Starting a 529 question

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MCS23
Posts: 1
Joined: Tue Aug 14, 2018 3:20 pm

Starting a 529 question

Post by MCS23 » Thu Aug 16, 2018 7:35 pm

Hello, beginner here in process of reading the Boglehead’s Guide book and seaking some advice. I’m 31 and we just welcomed our first daughter this year and I want to open a 529 education savings plan (state of Illinois- Bright Start). My husband has bias from talking to coworkers that think it’s a waste of time and there are better routes to college saving, like investing in real estate (tax reasons??). We do have high income as a family (I make approximately 200k annually and his income is usualy around 170k). Is there a disadvantage to investing in a 529 for our daughter? If we do open the 529, should we be the account owner or should she given our personal circumstances? Is there something else I should consider? Your advice is greatly appreciated.

CppCoder
Posts: 841
Joined: Sat Jan 23, 2016 9:16 pm

Re: Starting a 529 question

Post by CppCoder » Thu Aug 16, 2018 8:12 pm

There are pros and cons to any investment. You can read extensively about opinions on this forum about 529s with the search button, and the best place I've found to do individual 529 research is

https://www.savingforcollege.com

That said, in my opinion, high income/high net worth people (defined in this context as those already maxing out their other tax advantaged space) can benefit significantly from the tax treatment of 529 plans, both from the tax free growth for qualified expenditures and from the state tax deduction ($20k for joint filers in Illinois). Most Bogleheads seem to have converged on Utah, Nevada, and New York as some of the best plans. However, in your case, the $20k tax deduction is hard to pass up. The Bright Start fund seems new. It looked like it had pretty reasonable options. I personally would recommend the Vanguard based age options. If in doubt, choose moderate risk. It will have reasonable expenses and will be quite simple to manage.

As for talking to coworkers for investing advice, your husband should probably just quit doing that. Everyone has an opinion, but few opinions among the general population these days (about anything) seem to be actually informed by facts or knowledge. I suspect the advice you will receive on this forum will be much better informed.

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bligh
Posts: 922
Joined: Wed Jul 27, 2016 9:13 pm

Re: Starting a 529 question

Post by bligh » Thu Aug 16, 2018 8:24 pm

MCS23 wrote:
Thu Aug 16, 2018 7:35 pm
Hello, beginner here in process of reading the Boglehead’s Guide book and seaking some advice. I’m 31 and we just welcomed our first daughter this year and I want to open a 529 education savings plan (state of Illinois- Bright Start). My husband has bias from talking to coworkers that think it’s a waste of time and there are better routes to college saving, like investing in real estate (tax reasons??). We do have high income as a family (I make approximately 200k annually and his income is usualy around 170k). Is there a disadvantage to investing in a 529 for our daughter? If we do open the 529, should we be the account owner or should she given our personal circumstances? Is there something else I should consider? Your advice is greatly appreciated.
Congratulations to you both! :)

If you are maxing out your tax deferred accounts and saving in a taxable brokerage account, and you are going to pay for your daughters university education, or now after the 2018 tax changes, private tuition during school years, you really should seriously consider a 529 plan as an option. If, on top of all of that, you are getting a state tax deduction for contributing to one, you are turning away free money.

There really are only two disadvantages I can think of to investing via a 529 plan.
1) You don't end up using the money for educational purposes (for anyone in your family) .. in which case you will pay a 10% penalty on your earnings in addition to income taxes.
2) You pick a 529 plan with poor investment options and/or high management fees.

I have two 529 plans (one for each child), one is in my name and one is in my wife's name. I do find it beneficial even without a state tax deduction.

It doesn't have to be an all or nothing decision either. You can start a 529 plan, start contributing a little to it as you read up and learn more, and ramp up your contributions when you are comfortable.

One of my friends has had a financial advisor tell him 529 plans don't make sense for him since he isn't in a state that allows him to deduct state taxes. I am not sure why the advisor would give such advice, but one reason financial advisors may talk down and discourage 529 plans is because it may be more profitable for them to "manage" those funds themselves. That "advice" ends up spreading among friends.

Either way, in your case, (assuming you are planning to pay for your kids college education or private schooling) if you are going to pass up a $20K tax deduction, you should have a really good reason for doing so.

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