Today is the last day in May and although you’re still positive for the month you look like you’re limping home. School is wrapping up for the year so perhaps you have a bad case of “senioritis” or “summer fever”. Are you getting tired Mr. Market? It sure looks like it. Speaking of being a student, today also is May 29th, and it marks the sixth annual national 529 Day. With that being said, let’s review why a student needs you (the market and a good platform) to ultimately get to their “finish line”.
Whether you are a parent or grandparent it’s likely been a long time since you’ve been in college. Even if you stay close to the numbers of what it costs to send a child to college, you’re likely to be blown away when it actually comes time to write that first tuition check. For the 2014-2015 academic year the College Board surveys reported that in-state college budgets averaged $23,410/year and private college averaged $46,272. Before we go into how you’re going to help pay for these types of college costs let us share with you the two reasons you should NOT use a 529 College Savings Plan.
(1) You can’t afford to – We’re not big fans of the word “cannot” because most budgets can find a way to be improved. The caveat here, however, is that one should not save for college before they address their retirement needs. Unlike many financial advisors, if being forced to choose between college and retirement savings, we actually recommend reducing your contributions to college. Is it because we hate kids or higher education? Nope…It’s because we don’t want you to eat cat food in retirement. Your child or grandchild can always borrow for college (or work) but you cannot do so to fund your retirement.
(2) You have a teenager – One of the major benefits of a 529 Plan is that your savings grow tax-free. If your student is relatively close to college age the upside of tax-deferred growth likely doesn’t outweigh the risks or possible restrictions of a 529.
That’s it folks…. You can now ignore all the hogwash articles or convictions from your neighbor, co-worker, or friend who tells you that 529 Plans are not right for you. They are by far and away the best platform to save for a young student. Here are some myths that should not scare you away:
(1) What if the student doesn’t go to college? – Well…is he or she just going to park it on your couch until they’re 30 years old? We won’t tell you how to parent or opine on the value of a college degree but at the very least one needs a career. 529 Plans aren’t just for college; you can use the savings for other career training programs at a trade or vocational school.
Also know that if your student gets aid or simply doesn’t need the money those savings are portable. You can change the beneficiary to an immediate family member and as you’ll learn the list is quite flexible. Eligible beneficiaries include siblings, nieces, nephews, aunts, uncles, a spouse or child of the beneficiary, parent, and even grandparent.
(2) 529 Plans are too restrictive – Really? We disagree. First and foremost, saving for college (or anything for that matter) is better than not saving. We’re always amazed at the disconnect some people have with tax advantaged programs. (The operative word here is “advantage”!) Have you ever heard of someone saying, “I don’t invest in my employer 401k program because they don’t match” or “the investment choices aren’t great”? A bad tax deferred program beats one that doesn’t grow tax-free for a decade or more.
Between the two types of 529 Plans (Pre-Paid Tuition Plans versus College Savings Plans) we would lean towards the latter. Pre-paid plans are losing popularity (only 12 states offer them) partly due to some only allowing tuition and fees to be applied towards in-state colleges. Also room, board, books, and other education related expenses are not covered. Lastly, don’t sweat it if the plan you’re looking at is not in your state. 529 College Savings Plans are exempt from Federal taxes which as you know is the lion’s share of the tax bill.
Yes, today is 529 Day so aside from learning something…do something! Open an account for a student that you care about. When doing so make sure you are not being sold a plan or paying transaction fees each time you contribute. Most financial advisors charge for 529 College Savings Plans. They either make a fee for “managing” the funds or choose mutual funds for you that pay them. If you see things like “A shares, B shares” etc, …run for the hills! If you’re in such a plan now…get out! Transfer it over to one where your money is growing for college not your advisor’s commission quota.
My Portfolio Guide offers free College 529 Plans managed through Vanguard.
No commission. No management fees. No set-up expenses.
Ask us today about how to get one opened!