Saturday, May 30, 2015

Saving for College for Kids You Don't Have Yet: Yes You Can

Did a video on YouTube on this subject here but also wanted to address it on the blog as well.  I was wondering after reading an interesting book on financial planning (to remain nameless-no plugs here) if there was any way to save for college for children before you even have them.  My thought was basically that the longer the time horizon the money has to grow before you use it to pay your kid's college tuition, books, etc. the better off both you and your kid will be once it comes time for them to start college, particularly with how expensive college has become in this country.  Let's face it, college tuition, although increasing slightly less rapidly in the past several years, has increased by more than 300% over the past 30 years.  Then there's all the random fees, many of which strike me as ridiculous, but that is a topic for a different rant.

As a personal example, I was accepted to the law school I eventually chose in February 2007 and was very happy to receive a $7,000 yearly scholarship (tuition was $35,000).  Well, you had to write a check for several thousand dollars to reserve your seat in the class by I think it was April 30 and then the next week they announced what tuition would be the next year.  Well, after I had already submitted my deposit, they announced tuition would rise to $39,500.  I was very pissed because basically most of my scholarship was eaten up.  The following year there was a similar rise, meaning I may as well not have gotten the scholarship for all the good it did me.

Anyhoo, to get back to the topic at hand, the tax code permits parents (or anyone for that matter, which is what helps out here) to establish an account with a 529 savings plan.  A 529 is an investment account you can establish with any number of investment management companies that can be used for qualified education expenses.  (I will discuss what those qualified educational expenses are in a subsequent post).  I opened one with T. Rowe Price because I use them for my retirement accounts.  Also note that you can open an account with any state's 529 plan, whether you live there or not.  This topic was recently discussed on a radio program I enjoy on SiriusXM called Your Money hosted by Professor Kent Smethers and he recommended the Utah plan, which is run by Vanguard.  Also note that some states with state income taxes allow deductions for any contributions to a 529 plan, so there is an added tax benefit as well.

Anyone can open an account and name yourself as a beneficiary.  I don't have kids yet but we are planning to have them in the next couple years.  So what I did was open a 529 account with T. Rowe Price and named myself as the beneficiary.  Once our first kid is born, I will switch the beneficiary to him or her and continue saving.

Now you may have other investment goals, like saving for retirement, down payment on a house, etc. I have a sizable amount of student loans and we are working on paying those down as quickly as possible while also saving as aggressively as possible for retirement, so I am only doing $50 per month in the 529 account for the time being.  I will probably ratchet that up over time but figured it made sense to at least start saving a nominal account in order to take advantage of a couple extra couple years of growth on that money.  This is particularly true given that any contributions to 529 plans are like Roths in that the money you contribute is after tax and there is no tax on the earnings once you begin withdrawing them to pay for college.

I thought this was a really neat trick and wanted to share it.  I figure if we have start having children in a couple years then I will be ahead of the game in helping them save for college even though I am investing such a nominal amount.

No comments:

Post a Comment