I started a 529 account and I do not have a child

Cute gecko in Big Island, Hawaii[/caption] A great thing to do if you know you want kid(s) and are able to is to start funding their college account now. Why? The cost of college tuition has been outpacing inflation at an astronomical rate. I started college in 1995 at Barnard College in NYC. Tuition at that time was ~ $20,000. 2016-2017 tuition is $48,614. That’s over a 200% increase in tuition in about 20 years. I qualified for financial aid and only had $16,000 in loans when I graduated in 1999. Lucky indeed. Of course, medical school was a different story and that tacked on another $150,000 in loans, but knowing how much other students graduate with now (> $300K !), I still consider myself quite lucky. I qualified for financial aid at Columbia and received a half tuition grant ($20K) and took out only Stafford loans and a private loan from Columbia funded by alumni. The noose I feel around my neck from these loans is enough for me to want to not have this (entire) burden for my (future) kid(s). So much so that I started a 529 account NY in 2016. A 529 account is an account that you contribute post-tax dollars into that grows tax -free and can be withdrawn tax-free if used for qualified educational expenses. Kind of like a Roth IRA for education (which btw, you CAN use your Roth IRA for qualified educational expenses, but it should not be earmarked as such!) There are numerous 529 accounts and they are state sponsored. NY is one of the states that allows a state income tax deduction on 529 plans (up to $5,000 per year). You can also benefit from this tax break even if you live outside of NY as long as you have NY income. So I am currently funding this account up to the state income tax max deduction per year. I expect that in about 5 years, I’ll be able to increase that to $10,000 per year. I should have anywhere between $150,000-$250,000 in that account once said kid attends college. Time is on my side. Note that the annual limit to contribute to a 529 is limited to $14K per person or $28K per married couple to avoid possible gift taxes and for 529s, you can actually front load the account 5 years at a time. I do not feel the need to fully fund their college education. Mainly because I may not be able to due to my late start at my own savings (as far as I know, there is no such thing as retirement loans) and I do want my kid to be grateful and have “skin in the game” for their education. I do not think most people appreciate things given to them for free. M and I also feel strongly that unless our kid gains acceptance to a top private school (aka Columbia, NOT Colgate) then they can go to state school. Edit: You’ll need to name yourself as the beneficiary until the kid is born. Do you have a 529 account for your kid(s)? Are you planning on fully funding their college education? Comment below.]]>

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5 Comments

  1. Physician on FIRE on January 20, 2017 at 6:50 pm

    You are clever to start taking the deduction and building up the funds as early as possible. I don’t think I realized it was an option when we first got married.

    We started our boys’ funds when they were babies, and expect to have them funded with $100,000 each before I step away from my job in a couple years. They’ll be 8 and 10 and there will still be a number of years for the funds to grow before they’re accessed.

    It’s tough to know how much is the right amount. Tuition has been growing at a pace faster than inflation. There are also many unknowns. Will the kids go to college? Probably. Will they go to a public school with scholarships? I hope so. Will they go to grad school or professional school? Who knows? One way to give them skin in the game is to let them keep anything left over for their own kids. Imagine what a couple three decades can do for that money (not to mention the cost of tuition)!

    Best,
    -PoF



  2. Biglaw Investor on January 22, 2017 at 8:27 am

    Getting out of the New York state AND city tax is a pretty good deal. I’ve been thinking about doing this even though I don’t have any children yet. This could be the year!



  3. Financial Panther on January 22, 2017 at 3:03 pm

    I happen to live in a state without a tax deduction for 529s, so I opened up a 529 account in NY and named myself as the beneficiary. Since I don’t have kids and am a long way away from having kids, I figured it made sense to open up an account in advance just so that I know how it works.

    NY’s plan only requires a minimum 25 deposit, so I’ve just been depositing 25 bucks a month for the past two years. It’s a tiny amount that I don’t even notice, and it gives me comfort that when I do have kids, I’ll know exactly how a 529 works.

    An interesting thing you can do with the NY 529 plan is to funnel some of your current education costs through it. People who are in law school or business school, for example, stand to earn significant sums of money during their summer jobs. You can get yourself a tax deduction by putting 5k into a 529, then withdrawing that money to pay rent or textbook costs.



    • missbonniemd on January 28, 2017 at 11:02 pm

      That’s clever for law students and I wonder if any are savvy enough to do that!



  4. espositomontazeri on January 23, 2017 at 10:10 pm

    Wow, great info. I really wish I would have known that you can start an account before having a child. I missed out on years of growth!



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