Is a 529 plan even worth it?

[Nika]

According to Vanguard's 529 State Tax Deduction Calculator, if we put $3,000 into a state 529 plan this year, it will save us a whooping $144.

Is it worth it to give up so many freedoms in managing and using this money? Seems like a lot of restrictions for very little savings. (Maybe even less for us, since DH works in NJ, who tax him on the entire income, including 529 and 401K contributions).

What do you think? What would be the best approach to saving for baby's college?

[disneysteve]

Don't forget that the main advantage of a 529 isn't the tax deduction for the contribution. It is the tax-free growth and withdrawals from the account. I live in NJ where there is no deduction for contributions but we are still doing a 529. We started it about 8 or 9 years ago I think. It has grown nicely and will provide upwards of 50K toward college when our daughter starts in 2014.

The alternative, I suppose, is to invest in a taxable account, but then you're paying taxes on the growth all along which will reduce the end result of your saving efforts.

[MonkeyMama]

I personally do not see the point of a 529 plan in our situation, and that is my opinion as a tax professional.

It depends on how much you are saving. We just use UGMAs - it is easy to pay no taxes on this money, but that is extra so because we are in the lower tax brackets. I expect in a higher tax bracket your situation is very different. But the first $1k or so of unearned income, per year, will still be tax-free. Which doesn't matter much early on in the savings process. You can also harvest tax gains ($1k per year) to this end - that is what we do. (Versus letting an investment grow and grow and grow and have to pay a big kiddie tax later when you sell it for college expenses). In our tax bracket, about $2k per year is tax-free, which is the final nail in the 529 coffin for us. We can invest this money absolutely anywhere with no strings.

ESAs are a fair alternative - have you considered those? I never did because politically 529s were supposed to replace them. Fast forward many years and ESAs are still around (Surprising) BUT several brokers no longer offer new ESA accounts, as they look ahead to future tax changes. So I recommend with a "meh." I feel like I was maybe wrong to ignore them for the last decade, but the writing is more on the wall for their demise at this point in time. VG might be one that does not accept new ESAs?

My general feeling is that the 529 cons far outweigh the benefits for our personal situation at this time, BUT we can always move the money to a 529 plan later if that becomes a better option. So, win-win.

In general, larger sums of money, longer time horizons, and higher tax brackets will make 529 plans more attractive. & state tax deductions (which we also do not get).

529s are designed to be more higher-income and higher-asset tax shelters. There are also financial aid considerations. Again, hell will freeze over before we get financial aid, so is not of concern for us. I do throw that caveat because financial aid is a more serious concern for many, and is a reason to consider 529 plans at lower asset and income levels.

[MakeAStash]

Since UGMAs have no limit on use once the minor reaches the age of maturity, I've had concerns of the impact on the recipient. Around age 20 a few thousand dollars may lead a young adult to think he/she doesn't need to find a job, or can afford the downpayment on an expensive car, etc. and thereby begin lifestyle habits that are difficult to break.

[sblatner]

We have two teens with one going to college in a year. We chose not to invest in 529s and just did our own saving/investing. We have more flexibility, control, etc.

We have friends who had kids going to college in 2008/2009 and they were surprised to find their kids' 529s were worth a lot less than they thought they should be. At a time when the 529s should have been shifting their money to less risky investments (since the kids would be going to college within a year), the 529s were still invested like they were when the kids were a lot younger.

[disneysteve]

We have friends who had kids going to college in 2008/2009 and they were surprised to find their kids' 529s were worth a lot less than they thought they should be. At a time when the 529s should have been shifting their money to less risky investments (since the kids would be going to college within a year), the 529s were still invested like they were when the kids were a lot younger.

This is NOT the fault of the 529 plan. This is the fault of the parents for not paying attention. With any investment, you need to understand how the money is invested and you need to decide if it is appropriate for your situation, needs, and goals.

My daughter's 529 was 100% in an age-adjusted portfolio. However, I felt that it didn't get conservative enough soon enough so about 2 years ago, I changed the allocation and directed new money not to the age-adjusted portfolio but rather to the more conservative investment option. That gradually shifted the overall allocation more conservative faster than had I left it alone.