon) up to a contribution of $4,620 ($2,310 for an individual). The key word here is “state”, there is no federal tax deduction. Most people assume 529’s work like a 401(k), they do not.
- Be careful who the account owner is, do NOT make the child or children the account owner as this will decimate any financial aid they could potentially get as it relates to the expected family contribution calculations (EFC). Having a parent as an account owner is better, but still reduces your financial aid. The best option, grandparents. There is no financial aid impact if a grandparent or third party is an account owner.
- There are some pro’s to 529’s; such as tax deferral, tax free withdrawals for educational purposes, and a state tax deduction. -My viewpoint is that taxes shouldn’t be your only consideration, think about expense ratios, opportunity costs, and financial flexibility as well.
I always talk to my clients about financial flexibility, college savings plans typically don’t meet that criteria. We start by making sure you are taking care of yourself financially by:
-Maxing out your retirement plans at work (401(k), 403(b), 457’s)
-Investing in a Roth IRA
-Building an emergency savings fund
-Paying down your (bad) debt
-After #1-#4 are addressed then you can start thinking about saving for college.
All in all I think there are better options our there. Yes, 529’s can be quite effective for some folks, but I find that number to be smaller than expected. And remember, they don’t let you take out loans for retirement, but they do for college.