Saving for College: 529's and Education IRA's

[Scanner]

Okay, maybe kv or someone else can help me out here.

I feel pretty confident on funding my retirement but like most Americans, I feel behind on college. To let me you know my goal, I would like my kids to be able to attend college with tuition paid but they pay room and board and books (like I did - with summer jobs and part-time 10 hour/week work throughout the year). I will also pay for car insurance for their own car, bought with their own money (a klunker) so they can work.

I have a 9 year old and a 4 year old.

Okay, some spousal miscommunication - my wife signed up for a 529 through work - a mutual fund salesman from Paine Webber talked her into it.

Okay fine, it's kind of one of those loaded mutual funds (back end loaded if you withdraw quickly) so I rather have not done it but it was $15 every 2 weeks and I must admit I kind of like the funds in that they automatically balance the stock/bond mix as college approaches. Here's one case I do think bonds serve a purpose for diversification.

Anyway, I have some money sitting in an Education IRA too for each of them, accumulated gifts from family mostly, and I want to "roll it" into the 529.

Can you do that? I called the mutual fund salesman (financial advisor, sorry) and he said he didn't know. . .he'd check into it, but never got back to me.

I am just trying to clean up a bunch of small accounts where money around $1-3000 is just sitting there.

Thanks anybody in advance, if I forget.

[TBH]

I don't know if you can roll an Educational IRA into a 529 but I imagine you can. However, why put even more in an expensive fund? You can open a free 529 at Fidelity and they also have those target-date funds. I bet Vanguard and T. Rowe also offer a good deal.

I know what you mean about cleaning up tiny random accounts, but I think in this case you should think about putting the money in a better place. Fidelity also has that autodeposit feature, and I think the minimum is $15 per month.

Good luck. It's a scary thing, saving for college. I'm with you, though--I want my son to pay for part of it (maybe 25%) on his own.

[Scanner]

TBH,

Thanks, it's complicated - if you are married, it's a wife/husband thing.

You see, it's through her employer, the 529, and I have tried to explain loaded vs. non-loaded and expense ratios and her eyes glaze over. I love the investing stuff; she hates it. I really beleive what Suze Orman writes - females often do better with investments than males because they don't trade as much. I am not saying that to be patronizing at all.

However, I think females, in the case of my wife, like the feeling they are "being taken care of." She really likes her company and they "provided" this to her and she wants to use it - even though it makes total sense what you are saying - to go find a more efficient vehicle.

Males love control over accounts. Females would like a pension. Just a sexist observation.

So, I have just decided in the interest of marriage and saving a fight about it, to just pay the loads (I am not sure - the loads may only be back end if you withdraw early anyway).

If you are married, you'll learn what battles to pick - like who gets control of the basement .

BTW, I am not totally "anti-corporate" - I have told her, they are giving her a 403(b) this year with a co. match and to max that out, loads or no-loads (I hope they are no-loads). You can't beat an immediate 100% return, no risk. Even Vanguard no-loads can't match that so in that case, you grit your teeth and pay the loads.

In fact, given that return, I would opt to fund that vs. funding our Roth, if it came push to shove of which funds would go where..

[disneysteve]

Originally Posted by Scanner

the loads may only be back end if you withdraw early anyway

Technically, that isn't a load. It is an early withdrawal penalty. Lots of no-load mutual funds impose those, including Vanguard and other major companies. They do this to discourage people from market timing.

[kv968]

Originally Posted by Scanner

Anyway, I have some money sitting in an Education IRA too for each of them, accumulated gifts from family mostly, and I want to "roll it" into the 529.

Can you do that? I called the mutual fund salesman (financial advisor, sorry) and he said he didn't know. . .he'd check into it, but never got back to me.

Yes you can rollover an educational IRA (now known as a Coverdell ESA) to a 529. However which 529 plan to choose can become kind of confusing. There are quite a few circumstances and situations you have to take into consideration. Your best bet would be to check out this website and start from there:

http://www.savingforcollege.com/

It can answer a lot of questions about what to look for in a plan and the different types that are out there. Each state offers their own 529 with various benefits to residents.

[jodi]

Originally Posted by Scanner

Males love control over accounts. Females would like a pension. Just a sexist observation.

Well, you pretty well just described my husband and me

[TBH]

Originally Posted by Scanner

Males love control over accounts. Females would like a pension. Just a sexist observation.

Hmm, I guess we're the exception to that rule. He prefers not to think about investing ever if he can help it, and prefers more conservative investments. I read a lot of personal finance websites and articles, and can tolerate plenty of risk if I have a long time frame. In case you're confused because I use the word "partner" to describe my spouse, he's a man and I'm a woman.

That's why we've chosen the college savings combination that we have. When we were first starting out saving for our son's education, we had a small lump of money to put somewhere. We decided to split it up and put half of it in my name and half of it in my partner's name.

The half that is in his name is in a guarranteed tuition plan. I would never have chosen that if it were just me, but it keeps the peace. Before I agreed to it, I made sure that we could use the $$ to send our son to any college, in state or out. To avoid account maintenance fees on that account, we have to put in $25/month.

In my own name, I opened an investment 529, first in my state and then after I got annoyed with their crappy online interface, I moved it to Fidelity. When our son gets birthday checks from the grandparents or we have extra cash to throw toward his education, I put it in that account.

Everybody's happy. My partner gets a conservative investment with auto-deposits so he doesn't have to think about it, and I get to have a low-fee investment account with access to all the mutual funds I could want.

That's why I recommended opening a second account that you can manage yourself. I agree you should be happy she's taking some initiative in this savings goal and let her keep the workplace 529, but I think it would be foolish to put ALL your college money there when you could keep the peace AND control some portion of the money yourself.

[Scanner]

TBH,

I control our retirements - she controls the college savings.

Does that money need to be more aggressive and maybe a less expensive fund? - yes, IMO.

But you learn to pick your battles. Trust me - I have been married to my valentine for 12 years. She'll take the analysis of her fund from work as being a criticism, there will be a fight, and she'll win and I'll lose.

C'mon, you're a woman, you know how these things go.

[jIM_Ohio]

Here's a different consideration- ever think of using life insurance to fund the education? Buy a 50k permanent policy. If you die the day after taking the policy, your kids get 50k for education.

You pay an insurance premium each month. after 10-15 years you would have $50k cash value to borrow against the insurance policy.

This may not be the cheapest route, but is something I have read about (smartmoney, among other sites). The insurance would also be hidden from the financial aid application. I think 529's and education IRA's count towards financial based aid.

[Scanner]

Interesting suggestion since lately I have been feeling uninsured in that department - I have a 400K term policy, 15 year, I took out when I was 28 - I am now 38 so only 5 years left.

My wife only has 50K through work. We definitely need to increase that to at the very least 250K.

Normally, I poo-poo life insurance as a vehicle for investing.

The question is - do I just load up on more term life insurance and invest the difference or go for a whole life/universal policy? I'll admit I don't know much about life insurance as I have just heard ridiculous commissions associated with them.

Another question would be - the 529 is a deduction, grows tax free, and exits tax free, right? And there's no maximum, right?

Life insurance gets hit going in (kinda like a Roth, no?) but exits tax-free.

[HiImSeth]

I'm pretty sure everything I've read has said to not use Life Insurance as any sort of investment vehicle.

[Scanner]

HIMSeth,

I hear ya.

I have read that in some circumstances, it has a place in your portfolio. Most of the stuff I have heard is mostly for estate planning though.

I can understand one advantage is that all growth and earnings exit tax-free.

And if the kids don't go to college, I can use it for a new boat, a pool, whatever so I can see some advantages in that it's probably one of the more flexible vehicles. Gov't sponsored plans have specific purposes and you can endure a 10% penalty after all those years of enduring risk, should Junior want to join the army instead of go to college.

I'll consider it but I don't know, I don't relish the idea of talking to a high pressure salesman about it.

[RJB1180]

Scanner, most 529 recieve no deduction and have a max contibution cap check the savingforcollege.com for more info

[jIM_Ohio]

I am not an insurance agent. I know what I read and what I have. I am willing to pay for flexibility and pay for a service/product.

Here is my total "picture" as I paint it.

age 34/ wife is 33. We reply on each other's income for the most part... especially because I like to save a huge chunk (close to 20%). One of my wife's two monthly paychecks is invested each month when life is normal...

I contribute 10% to my 401k, which is approaching 6 figures.
Wife contributes 6% to her 401k which is approaching 5 figures. She also has a 5 figure rollover IRA
I have 3k in a rollover IRA from a pension plan from a company which bought us out/sold us off.
I contribute 4k to my Roth each year. That account is low 5 figures.
My wife's Roth gets opened in May of 2007. 4k each year.
That is what I have marked as retirement assets.

We have 300 term policies for my wife and I. This will pay off any debt we have (mortgage, cars) in event either of us dies. The goal is to allow the other spouse to keep working and not have the bills of two people. It is not money to live off of if other dies, it's money to clean up finances and allow one paycheck to sustain what we currently need two paychecks for.

We each have 25k permanent policies. This is for funeral expenses. We know we will die... we know this expense is real. We insure against it for life.

The permanent+term payments for both wife and I is $129/month ($650,000 of total coverage). Most of that is the permanent policy. Money going in is post tax. If we collect insurance premiums, that money is tax free (on death of spouse). If we take a loan, I think the loan is tax free... but my insurance agent would be the one to tell me for sure. If there is more cash value in the account than the payout, then the payout is the cash value (and not policy value). The cash value is indexed to S&P 500. The value goes up by S&P 500's increase (no dividends), capped at 12%/year (I think it's 12%, there is a cap). If S&P goes down, cash value increases a nominal 1% from previous year. Cash value can never decrease year over year.

I trust my agent, and from what others have told me, he made a great commission off the 2 permanent policies. But I received a good product at a fair cost. We are in year 3 of 20 yr 300k term policies. It is possible in 17 years we could not get insurance (if health worsens). This policy is cheap for us now. The same policy 20 years later would have cost us MUCH more... we locked in premiums as younger people. This is the cost which you cannot quantify with "buy term and invest the difference".

The way the permanent policies work, is if my permanent premium was "60/mo" (I don't know the break down of premiums for 4 policies, we have one bill and pay the one bill automatically each month), after 25k of premiums are collected, the cash value would probably be well north of 25k (with S&P increases feature). I think it's around year 15 or year 20 when this happens. Within 30 years, the cash value will be well north of 100k with average S&P returns (7%). No need for 300k term at that time because Mortgage should be paid off.

The cons to this:
cost (there might have been cheaper ways to accomplish this)
funeral expenses today cost 10-20k. No guarantee a funeral for me when I'm 80 or 90 will cost 25k.

This is an emergency cash reserve... it is expensive to cash in... but we could do it if medical bills hit or something like that happens.

We use the same insurance agent for car, life and house insurance. He lives and works in the community and I put some merit into that.

[Scanner]

Jim,

I wasn't poo-pooing your decision. Like I said, I think sometimes it has a place in the portfolio. I have a good relationship with my agent too - he's a patient and his whole family are. It doesn't mean though that the salesmanship kicks in when it needs to.

I don't question the person sometimes as much as the process. A good example is a real estate agent (also a patient of mine, a very good pt.). I think the process is that they want a deal, closed fast, whether you could get an extra 20K for the house if you hold out or not.

It's just the nature of the beast.

An insurance agent isn't going to be thinking 529's, Coverdells - he is only got a one track mind - cash value polciies.

Again, I can see it's flexible, which maybe you have to be with college to a certain extent and I do need more coverage, at least for my wife - I am not sure if my policy is renewable when I reach 43.

And not having it count as an asset in financial aid could be a plus.

Most creative suggestion I've heard - thanks.

[Scanner]

I called my agent and told him to run some numbers for me so I'll let you know on the life insurance thing.

Since my wife only has 50K of protection, I told him to look into a whole life policy under her (females get better rates anyway).

[disneysteve]

Originally Posted by RJB1180

Scanner, most 529 recieve no deduction and have a max contibution cap check the savingforcollege.com for more info

Currently, 23 states plus DC make 529 contributions tax deductible.

There is a cap on contributions, but it is generally pretty high. We're in the NY plan and the limit is $235,000. I don't plan to put anywhere near that much in the account so the limit really isn't an issue in most cases.

[HiImSeth]

So, if I were to be living in Oklahoma, but contributing through payroll deduction to the CollegeBoundFund (RI's 529) - do you know if this would this be deductible? I was just not sure if the 23 states you were referring to meant you had to invest in your own states 529 plan or could do so elsewhere and still enjoy the tax deduction.

Thanks!

[sweeps]

I would be shocked if any state would offer a tax deduction for contributing to another state's 529 plan.

[jIM_Ohio]

Originally Posted by Scanner

Jim,

I wasn't poo-pooing your decision.

And not having it count as an asset in financial aid could be a plus.

Most creative suggestion I've heard - thanks.

I never took position you were shooting me down. I've been on enough "life insurance" discussions to know I need to come with my full Arsenal at beginning of discussion.

If you want an objective opinion, I know another group (with people which know a LOT more than me, some of which sell the stuff) which can give you another perspective.

Life insurance has a place. It is NOT a savings vehicle. However if you have a clear financial need, and want a means to accomplish it and insure against it NOT happening, there is a solution with life insurance to consider.

You need to weigh this against the likelihood your children can get aid (if assets are hidden from the calculation). You might be able to buy a 10 year term policy for each kid, invest the difference for education, and still come out ahead.

I like being creative and constructive. thx