Saving for College - 529 Not For Me
The 529 and it is not a good fit for me. http://money.howstuffworks.com/529.htm
Basically the tax benefits are good until 2011. My child will be going in 2021 and by then the tax benefits do not help us. There are too many drawbacks to consider that concern me. For instance, if your child applies for financial aid, the 529 account may affect eligibility. The money in your 529 plan can't be used as collateral for a loan. You don't control the investments. If you have to withdraw the money for some reason other than to pay for qualified higher education, then you pay tax (at your rate) and a 10 percent penalty.
What I am doing is putting money into the Vanguard Windsor II Fund (VWNFX) www.vanguard.com , as soon as I accumulate $3000 (their minimum). I love Vanguard, their fees are low, their customer service is excellent, and they have great funds! They money will be kept in my husband and my name. Too much money in the child’s name will not help them qualify for financial aid. Monthly, we are putting away $150 for our child’s college. If it turns out that she does not want to go to college (she better or else!), the money is ours and not tied up in 529 or other plan.
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I'm sure you've done your homework, but I disagree. The 529 plan will have the child's name as a beneficiary, but it is not considered an asset of the child and thus will not have as much of a bearing over financial aid as custodial accounts. I could be wrong, but I don't believe it will cause much more of a problem that simply having the money in a mutual fund (assets of the parents are considered when determining financial aid).
Also, you're correct in saying that the current tax exempt status will expire in 2011, however what you don't mention is that congress will almost certainly extend this past then. I have faith that the tax exempt earnings will still be there when my child starts college in 2023.
And the penalty isn't as bad as you say either, you will only be taxed on the earnings (remember it is after tax dollars funding the account so the contribution won't be taxed when you take it out). The 10% penalty shouldn't do much more than offset the tax free compunding interest over the years, so in a properly managed fund even if you don't use the proceeds for education it still won't be far off from just investing now and paying taxes every year on the earnings.
And one last advantage, if the beneficiary child chooses not to go to college, the fund can be used to fund college for anyone else in the family.
I do agree with you though, it'd be nice to have a little more control. I chose to go with a managed fund for the 529 which will progressively get more conservative as the college date draws near.
I also agree, if you are going to go the mutual fund route, Vanguard is the way to go!
Correct me if I'm wrong on any of this.
Nathan, you are correct on your reasoning for the 529 plan. But it is still not for me. The main thing that gets me is control over the money, and the fact that you have to use the money for college.
* Regarding assets: Colleges expect children will contribute 35% of their savings to the cost of their education, but parents are expected to contribute about 6% of theirs. Assets in 529 savings plans are considered as the parents’ assets and will have less of an impact on aid. So that works out in your both our favors.
* You say “if the beneficiary child does not go to college you can use it for another person to go to college”. What if you only have one kid and they don't go to college?
* You're faith that Congress will extend the tax exempt status, remains to be seen. You never know if you will have a tax happy government that might like to have that money.
I think we both are right because we both are saving for our children's college education.
