Planning for kids' college

[Publius]

With college costs outpacing the rate of inflation by almost 2 to 1, and the cost of private colleges well above $100K for a 4 year school already, how are you guys going to pay for junior's bachelor's degree?

[Ragnar Hogbrok]

I'm 26, and starting a 529 College Savings program for him.  The state of Arkansas matches up to $500 per year (at a different rate based on income) invested into it, and up to $10,000 of investment (for married couples filing jointly on their income taxes) is tax deductible.  There are three options for a vehicle of growth, however, I believe they are all mutual funds with different "risk" categories.

The money, when used on higher education including computers, tuition, books, transportation, etc, is totally tax exempt when withdrawn from the account.  Plus, the custodian (parent/grandparent/whoever) retains ownership of the account, even if not fully used.  So, the remaining amount could be rolled over to another child's account.  If you choose to take the cash value for a little vacation or just put in the bank, it is taxed at Arkansas' (and probably Federal, not sure) income tax rate.

It's not too bad.  You can go to www.savingforcollege.com and click on their interactive map of the U.S. and pick the state you wish to use (you're not limited to your home state).  Then, it will come up with all of the specifics for this program.

Plus, hopefully, I will be able to transfer the remaining balance of my GI Bill and pass it to my firstborn.  Oh, yeah, Junior is going to have to get a J-O-B.  Gotta' teach them that NOTHING is free.

[Publius]

I'm 26, and starting a 529 College Savings program for him.  The state of Arkansas matches up to $500 per year (at a different rate based on income) invested into it, and up to $10,000 of investment (for married couples filing jointly on their income taxes) is tax deductible.  There are three options for a vehicle of growth, however, I believe they are all mutual funds with different "risk" categories.

The money, when used on higher education including computers, tuition, books, transportation, etc, is totally tax exempt when withdrawn from the account.  Plus, the custodian (parent/grandparent/whoever) retains ownership of the account, even if not fully used.  So, the remaining amount could be rolled over to another child's account.  If you choose to take the cash value for a little vacation or just put in the bank, it is taxed at Arkansas' (and probably Federal, not sure) income tax rate.

It's not too bad.  You can go to www.savingforcollege.com and click on their interactive map of the U.S. and pick the state you wish to use (you're not limited to your home state).  Then, it will come up with all of the specifics for this program.

Plus, hopefully, I will be able to transfer the remaining balance of my GI Bill and pass it to my firstborn.  Oh, yeah, Junior is going to have to get a J-O-B.  Gotta' teach them that NOTHING is free.

Excellent post and good for you, Craig.  I have a 529 for my girl (she is 4) and put $5500 a year into it.  In Tennessee, there is no state income tax, so I do not get a tax break in that respect...I have my 529 with T Rowe Price and it is invested in a mix of their stock mutual funds which  become more invested in fixed income mutual funds as she approaches 18.  It sounds as if you have done your homework, Craig, and I must say for your young age, that is indeed impressive as is your outlook on hard work.  Well done, and thanks for your service in the military.

[SultanofSwine]

The Arkansas plan has the matching contribution you mentioned but there are income limitations on actually receiving the match.

Also, the distribution taken for vacation would also trigger a 10% penalty in addition to the possible taxation issues.

[Ragnar Hogbrok]

The Arkansas plan has the matching contribution you mentioned but there are income limitations on actually receiving the match.

Also, the distribution taken for vacation would also trigger a 10% penalty in addition to the possible taxation issues.

Correct, I just didn't want to post a novel.  The restrictions for investment matching are from income level of $0-30,000, giving you a $2 to $1 match, and from $30,001-$60,000 giving a $1-$1 match, and no matching for higher than $60,000.

My first post covered the penalty for withdrawing the account for non-higher ed purposes.  It's taxed at the income tax rate for your income level for at least the state of Arkansas, and probably (though I'm not certain) the federal tax rate for your income level.

[hog.goblin]

I have a 529 account for each girl...started as soon as I had the SSN's in hand.  I contribute on a monthly basis for each through an automatic draft.  What the first girl doesn't use I can roll over to the second girl.  What she doesn't use...guess I better have more kids

[hawgbawb]

I also have 529's for my 2 girls. One thing to keep in mind is that you  do not have to patronize your own state's program, and sometimes it pays to shop the program's ofvarious states. They are not all the same-some are better than others.

[hog.goblin]

I also have 529's for my 2 girls. One thing to keep in mind is that you  do not have to patronize your own state's program, and sometimes it pays to shop the program's ofvarious states. They are not all the same-some are better than others.

I do like the tax deduction here in Arkansas.  My wife and I are both in the 7% state tax rate so even if growth is only 3 - 5% we still make 10 - 12%...hard to beat that with a stick.  Of course we are hoping for something closer to the 6 - 8% range over the 18 year period (equating to 13 - 15%).

[J.A.Y.]

Alright back to the original FINANCE/INVESTMENT Forum thread that your truly got going on VUL.

This is the main reason I started that darned thing, was to have a back up fund for college for our lil' ones.

With a 529 you said you can roll over any remaining amount to an account for child #2 or #3?

If so is there a penalty for moving the money? any other catches with 529's?

[Ragnar Hogbrok]

Alright back to the original FINANCE/INVESTMENT Forum thread that your truly got going on VUL.

This is the main reason I started that darned thing, was to have a back up fund for college for our lil' ones.

With a 529 you said you can roll over any remaining amount to an account for child #2 or #3?

If so is there a penalty for moving the money? any other catches with 529's?

No penalty for rolling money over to child #2, 3, 4...10, etc.

The catches are referred to by my first and second posts in this thread.  Not really "catches" but penalties to ensure that you use the money as intended. 

I even added a link that you can click on for more information.

[J.A.Y.]

Thanks wocraig, I missed the link

[jwdento3]

I also have 529's for my 2 girls. One thing to keep in mind is that you  do not have to patronize your own state's program, and sometimes it pays to shop the program's ofvarious states. They are not all the same-some are better than others.

Good point.  Clark Howard's website has a list of "honor roll" states with good 529 plans.  If you can shop around, this is a good place to begin some research:  http://clarkhoward.com/shownotes/category/1/34/281/380/.

[bigyellowdog]

What kind of broker fees are associated with the 529?  Is there any way around them?

[Publius]

What kind of broker fees are associated with the 529?  Is there any way around them?

If you invest via a mutual fund company or directly through the sponsoring agency, there are no brokers fees....there are expenses associated with the mutual funds which are usually low "load funds" with expenses around 1-2 %.