Baby's future- 529?

[gooddecisions]

One of my 2012 goals is to set something up for my daughter's future. Does anyone have any personal experience with 529's or other plans specifically for your child? Do I choose one through my current state residence or are there better options? She's still a baby, so I have 18 years to save/invest.

[Deleted]

I have not set up a 529 yet, I just have savings accounts for each of my kids.

Each state sponsors a 529 plan. You can participate in any one. The benefit to using your state's plan is that you may get a tax deduction on your state income taxes for your contributions. But if your state plan stinks it is probably better to use one of the better state plans instead.

[NomoreDramaQ1015]

I live in Iowa and use their 529 plan. It's pretty good and I can recieved up to a $2,500 tax deduction on my state taxes.

I don't know much about investing so I have it set up on the age based plan where it invests really aggressively now and will become more conservative as she gets closer to 18 years of age.

Downside is it can only be used for education, if you take it out for something else you have to pay a fine.

If it were to be the case that she is like my brother however I'd have no problems taking the money back and paying the fee and putting into an account for myself or to be held elsewhere till she pulled her head out of her ass.

So if you want the funds to be for something other than education in the future I wouldn't recommend doing a 529.

[CarolinaKat]

Don't 529's held by the parent's count as 'expected family contribution' by the FAFSA?

[NomoreDramaQ1015]

Yeah, but if I am saving money for my kid's college why should I hide it from the FAFSA, isn't the whole point of saving for my daugther's college that I reduce her need for aid? Why should my kid get more aid because I am hiding funds?

[Deleted]

When we lived in Missouri, we contributed to a 529 plan for our niece. The "Missouri MOST plan".. We got a state tax deduction on the contributions.

[gooddecisions]

Well my goal would be to have her tuition fully funded, so FAFSA should hopefully not be an issue. If she were to go to college today, I could pay out of pocket given the current cost (shoot, daycare costs more than in-state college tuition right now), it's future costs I want to plan appropriately for and while receiving whatever tax advantages.

[Deleted]

Jan 6, 2012 10:36:10 GMT -5 CarolinaKat said:

Don't 529's held by the parent's count as 'expected family contribution' by the FAFSA?

They count as a "parental asset", and whatever calculations that they do to come up with the EFC comes from that, but it's not a one for one. The percentage of parental assets expected to be used is less than that of the students, so much better to have everything in your name than the childs. Of course, if you're not maxing your Roth's that's the BEST place to put college savings as it isn't counted at all.

[Deleted]

In IL, you can deduct up to $22K of contributions per child. They actually have a nice selection of plans as well, so that's a win/win.

First option is within your state. If they don't offer the deduction, then go out of state if they don't offer low-cost options.

[Deleted]

I thought we were supposed to kick our kids out at 18 and tell them they are not getting one cent toward college...?

[yogiii]

My state doesn't have anything to benefit me so I went with Utah which uses Vanguard funds and seems to have the lowest fees.

[CarolinaKat]

IDK MJ, All my kids have 4-feet for the time being. They don't need to go to kitty college . Although DBF's Step-Mom accused me of being Preggo over Christmas So I should be getting my ducks in a row, yes?

K for MPL for making sense to me

[gooddecisions]

"Of course, if you're not maxing your Roth's that's the BEST place to put college savings as it isn't counted at all."

I agree Roth IRAs are awesome, but the IRS has phased us out .

[gooddecisions]

Jan 6, 2012 11:28:57 GMT -5 @moneyjenny82 said:

I thought we were supposed to kick our kids out at 18 and tell them they are not getting one cent toward college...?

Yeah, I've seen that advice here, but my parents paid for mine and I'd like to pay the favor forward.

[lurkernomore]

Jan 6, 2012 11:00:28 GMT -5 minnesotapaintlady said:

They count as a "parental asset", and whatever calculations that they do to come up with the EFC comes from that, but it's not a one for one. The percentage of parental assets expected to be used is less than that of the students, so much better to have everything in your name than the childs. Of course, if you're not maxing your Roth's that's the BEST place to put college savings as it isn't counted at all.

I'm not up to speed on all the rules and regulations when it comes to Roth IRA's and making withdrawals....I would suspect there would be a penalty for withdrawing funds, right?

I ask because I was looking into setting up an education fund for my god daughter, and I was trying to find the best option and consider any tax benefits. I looked at the 529 plan, but I live in a state with no state income tax so no deduction there...looking for alternatives if there are any.

Also, as I'm not her parent how would any money that I say for her be accounted for when she fills out the FAFSA?

[gooddecisions]

...."I'm not up to speed on all the rules and regulations when it comes to Roth IRA's and making withdrawals....I would suspect there would be a penalty for withdrawing funds, right?"

No, there is no penalty if you withdraw your own contribution. You just can't withdraw earnings without a penalty until you are of retirement age.

[hsclassic]

We set up 529's for 2 nephews and 1 niece in Michigan. They use TIAA-CREF (seemed like one of the top programs for 529's). Granted, we used Michigan at the time because my parents lived there and were likely to contribute significantly (and they could get a tax break at that time).

Good experiences with TIAA-CREF after all these years - both as contibutors and in the kid's experiences withdrawing from them. The 529 can be used in any state, so no issues like we'd have if we used FL's prepaid program.

[gooddecisions]

So, I have to watch out for if a state's 529 plan has a requirement for attending a college in that state? Is that common?

[Deleted]

Jan 6, 2012 12:17:40 GMT -5 gooddecisions said:

So, I have to watch out for if a state's 529 plan has a requirement for attending a college in that state? Is that common?

Illinois, for example, has 2 plans that fall under the 529 plan.

1) Pre-paid college tuition is locking your tuition payments in TODAY for state-colleges (in your state). I personally wouldn't do that. The rates have gone through the roof in most states because they underestimated the costs for early sign-ups. So they are much higher now..plus you need to go to a state-school..plus you still have room/board.

2) 529 college savigns--This is more like the ROTH IRA of college savings. Put money in, after-tax, and the "earnings" (or profits) are tax-free. You also, depending on the state), get a state-tax deduction. In IL, it's $22K max per child if you're married.

Check your states plans. If you can deduct the contributions, then join their plan. If not and they have a good low-cost plan, then still join it. If it's not low-cost, then look out of state.

IL gives the deduction and they have Vanguard funds, so they are low-cost.

[Deleted]

Jan 6, 2012 12:14:56 GMT -5 gooddecisions said:

...."I'm not up to speed on all the rules and regulations when it comes to Roth IRA's and making withdrawals....I would suspect there would be a penalty for withdrawing funds, right?"

No, there is no penalty if you withdraw your own contribution. You just can't withdraw earnings without a penalty until you are of retirement age.

You can withdraw the earning penalty free if used for college. It's money completely under the radar from the financial aid department. The only drawback towards using the ROTH for college funding is you're taking up space you could be using for your own retirement. But if you're not already fully funding them, it's a no brainer.

[gooddecisions]

Thanks Dave, that helps.

[lurkernomore]

Jan 6, 2012 12:37:44 GMT -5 minnesotapaintlady said:

You can withdraw the earning penalty free if used for college. It's money completely under the radar from the financial aid department. The only drawback towards using the ROTH for college funding is you're taking up space you could be using for your own retirement. But if you're not already fully funding them, it's a no brainer.

Ok, got it. I can see the pros and cons...something to think about.

Back to the 529, since I'm not the parent how will money from it be taken into account for FAFSA? It's been awhile since I've had to fill that out but I can't recall ever seeing any questions about income other than your parents or your own.

[Deleted]

Jan 6, 2012 12:53:55 GMT -5 lurkernomore said:

Back to the 529, since I'm not the parent how will money from it be taken into account for FAFSA? It's been awhile since I've had to fill that out but I can't recall ever seeing any questions about income other than your parents or your own.

Since you're not one of the parents it wouldn't be reported on the FAFSA as an asset. But the student would have to report any money they recieved from your 529 as income the following year and the EFC is high for student assets and income. Now if you saved it for their FINAL year at college it would have zero impact on any financial aid.

[ruleof72]

Instead of using ROTH IRA funds for college just set up an ESA (formerly known as Education IRA). The limit is $2000/year but if you are starting early the balance should be relatively high in 18 years.
I have one set up for each of my kids and contribute the max each year. The advantage of an ESA over a 529 is that you can invest it in whatever you want and save some $$$ on fees.

[CarolinaKat]

Jan 6, 2012 13:06:16 GMT -5 minnesotapaintlady said:

Jan 6, 2012 12:53:55 GMT -5 lurkernomore said:

Back to the 529, since I'm not the parent how will money from it be taken into account for FAFSA? It's been awhile since I've had to fill that out but I can't recall ever seeing any questions about income other than your parents or your own.

Since you're not one of the parents it wouldn't be reported on the FAFSA as an asset. But the student would have to report any money they recieved from your 529 as income the following year and the EFC is high for student assets and income. Now if you saved it for their FINAL year at college it would have zero impact on any financial aid.

But if it's in the parent's name it doesn't count as part of the student's EFC?

[happyhoix]

Started our late, DS was in late elementary school, but the best part for us was we could set it up through an automatic deduction from my paycheck. We always do better saving money when it magically disappears from our checks before we get our fat fingers on it.

Was very excited a few weeks ago to cancel the 529 withdrawal from my check because DS is entering his final semester at school, we'll pay the last dorm fees/living expenses bills in January. That gave me a $200 per month 'raise.' Whoo hoo. Because we started later, we wouldn't have had enough to cover the entire 5 years DS spent at college for ALL his expenses, but he was able to get a scholorship so we only had to pay dorm fees, living expenses, books, etc. (He went 5 years because he periodically worked as an intern for several semesters). Because of the 529 neither DS or I ended up with any SL - another whoo hoo. So I'm a fan of 529s.

[Deleted]

Jan 6, 2012 13:31:04 GMT -5 CarolinaKat said:

Jan 6, 2012 13:06:16 GMT -5 minnesotapaintlady said:

Since you're not one of the parents it wouldn't be reported on the FAFSA as an asset. But the student would have to report any money they recieved from your 529 as income the following year and the EFC is high for student assets and income. Now if you saved it for their FINAL year at college it would have zero impact on any financial aid.

But if it's in the parent's name it doesn't count as part of the student's EFC?

Currently, no. A tax-free distribution from a parental 529 is not included in the next year's base income, but "gift" 529 money from other sources is. This is for federal aid, but every school can set its own rules and lots of them are getting wise to the hiding of 529 accounts in other family members names.

[happytraveler]

We used the PrivateCollege529 plan. It worked out great for us--it allows you to lock in tuition at today's prices for about 400 (I think) private colleges and universities. Yes, the plan does lock you into going to one of these 400 schools, but our kids both found that the selection of schools was more than adequate in terms of providing them with options. Also, investing in the plan does not guarantee admission.

[jitterbug]

I personally am not a fan of 529 Plans. In a perfect world, they are great - but what if your child decides not to go to college? My son was very fortunate that his grandmother funded a 529 Plan - but he's tried college twice and it's just not his thing (and he's now 25, gainfully employed, and has bought his own house, so he's not a deadbeat...just not college material). He's the only grandchild. If grandma had put that money into something else that was mentally earmarked for him, she could either now spend that money on herself or gifted him that money. Instead, she now either has to pay a penalty to withdraw it - or let it stay and maybe fund her not-yet-conceived-and-maybe-never-will-be great-grandchild.

[gooddecisions]

What's a better alternative? The 10% penalty and tax burden on withdrawn earnings doesn't seem unreasonable given the years of federal and state income tax breaks and grandma gets to now spend money just didn't plan on spending.