Donate to 529 vs pay down mortgage?

[pianoguy]

Hi friends,

I recently bought a house.  30-year-fixed mortgage, rate is 5.875.
My son is 2 years old and we live in PA, where contributions to 529s are fully deductible on state taxes.

If I have some extra money, does it make more sense to use that money to pay down the principal of my mortgage, or to donate it to the 529?

Thank you for your help.

[Finances_With_Purpose]

What's your state tax rate there? 

I would lean towards neither: buy a bond running about 5% rather than pay the mortgage early so that you still have (1) the cash + returns and (2) flexibility.  Then decide in December or maybe next year. 

Rates may be low enough or dropping by then such that you don't want to pay the mortgage down.  Or not. 

[mistymoney]

is a 529 really a donation situation? you own still own it....

[MDM]

Where do you see yourselves relative to the Investment Order post?

[nouseforausername]

PA's allowable 529 state income tax deduction is much more generous than my state's.  17k per year for single contributor or 34k per year for married filing jointly.

PA also allows PA residents to deduct contributions to out of state plans.

I know this in part based on research in response to OP's other 529 post earlier this year.

Best of luck to OP in their decisionmaking.

[RWD]

Remember that you may be able to refinance your mortgage to a lower rate in the future. Definitely look at the investment order by MDM linked above. Even without refinancing you should not be paying extra on your mortgage right now.

[scottnews]

5.875 is still great historically.  Its far from the 2.75 a couple years ago, but further from the ~10% rate of the 90s.

It depends how much you value paying your son's tuition.   It must be important to you, since you've started it.   The 529 is a narrow window and the sooner you contribute the better. 

We in the same boat as you.    We contribute to our son's 529, even thought it slows down our time to FIRE.

[appleseed]

We are in PA, too, so I put some money in my kids 529 accounts. I do hate this stupid rule though:

"PA 529 account owners may deduct up to $17,000 (previously $16,000) of contributions to their accounts, or $34,000 (previously $32,000) for couples filing jointly, provided both spouses have at least $17,000 of income." 

Really hurts the families with one stay at home/caregiver parent (especially when the cost of child care in many places is equal to or more than one parent's income). Doesn't affect us now that our kids are older and we are both working, but I think it is a crappy rule.

[TheAnonOne]

5.875 is still great historically.  Its far from the 2.75 a couple years ago, but further from the ~10% rate of the 90s.

It depends how much you value paying your son's tuition.   It must be important to you, since you've started it.   The 529 is a narrow window and the sooner you contribute the better. 

We in the same boat as you.    We contribute to our son's 529, even thought it slows down our time to FIRE.

I think the "historical" argument is a bit off considering the outsized costs of housing these days. 5-6% is extremely significant currently.