The Pros and Cons of 529 Plans
According to the College Board, the cost of higher education has been steadily increasing by a rate of 6% annually. Have you considered what the college cost for you child or children might be? There are various college costing calculators online, I like using both the US News Net Price calculator as well as the savingforcollege.com online college cost calculator. Both will give you a quick general sense of what you can expect to shell out for your child's college education. Let's do a quick analysis using my oldest son as an example.
The calculator asks for my son's age, 2. It asks for the current price of tuition at my selected school, 39,122 (I'm using the current out of state tuition cost from my alma mater, the University of Michigan - Ann Arbor). You can use the following link to look up a specific school and find a breakdown of relevant tuition costs. It also asks how long my child will be attending, 4 years, and on a full time basis.
There are some other inputs this particular calculator asks, and for this example, I'm going to assume that I wish to cover 100% of the total college cost by the time my son finishes school, that I have $0 currently saved for this goal, that college costs will continue to rise at 6% annually, and that I am able to earn a 6% after-tax per year.
The result: my oldest son's college education will cost $434,765. Quite the expense!
So what is a 529 and does it make sense for me?
A 529 plan is a tax advantaged investment vehicle in the United States, operated by a state or educational institution, and designed to encourage and help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996. There are two types of 529 plans, prepaid and savings plan. The prepaid plans allow you to pay tuition at the current price and attend in the future. The saving plans invest in stock and bond funds. The big flaw with the pre-paid plan is that one never truly knows what school their child will attend. By contrast, the savings plan is far more flexible.
What are the key 529 benefits?
What are the problems with 529 plans?
Be sure to speak with your financial advisor about whether a 529 would be suitable for you. In general, I recommend that individuals max out their retirement contributions first before contributing money to a 529 plan. I also suggest that these plans tend to get the "most bang for the buck," when large initial deposits are made to the account (ex: a grandparent makes a lump sum deposit as party of their estate planning). This front-loaded outlay enables the 529 account to benefit from maximum compounded interest, as discussed above.
I hope this information is helpful to you. Please contact me with any questions or to discuss how a 529 plan might fit into your own financial plan.
Jason M. Gilbert, CPA/PFS, CFF
Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.