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A 529 for Sophia

Greg Spears

OVER CHRISTMAS, I got the sort of question I love to answer. My daughter’s thoughtful boyfriend had set aside some money for his niece’s college education. What was the best way to invest it?

I said that we’d paid for much of our children’s education with money invested in 529 college savings plans. The investment gains went untaxed because we’d spent the money on tuition, room and board. On top of that, our 529 contributions were deductible against our state-income tax in Pennsylvania, where we live.

Our daughter’s boyfriend lives in Boston. A quick search revealed that he would need to contribute to a Massachusetts 529 plan to gain a similar state tax deduction.  We saw that Fidelity Investments offered a low-cost 529 plan with target-date index funds. The only slight hitch in opening the account was securing his niece’s Social Security number, which he quickly obtained with a call to his brother.

Sophia is a cute three-year-old with blonde ringlets, so it’s going to be a while before she reaches college age. One of the best things about opening a 529 plan this early is the potential for compound investment returns. There’s another important advantage, however, to opening a 529 account for one so young.

A child with a college savings account in her name is three times more likely to attend college than one without such a fund, according to one study. Interestingly, it doesn’t seem to matter how much money is in the account. The expectation of college attendance is set even if the amount saved is just $50. The next step, then, is to tell Sophia about her 529—and her big plans for the future.

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JoeBlow
JoeBlow
10 months ago

..the 529 plan in N.C. for my daughter was complete garbage. It lost more than I could put in monthly. I hope others had better luck than I did as it seem a poor choice. Opened a Roth IRA instead and it seems to be stable with zero fees.

Steve Spinella
Steve Spinella
10 months ago

For some reason, people seldom evaluate the impact of fees on 529 and similar plans. A rebate of state income tax is often quickly exhausted by higher custodial fees and limited investing options in these plans. While it is possible to transfer funds between plans once they’ve been designated in a state-sponsored or endorsed plan (Ohio has some of the best plans), this adds complexity to the process of investing. When I actually compared the costs and available options I came to the following suggestions:
-it is actually better financially to invest the money at the LAST possible moment in the plan, as it lowers continuing fees.
-these are some of the least attractive boxes to put money in, and other boxes should usually be considered first, beginning with Roth accounts, but also including taxable accounts. As well these have the benefit of not requiring any specific use case for the money.
-As another reader pointed out, a major concern is that 529 and similar monies may interfere with other education-related funding and tax benefits, which may end up being better than 529s anyway. Continuing fees, though, are a constant, unrelenting drain on investment.

Rick Connor
Rick Connor
10 months ago

I congratulate your daughter’s boyfriend for wanting to help his niece, and you for helping him accomplish it. I’m sure he learned a lot going through the process.

I’m assuming the niece’s parents had not set up a 529 account. Do you have an opinion about whether to set up an account for a niece or grandchild, or just contribute to the parents plan if available? It seems like the opinion is changing on that topic. I understand that as of October 2022, that a grandparent owned 529 will no longer be included in a FAFSA.

https://savvyfi.co/2020/07/grandparents-vs-parents-who-should-own-the-529-plan/

Greg Spears
Greg Spears
10 months ago
Reply to  Rick Connor

Rick, that’s great news if a 529 opened by a grandparent would no longer potentially reduce college aid for a grandchild after October 2022.

The advice I’d previously heard was to delay spending the grandparent’s 529 money until the grandchild’s senior year of college, as it could have no follow-on effects on aid awards. It looks like that workaround might not be necessary now, which will be a relief, I’m sure, to doting grandparents everywhere.

An uncle could coordinate contributions to a parent’s 529 account for the benefit of a niece, but as you observe, that depends on the parent establishing such an account first.

Harold Tynes
Harold Tynes
10 months ago

The Fidelity Plan is an excellent choice. I used it to save for my sons college and now have funded accounts for the 4 granddaughters.

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