I was one of those parents that thought my son needed to learn the hard lessons of life on his own. As part of his “lesson”, I felt that he should be responsible for his own education.
My mind said…
“I will take care of his upbringing until 18 years of age. And then it will be his responsibility to make something of himself.”
But my heart said…
“Yeah right!”
I threw those plans out the window the minute I held my baby boy. Because I wanted to give him every opportunity I could afford. So, I bit the bullet. And opened up a 529.
5 Reasons You Need a 529
Before I start…
I’ll admit that 529’s are a little tricky. They can only be used on educational expenses. And the tax benefits are slightly different in each state. But, it’s a decent tool to stockpile money for your kids. Especially, if they are still young.
1. Tax Free Growth
Every dollar you place in the 529 grows tax-free. This allows you to build a nice little nest egg for junior’s education. Because all the dividends and interest grows without paying money to Uncle Sam.
As a result, your 529 will grow 20% larger over 18 years than using a traditional brokerage account.
2. Avoid State Income Tax
If you start a 529 in your home state, you can shelter your contributions from state income taxes. This is only a side benefit of investing in the 529. Because your home state may not have state income taxes. And, in that case you can open a 529 plan in any state.
If I didn’t pay state income tax, I would choose the 529 plan that has the lowest fees. After all, the tax-free growth is still a strong benefit.
3. Doesn’t Hurt FAFSA Application
529 plans have a smaller impact on your child’s financial aid than other investment vehicles. A maximum of 5.64% of the assets in the 529 will be counted as the expected family contribution (EFC) for the FAFSA application. This is much better than the potential 20% EFC that would be counted in a custodial brokerage account.
4. You Have Young Kids
Time in the market is the biggest benefit to the 529 plan. We know that it will take ~7 years for your portfolio to double using the Rule of 72. So, you’ll earn more tax-free interest by saving earlier.
5. Generational Wealth
It’s ok if your child doesn’t want to attend college. You can keep the 529 going. And pass the 529 to your grandchildren. All you have to do is change the beneficiary on the account.
No Matter What. Start Early.
If you start the 529 when your child is born, you have time for you portfolio to double twice.
If you wait until middle school, you’ll be lucky to double your money.
So, don’t wait.
Start a 529 with the money you have. And watch the market help you do the heavy lifting.
#ALMOSTVESTED
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