Planning for your child's future college expenses. Vanguard 529
Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes
Just curious to see if any of you have contributed to an education IRA 529 plan for your child's future college expenses. I have heard that the 529 plans in Utah and Nevada area the best as you can select low fee Vanguard funds.
Thanks.
Hi James,
While we don't use the 529 savings plan, my wife and I have generated the following savings plan for our kids.
We like this option the most because it requires a chunk of money up front, but after that (ideally) the savings and increase in value are all accounted for with rent payments from the tenant. While college costs are currently appreciating faster than inflation, this plan does account for typical inflation through the increase in value of the property.
**I operate a property management business and I'm a licensed Realtor so it makes cash flowing on a $150,000 home/15 year note a little easier**
Hope somebody finds this plan helpful! We've put a lot of thought into it.
Josh
Hi James!
Is this a new area of Bigger Pockets? I have been gone for a while and I love that there is a personal finance section.
I have 3 sons and we are auto-depositing every month into our state 529 plan in Wisconsin. Wisconsin gives some state income tax break and that's why I chose our in-state plan. Overall it has been OK, and I'm happy that we are auto-contributing so that it always gets done, and contributing to college savings is part of every day life.
Vanguard is excellent and if we did not receive tax savings, I would seek out a plan that uses their funds.
I also have a Coverdell Education Savings account for each child with Charles Schwab. In this account, I can contribute $2k per year per child, and invest those funds directly in company stocks. It's not a lot of money, but it will add up over time, and it works a lot like a ROTH IRA where you use pre-tax dollars and the growth does not get taxed. (Next year's contributions are already saved up so January 1, I will deposit for the kids, and I will deposit for our own ROTH IRAs.) There are some income limits on Coverdell.
I am not involved in real estate investing at this time, although I like real estate and might like RE investments in the future to diversify our holdings.
If I had a RE portfolio, I might consider using rental cash flow to pay college costs as they happen. It depends on your financial situation and your goals.
The real estate folks here may have more specific advice about using real estate to fund a college goal that I am not familiar with.
Kudos to you for saving for your children's education. Starting early should make a difference for your family.
Side note, I used the website savingforcollege.com to estimate the future costs of college. I made a spreadsheet and estimated the costs for in-state public school tuition. Then I made it our goal to save for about 80% of the college costs. The kids can work or we can help pay the rest through our regular income. Also by the time the kids are in school, our mortgage will be paid off and we should have more disposable income to help if needed.
I also have Vanguard UTMA accounts established for my kids. These are not big balance accounts, but I will make contributions on their birthdays and at Christmas. This money is money that they own and they can use for whatever -- maybe they will sit on the savings or use it for a future home purchase.
My big advice is to -- DO IT NOW! Don't let the time slip away from you. I should have started a little earlier with my kids. (We were making small little contributions, but this year I got serious about figuring the costs and we significantly increased our deposits. We should have kicked in more, sooner.)
Blessings to your family!
Karen
I'm investing in a 529 plan and don't even have kids yet! In Indiana, contributions to a 529 get you a tax credit (not discount, an actual credit).
Hello James,
My husband and I have 3 kids (11, 10, 9) and have found that putting post-tax dollars into any kind of plan was much less profitable than investing in real estate. So we have put those post-tax dollars into properties instead - definitely more of a headache, but also much better return - cash flow and appreciation. We do max out our own retirement funds each year though, but that is mainly because they are pre-tax dollars and it makes more sense. If laws change and allow for pre-tax dollars to be placed in college funds, we may change our tune.
Nada
Check out this post by Al Williamson. Effectively pay your children for services rendered to your RE business but only as much as they are under the earned income limit for dependents. This money can then be used for contributions to a 529 plan AND an expense against income.
http://leadinglandlord.com/tax-deductions-for-landlords/
I contribute to a 529 plan for my nieces. My kids are the four legged kind.
@Karen M. You might want to rethink those UTMA contributions. Understand it gives your kids great flexibility but any annual unearned earnings over $2,300 are taxed at the parent's rate. While 529 are tax free UNLESS the money is not used for education, then the earnings are taxed at your ordinary income level plus a 10% again on the earnings. Also, some 529 plans allow you to direct the withdrawal to the beneficiary, which would presumably keep it in a low tax bracket.
I'd think even with a 10% penalty you'd be better off long term by doing a 529 plan rather than paying ordinary income rates on any earnings over $2,300. Run your numbers and see what happens.
All of this presupposes that you and your husband will not have to worry about the $10 million+ estate issues.
I contribute to a 529 plan for my nieces. My kids are the four legged kind.
@Karen M. You might want to rethink those UTMA contributions. Understand it gives your kids great flexibility but any annual unearned earnings over $2,300 are taxed at the parent's rate. While 529 are tax free UNLESS the money is not used for education, then the earnings are taxed at your ordinary income level plus a 10% again on the earnings. Also, some 529 plans allow you to direct the withdrawal to the beneficiary, which would presumably keep it in a low tax bracket.
I'd think even with a 10% penalty you'd be better off long term by doing a 529 plan rather than paying ordinary income rates on any earnings over $2,300. Run your numbers and see what happens.
All of this presupposes that you and your husband will not have to worry about the $10 million+ estate issues.
Hey Cal, my reason for choosing the UTMA and Coverdell is to give my children exposure to stock investing. I am a stock-picker, and so that's what I like to do, and they will get to see the results of those investments over time. Another stock-based vehicle for savings for kids are DRIP plans. Here is a great post on DRIPs from Joshua Kennon's blog. Great example of regular savings:
DRIP investing
Hi James,
While we don't use the 529 savings plan, my wife and I have generated the following savings plan for our kids.
We like this option the most because it requires a chunk of money up front, but after that (ideally) the savings and increase in value are all accounted for with rent payments from the tenant. While college costs are currently appreciating faster than inflation, this plan does account for typical inflation through the increase in value of the property.
**I operate a property management business and I'm a licensed Realtor so it makes cash flowing on a $150,000 home/15 year note a little easier**
Hope somebody finds this plan helpful! We've put a lot of thought into it.
Josh
I contribute to a 529 plan for my nieces. My kids are the four legged kind.
@Karen M. You might want to rethink those UTMA contributions. Understand it gives your kids great flexibility but any annual unearned earnings over $2,300 are taxed at the parent's rate. While 529 are tax free UNLESS the money is not used for education, then the earnings are taxed at your ordinary income level plus a 10% again on the earnings. Also, some 529 plans allow you to direct the withdrawal to the beneficiary, which would presumably keep it in a low tax bracket.
I'd think even with a 10% penalty you'd be better off long term by doing a 529 plan rather than paying ordinary income rates on any earnings over $2,300. Run your numbers and see what happens.
All of this presupposes that you and your husband will not have to worry about the $10 million+ estate issues.
Hey Cal, my reason for choosing the UTMA and Coverdell is to give my children exposure to stock investing. I am a stock-picker, and so that's what I like to do, and they will get to see the results of those investments over time. Another stock-based vehicle for savings for kids are DRIP plans. Here is a great post on DRIPs from Joshua Kennon's blog. Great example of regular savings:
DRIP investing
Interesting. That shows more forethought/insight than a lot of parents. Continuing on that same line of thinking, once they get old enough you might want to think about paying them a salary and doing a roth for them. You can pick stocks inside it too as you are probably aware.
I have been contributing to my oldest's 529 plan for about 6 years now. We had twins about 3 years ago and I have used the same plan for their college fund as well. Vanguard is the best of breed for this type of plan IMO and is what I would recommend to anyone looking for a way to grow their child's college fund using securities. If you plan to invest some money for their plan in your lucrative real estate projects make sure they're done properly and I would recommend using a TPA to have things at arms length.
Note that you can "supercharge" their college fund if you're a high income poster and can afford it. IRS Form 709:
IRS Form 709
is what you need to look into if you plan to do this. Apparently the gravy train stops at $300k per account. That should be far more than you need to send your kid to a quality college.
Interesting. That shows more forethought/insight than a lot of parents. Continuing on that same line of thinking, once they get old enough you might want to think about paying them a salary and doing a roth for them. You can pick stocks inside it too as you are probably aware.
The minute they get a job, we'll start talking about Roths. The kids aren't quite old enough to work for me, and I have to get going if I'm going to develop a business that can pay them. :) I thought rentals would be perfect for the teenage years, 3 boys to help with painting and lawn mowing and all those things. However, I don't know if that is where we will end up or not. If I become a realtor, I might be able to have them work as assistants, but I want them to have meaningful work and they might have better learning experiences working for other, tougher bosses. It's at least 3-4 years away, so we'll see. It's exciting! The kids are definitely going to need to learn to work, work hard, and understand that there are a lot of people out there who work very hard for very little money, so that they have a good understanding of life, and so they have some motivation to handle money wisely.
The kids are old enough to get a job and for you to start a Roth IRA for them. I know of a guy who took a photo of his grandchild the day he was born. He used it in some marketing for his company and paid the kid a modeling fee. That fee was earned income and was used to start a Roth IRA. I didn't hire my daughter until she was ~5 years old. (I might have started earlier but I wasn't familiar with Roth IRA's previously.) This was back when stamps had glue that had to be wetted. (Most people licked them--I hated licking stamps). My daughter seemed to be happy to help me by licking the stamps and placing them on my outgoing mail. I paid her for her work and started a Roth IRA for her. (I paid her well enough that my accountant offered to do the job.) She got a large raise a few years later when she began preparing my invoices for me.
I invested her Roth money aggressively--it performed better than any other investment I had. Since Roth funds can be withdrawn without penalty to pay for tuition that is what it was used for. Her IRA paid for a couple years of college.
I live and work in NH so our State does a real crazy thing where they let us actually KEEP our earnings instead of taking it and spending 250% of it at lightning speed. Crazy idea right?
So I have no tax incentive for a 529 but several years ago after exhaustive research I settled on Utah's program. I'm a happy customer. I love the Vanguard funds and the low admin fees Utah provides.
I have been contributing to my oldest's 529 plan for about 6 years now. We had twins about 3 years ago and I have used the same plan for their college fund as well. Vanguard is the best of breed for this type of plan IMO and is what I would recommend to anyone looking for a way to grow their child's college fund using securities. If you plan to invest some money for their plan in your lucrative real estate projects make sure they're done properly and I would recommend using a TPA to have things at arms length.
Note that you can "supercharge" their college fund if you're a high income poster and can afford it. IRS Form 709:
IRS Form 709
is what you need to look into if you plan to do this. Apparently the gravy train stops at $300k per account. That should be far more than you need to send your kid to a quality college.
I started the 529 for each of my kids when they were born. Monthly auto deposit.
My thinking is if I can invest and accumulate enough money for when the kids need to go to school, the repetition of saving will have created other income in other places and we won't even need the 529 plan to send them to college.
Frank
@frank r,
Which state 529 plan did you get for your kids?
@James Park I invest a small amount of money in each kids' 529. I chose the NC program because we received a state income tax deduction, but that went away last year. Money is invested in the Vanguard Aggressive Growth Fund. I only contribute $100/month for each kid (Accounts are about $5700 each right now).
I should also have at least two paid for rental properties that rent for a total of $2885/month in today's dollars. That is going to supplement the 529. I didn't want to invest too much in the 529 in case my kids decide to become entrepreneurs and skip college.
@Bryan Hancock I have twins too! Mine will be four in March
I have one for my kid at TD Ameritrade. I also have a ROTH IRA for him. If you can, also open a ROTH IRA for your child.
I max out the 529 for my son every year. Just do the monthly auto draft and forget about it.