Author Topic: Investing for kids' college  (Read 8304 times)

MountainFlower

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Investing for kids' college
« on: January 02, 2013, 09:32:00 AM »
My kids are 3 and 5.  I want to take the money I'm spending on daycare and start saving for college when they start school. 

We are older parents. 
When my daughter starts college, my husband will be 64 and I'll be 58. 
When my son starts school, my husband will be 66 and I'll be 60. 

Currently we both have 403b accounts for retirement.  Mine is through TIAA-CREF and I have the option of contributing extra pre tax.

Given our ages, should we just use retirement accounts, or is there some advantage to also using a 529. Initially, we'll probably contribute about $500/month for each account.

What would you do?

James

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Re: Investing for kids' college
« Reply #1 on: January 02, 2013, 11:27:56 AM »
I have a similar question, we have 529 plans for each of our three kids, but don't contribute much to them right now while we focus on some other priorities.  I'd love to hear feedback from someone who had weighed that decision and can make some suggestions and give good info.

frugalcalan

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Re: Investing for kids' college
« Reply #2 on: January 02, 2013, 01:25:48 PM »
The problem with 529 accounts, as I'm discovering, is that the investment options are limited, and there's assorted fees.

I'm 24, and will probably have kids someday, so I've got a general "potential future offspring" account that consists of 2 USAA mutual funds.  I have $125 automatically deposited there monthly.  I also have a 529 plan through USAA, but it turns out it's just in partnership with UPromise or something.  $50 a month gets deposited there.  It has existed for 4 months, and although I deposited $200, the account value is $189.  I am thoroughly unimpressed.

Although the earnings are taxed, I'm doing much better in my self-directed accounts. I'm beginning to wonder if 529 plans are a bit of a fraud, designed to prey upon well-meaning parents.

eyePod

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Re: Investing for kids' college
« Reply #3 on: January 02, 2013, 02:12:24 PM »
The fees I've seen in the Vanguard ones aren't that bad.  The ER is 0.25% to 0.52% depending on your choice of funds.  They give lots of options based on markets or age of the beneficiary.

In general, any gains on a 529 are not taxed.  They can then come out tax free as long as their used at an educational institution or for educational expenses of the beneficiary.  Additionally, you can change the beneficiary on the 529 also.

smedleyb

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Re: Investing for kids' college
« Reply #4 on: January 02, 2013, 05:03:41 PM »
You could set up a Roth 401k for each child (as you allude to).  The money still grows tax free (with better investment options) and can be tapped for college (I'm almost positive about this -- where's Grant when you need him!).  Plus there's the added flexibility of having a good ole' Roth should the child decide not to attend university. 


fiveoh

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Re: Investing for kids' college
« Reply #5 on: January 02, 2013, 06:46:05 PM »
You could set up a Roth 401k for each child (as you allude to).  The money still grows tax free (with better investment options) and can be tapped for college (I'm almost positive about this -- where's Grant when you need him!).  Plus there's the added flexibility of having a good ole' Roth should the child decide not to attend university.

I thought kids cant have a roth unless they have income?

smedleyb

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Re: Investing for kids' college
« Reply #6 on: January 02, 2013, 09:10:28 PM »
I thought kids cant have a roth unless they have income?

Good point.  Perhaps gift them a few shares of a dividend paying stock?  Some interest earned on a checking account in their names?  How hard is it to manufacture income?   

edit:  hmm, I guess you can't contribute more to a Roth IRA than what you earn.  A small dividend or interest check is irrelevant.  For the OP's situation, a Roth IRA clearly doesn't work, unless of course the 3 year old gets an acting gig.
« Last Edit: January 02, 2013, 09:18:27 PM by smedleyb »

Self-employed-swami

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Re: Investing for kids' college
« Reply #7 on: January 02, 2013, 09:49:08 PM »
edit:  hmm, I guess you can't contribute more to a Roth IRA than what you earn.  A small dividend or interest check is irrelevant.  For the OP's situation, a Roth IRA clearly doesn't work, unless of course the 3 year old gets an acting gig.

Child slave labour!

I am just kidding ;)

American tax law is very confusing to me, so I have no advice, but I think it is wonderful that you are thinking about your kids' future.

James

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Re: Investing for kids' college
« Reply #8 on: January 03, 2013, 08:19:15 AM »
You could set up a Roth 401k for each child (as you allude to).  The money still grows tax free (with better investment options) and can be tapped for college (I'm almost positive about this -- where's Grant when you need him!).  Plus there's the added flexibility of having a good ole' Roth should the child decide not to attend university.


You could use the Roth principle for college (or anything for that matter), but not the earnings.


My 14 year old got a job for the first time last summer (actually when he was 13), and made a few hundred bucks.  I'm thinking of starting a Roth for him at Vanguard and contributing whatever he makes each year and putting it in the index fund.  As he makes more each year it will build up, and he could use the contributions for college when needed.  Any earning can remain in the account for retirement.  My kids 529 accounts really haven't grown, so the advantage of this is simply the growth he will have long term, and the simplicity and flexibility of the Roth account.


I'm not going to restart my contributions to my 539s unless I can find some good reason to.

MountainFlower

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Re: Investing for kids' college
« Reply #9 on: January 03, 2013, 09:05:30 AM »
James,

Will having assets like a Roth or investment accounts in his own name hurt him if he needs financial aid? 

-Paula

Jack

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Re: Investing for kids' college
« Reply #10 on: January 03, 2013, 09:35:42 AM »
Will having assets like a Roth or investment accounts in his own name hurt him if he needs financial aid? 

It's been a while since I filled out a FAFSA, but I don't recall there even being a line to report the student's assets. (I suggest you download a PDF of it and check.)

eyePod

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Re: Investing for kids' college
« Reply #11 on: January 04, 2013, 07:49:23 AM »
Will having assets like a Roth or investment accounts in his own name hurt him if he needs financial aid? 

It's been a while since I filled out a FAFSA, but I don't recall there even being a line to report the student's assets. (I suggest you download a PDF of it and check.)

I'm pretty sure it will have to be reported.  Just as a point of reference, my father in law wanted to put our daughter's 529 in his name because FAFSA does not look at the beneficiary, only the account holder.  If we were to have it in my father-in-law's name, then it wouldn't be reportable for the FAFSA for the first year of college.  Once money was used for it though, all of that would be reported as income of the students for the next year, so I believe that any of the student's income is reportable on FAFSA.

secondcor521

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Re: Investing for kids' college
« Reply #12 on: January 04, 2013, 08:00:07 AM »
I'm just about to fill out the FAFSA for my oldest child this weekend, so I've been reading up.

Both the student's assets and income are reportable on FAFSA.  The parents' assets and income are reportable as well in most cases.  Each of the four numbers contribute at different rates to the family's EFC amount.  (EFC is the amount that the college thinks you are able to pay for that next year.)

2Cor521

James

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Re: Investing for kids' college
« Reply #13 on: January 04, 2013, 08:18:38 AM »
James,

Will having assets like a Roth or investment accounts in his own name hurt him if he needs financial aid? 

-Paula

Good point, yes it would hurt him for financial aid, though I'm not sure it would hurt him more than putting the money in his 529 account. 

chucklesmcgee

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Re: Investing for kids' college
« Reply #14 on: January 06, 2013, 05:06:59 PM »
You could set up a Roth 401k for each child (as you allude to).  The money still grows tax free (with better investment options) and can be tapped for college (I'm almost positive about this -- where's Grant when you need him!).  Plus there's the added flexibility of having a good ole' Roth should the child decide not to attend university.

I thought kids cant have a roth unless they have income?

Yes, but you might happen to say, pay $100 or so to start the sole-proprietorship "MountainFlower Family Pictures", a family run business which sells pictures of your adorable children. They might be paid $5500 for their modeling fees annually. Or something along those lines. Then they'd have income.

MountainFlower

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Re: Investing for kids' college
« Reply #15 on: April 11, 2013, 12:21:18 PM »
I am the OP and I've done some reading on this topic.  I thought I would share.

First, you can withdraw funds from an IRA to use for educational purposes even if you're not retirement age.  I've tried to summarize the pros and cons of a Roth IRA vs a state 529

ROTH IRA

Pros
-Not included on FAFSA (not that simple, however, see cons)
-can be used for retirement if you donít need it for education purposes

Cons
-Any distribution you take WILL impact the next yearís FAFSA.  So, if you are already FI and living on say 25K/year and you take out 20K for tuition that shows up as income and might impact financial aid for your kid if they need it.
-no state tax break
-for Roth, any gains will be taxed as income
-You might need this vehicle to save for retirement


529

Pros
-state tax breaks (state dependent)
-tax-free withdrawals on both principal and gains
-you can take the money out if your child dies or becomes disabled.  You can also take out money if your child gets a scholarship

CONS
-Up to 5.64% of your 529 can be ďused against youĒ on the FAFSA
-Unused funds:  The IRS will assess a 10% penalty + income tax on GAINS (not on principal)


Given all of this, I think Iíll open up 529 accounts.  Ours (Colorado) are through Vanguard. 

I hope this helps some of the others here.  If Iíve misspoken about something, I hope that someone will correct me.  I donít know much about IRAs. 

smedleyb

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Re: Investing for kids' college
« Reply #16 on: April 11, 2013, 12:28:14 PM »
Great info, MountainFlower.

Personally I'm betting that the college tuition bubble will collapse before my 8 and 4 year old graduate.

Throw in some college course work while they're still in high school (via that internet thingy) and I'll take my chances without locking up my funds in some restrictive 529 plan.  I might open a couple coverdells in the next several months, though, just in case my predictive powers fail me yet again.