How to Choose a 529 Account
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We haven’t talked about 529s in a long while, ladies — so let’s discuss! How did you choose a 529 account for your kid(s)? If there is a tax deduction offered in your state, do you invest beyond that — and if so, do you do it in the same 529 account, or have you opened one in another state? If you have multiple kids, how do you allocate the money among them?
A friend of mine who lives in Ohio was just wondering about this — she noted that you can save $4,000 per child in order to get the state tax deduction — and was wondering if she should do a secondary account somewhere else. (Contrast this with New York state, which allows a married couple to contribute $10,000 total — regardless of how many kids — to a 529 account.) I’d love to hear from moms in states with this setup how you’ve handled it when second kids have come along!
Another friend of mine is based in California and was also wondering if she should do a secondary account for her son now that she’s divorced — she posed her question and got a number of recommendations for Nevada’s plan.
So let’s discuss… I’m curious to hear if you’ve got multiple 529 accounts in multiple states, and if so, how you chose!
Psst: We always used to call money discussions “Tales from the Wallet” at Corporette — so we’re continuing the tradition here! Pictured – love this wallet from Brahmin!
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The Easiest Way to Choose a 529 Account
If you’re very new to 529 accounts, the easy answer is almost always “IF YOUR STATE OFFERS A DEDUCTION, GO WITH THE ONE YOUR STATE OFFERS.”
Get started as soon as possible. Know the state limits on 529 contributions — like our examples of Ohio and New York above, different states have different requirements on the amount you can contribute if you want a tax deduction.
Of course you can always contribute more, either to that 529 or another one — the federal gift maximum applies. In 2021, that’s $15,000 one person can contribute to another person, so if you’re a single mom with two kids, each could get $15K; if you’re married with two kids, each could get a gift of $30K from the parents. There is also a more complicated option called “superfunding” your 529. (Readers, I’d love to hear your story if you’ve superfunded a 529 or had a grandparent do so!)
I’ve always been of the opinion that if forced to choose, you should save for your own retirement instead of saving for your kids’ college — but every little bit helps.
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Readers, let’s talk — what 529 accounts (or other accounts, like UTMA accounts or STABLE accounts) have you set up for your kids? How did you choose how much to give, and if you have multiple accounts in multiple states, how did you pick them?
Stock photo via Deposit Photos / ababaka.
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We have one at Vanguard for one kid and one at Fidelity for the other kid. One of these has the state deduction for our state (MA). I just checked and our deduction is $2,000 per year so there’s no additional benefit to us to keep both plans in the state one as we contribute at least $2,000/year per kid.
My state gives a tax credit but only if you use our state’s plan so for us it was a no brainer about which plan to use. We save only up to the amount necessary to get the full tax credit because we expect to have a lot of grandparent help with college and even if that falls through we would likely be able to cover even private college out of current income and we’d rather focus on saving for our retirement.
I live in one of the states where I can deduct for any state’s plan, so I pondered for awhile and eventually gave up and went with Vanguard because I couldn’t figure out which one was best.
We couldn’t afford to save in a 529. By the time we were done paying for child care and law school and had money available to save, our time horizon was too short to invest college savings in the stock market. We are saving in cash under our own names rather than the kids’ names to minimize EFC liability.
I use our state’s 529 for both kids because we get a small tax credit for contributions of up to $4000 per kid. I say “I” because my husband would rather not do this and just save in a brokerage account where the money is more fungible, so it is a point of contention, but not one I’m willing to concede because it’s a personal priority and we can afford it, so I have my employer automatically contribute $1250 per kid per month ($2500 total) directly from my paycheck into each kid’s 529 account. My husband knows I do this and doesn’t like it, but it’s “out of site, out mind” now, so over time it has become a lesser issue in our marriage. My 9-year old has $160k and my 2-year old has $52k. I plan to keep on contributing for as long as I can because my husband and I both when to private schools for undergraduate and law school for me, MBA for him, so it’s hard to imagine our kids will not go to college plus grad school. My parents paid for everything, so I feel an obligation to pay it forward. My husband’s family was not in a position to help, but he got a full ride for undergrad between his sport and grants, and his employer paid for his very expensive MBA. His path seems very unlikely for our own kids, though, given we won’t get grants, and it is really unrealistic to count on a sports scholarship.
Anyone else find that this is a source of contention in their marriage?
So just to be clear on the superfunding item. You are allowed to give any one person $15,000 without it being treated as a taxable gift (an annual exclusion gift). For 529’s there is an election that allows you to fund 5 years worth of contributions in 1 year (using up 5 years worth of annual exclusion gifts to that person). You can fund a 529 account with as much as you want, but it would be treated as taxable gift and either use up lifetime exemption (or be subject to gift tax).
I’m in a state that doesn’t give a benefit to putting money into a 529, so we set up a Utah 529 for the kiddo. We’ve been putting money in on their birthday and it’s crazy how much it has grown (we started right when they were born). That said, I realize we are lucky because we paid off our student loans right before we had kids so we were able to take that money to put it into funding college (and daycare…SOOOO EXPENSIVE).