My daughter just turned 2, and I started investing in her 529 plan when she was about 3 months old. Needless to say, the account isn’t worth as much as I’ve put into it.
No one is happy about the global stock market crash. But that doesn’t mean you should stop contributing to 529 plans. Think about it this way. You may have “bought” the stock market at 14,000, and 13,000 and 12,000 and 11,000. Now that it’s cheaper, should you stop buying it? One of the nice things about 529 plans is they let you set up a regularly monthly contribution. If you stick to your plan, that means you buy into the market every month. This allows you to dollar cost average your investments.
Although my time horizon is long, you need to evaluate your strategy if your kid is going to college soon. Many 529 plans offer time horizon funds which automatically switch some of your money into bonds and less risky investments when your kid gets closer to college. That way a sudden crash in the market, like what we’ve seen lately, won’t keep you from being able to pay for college.
Unless you think the market will continue on a downward trajectory from now until when your kid goes to college, it probably makes sense to stick to your plan and keep investing on a regular basis.
529 plans are a great way to save money over the long term for your child’s education. But there’s a huge tax benefit for people who’s kids or grandkids are already in college or starting this fall. This loophole works for people who live in states with state income tax benefits on their 529 plans.
Here’s an example, as illustrated by the Charleston Post and Courier. Say you have a tuition bill due in a couple weeks for $10,000. You can contribute $10,000 today to your child’s 529 account, and then withdrawal it next week to pay the tuition bill. South Carolina’s 529 plan offers a state income tax deduction for contributions to a 529 plan, so you would be able to deduct $10,000 from your income on your state income tax return this year even though you only had the money in your 529 account for a week.
Many other states also have this loophole because there’s no waiting period for getting the deduction. Of course, this doesn’t have anything to do with federal tax benefits of 529 plans, so it only applies if you live in a state with a 529 plan offering upfront tax benefits with no waiting periods.
Money Magazine has a new article, just published on CNN.com, about 529 plans. It asks if 529 plans are still the way to go. The answer: absolutely, except in very rare circumstances:
The tax breaks usually make 529s unbeatable. Say you’re in the 28% tax bracket, have a five-year-old and save $200 a month in Utah’s low-cost 529, which has annual expenses of 0.38%. Assuming annual average returns of 5%, you’ll have $39,100 by the time your kid is 18. Invest the same amount in a taxable account with equal fees and returns, and you’ll have $36,200 after taxes. In other words, you’ll lose $2,900.
The 529 comes out even further ahead if your state allows you to write off all or part of your contributions (33 states and the District of Columbia will let you do that).
I came across a great blog post today at InterestingMoney.com called “5 Reasons Why You Should Open A 529 Account Right Now.”
No, it’s not about setting up an account for your kid. It points out that you can set up a 529 plan even before having children. Just make yourself (or spouse) the beneficiary. You can use it to pay for your continuing education expenses, or just transfer it to your child after they are born (or any time thereafter).
This makes great sense, especially if you are in a state that offers upfront tax benefits for investing. Why wait until your kid is born to start taking advantage of these benefits?
I’m excited to announce that 529s.com has released a new report, “5 Biggest 529 Plan Mistakes”. The free report discusses ways that people make costly mistakes when setting up 529 plans.
I recommend downloading a free copy while doing your research on 529 plans.