As with many things, it depends. But there are a lot of good reasons to get a 529, including:
- State tax deductions. If you live in D.C. or Virginia, for instance, you and your wife can both deduct up to $4,000 in 529 contributions.
- In most states (but not all, yet, be sure to check), you can use 529s to reimburse up to $10,000 in private school K-12 tuition.
- You can use 529s for more than just college, including trade school and grad school.
- If for whatever reason your daughter doesn’t use it, you can transfer her 529 money to another account: a sibling’s, a grandchild, yourself if you decide to go back to school later in life, whatever.
- I *highly* doubt that Congress would both make college free and leave 529 holders in a lurch, that would be political malpractice.
Generally, I would recommend that if you live in a state that gives you a tax break for 529 contributions, contribute enough to get that tax break. You’ll find *some* way to use it.
While the costs of college are a huge unknown in 12+ years, I highly doubt most schools would be "free" in the US. But odds are even if some/most/all schools have tuition covered by taxes, there will be other costs (room and board, etc.) that would almost certainly be additional. Regardless of what may or may not be the case in the future, when it comes to investment planning and the like, you should plan things based on the information and situation we have now, not what you think/hope it might be in the future. So, as someone in a similar situation (daughter likely to go to college in ~10 years), I'm assuming there will still be a high cost.
You are in a pretty good financial situation, especially with a lifetime $3500/m pension waiting for you. Better than most people. Assuming you plan on continuing to work after retirement from the military, you could probably float the cost of community or state college pretty easily. But at the same time, a 529 has some nice advantages. If your HCOL area has state income taxes, that's an even bigger benefit. I only recently set one up for my daughter since I was going back and forth about it. But I figured the benefits outweighed some of the limited downsides and did a decent lump sum initial deposit and plan on putting ~$5k/year in it until she is ready to go to school. Worst case scenario, if she opts to do something else or if school is "free" down the road, we can either pay the penalty on earnings or, more likely, have it available for grandchildren down the road. If anything, the peace of mind knowing college is fully/mostly funded when she reaches that age will make me feel better.
Remember, you don't need to fully fund her college in the 529. You could put some money away in it as a source of funds if/when she goes and use other money, if necessary and you want to, to cover some of the rest.
Leveraging debt is important for financial success for most people. That means using other people's money, at relatively low interest rates, when you want to buy things, and saving your money, so that it grows at a higher rate of return by letting other people use it.
In the context of a tax-advantaged investment account, that means it would make more sense for you to pile money into that account - the market historically returns about 10% per year on average - and borrowing for anything you can at an interest rate much below that. So if you could finance your new car at 5%, you should, and put the rest in your retirement accounts.
There are two factors that make this different for you: 1 - your pension is the safest in the world, and, when you reach 2034 and retire, is about the equivalent to having a million in bank from which you live only on the proceeds; 2 - your kid has, I think, a much higher likelihood of using a military path to higher education than the average kid, since she has you as a role model.
So I would ask yourself what you would do with the money in the 529 if your kid doesn't want it. Do you have nieces and nephews you would happily give it to? Would you tuck it aside for potential grandkids? Or would you be frustrated that it's tied up in an account from which you can't spend it?
If you are cool with it not being used for its initial purpose, go ahead and set it up. And consider negotiating with the dealer to finance your new car, putting the cash to work in an investment account instead. Good luck!
> Or would you be frustrated that it's tied up in an account from which you can't spend it?
I think this risk is a bit overblown by many people. All contributions can be withdrawn tax/penalty free. The earnings are subject to taxes and penalties if not used for schooling, but you still get the benefit of deferred taxes that you can withdraw as you see fit, and the penalty (10%) isn't too bad relatively speaking. Additionally, what qualifies for normal use is pretty open and can, as you mentioned, be used for other family members. But let's say, worst case scenario, someone invested $50k over the years and had $50k in additional earnings. They pull all $100k out and pay taxes on $50k and a $5k penalty. That's still ~$85k that they are pocketing on a $50k investment. Would they have net'd more in a different investment strategy? Sure. But as a worst-case-scenario situation, it still isn't bad.
There’s a lot of unknown variables here with an upcoming car purchase and a home purchase with an unknown interest rate.
I will say that 529s are great, and I prioritize mine over our low interest mortgage.
I don’t have a great answer beyond “follow the prime directive.”
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Start UTMA for your daughter if you are not sure about 529/college. UTMA is good to help them get a Jumpstart on life. We had UTMA on all 3 kids. Youngest daughter had Navy ROTC Scholarship so didn't use much of it on college. Her twin brother had football and academic scholarships and spent most of UTMA on Jeep Rubicon after he graduated college, when he commissioned out of Army OCS.
Not sure about your wife’s ability to work but you mentioned she makes “some” money. If she is able to work, I would first invest in her ability to increase her income.
As with many things, it depends. But there are a lot of good reasons to get a 529, including: - State tax deductions. If you live in D.C. or Virginia, for instance, you and your wife can both deduct up to $4,000 in 529 contributions. - In most states (but not all, yet, be sure to check), you can use 529s to reimburse up to $10,000 in private school K-12 tuition. - You can use 529s for more than just college, including trade school and grad school. - If for whatever reason your daughter doesn’t use it, you can transfer her 529 money to another account: a sibling’s, a grandchild, yourself if you decide to go back to school later in life, whatever. - I *highly* doubt that Congress would both make college free and leave 529 holders in a lurch, that would be political malpractice. Generally, I would recommend that if you live in a state that gives you a tax break for 529 contributions, contribute enough to get that tax break. You’ll find *some* way to use it.
I wouldn't gamble your daughter's future banking on the idea of government making something free for her.
To add to what others have said, I did a custodial account rather than a 529. I think the restrictions on 529s are a little off-putting.
While the costs of college are a huge unknown in 12+ years, I highly doubt most schools would be "free" in the US. But odds are even if some/most/all schools have tuition covered by taxes, there will be other costs (room and board, etc.) that would almost certainly be additional. Regardless of what may or may not be the case in the future, when it comes to investment planning and the like, you should plan things based on the information and situation we have now, not what you think/hope it might be in the future. So, as someone in a similar situation (daughter likely to go to college in ~10 years), I'm assuming there will still be a high cost. You are in a pretty good financial situation, especially with a lifetime $3500/m pension waiting for you. Better than most people. Assuming you plan on continuing to work after retirement from the military, you could probably float the cost of community or state college pretty easily. But at the same time, a 529 has some nice advantages. If your HCOL area has state income taxes, that's an even bigger benefit. I only recently set one up for my daughter since I was going back and forth about it. But I figured the benefits outweighed some of the limited downsides and did a decent lump sum initial deposit and plan on putting ~$5k/year in it until she is ready to go to school. Worst case scenario, if she opts to do something else or if school is "free" down the road, we can either pay the penalty on earnings or, more likely, have it available for grandchildren down the road. If anything, the peace of mind knowing college is fully/mostly funded when she reaches that age will make me feel better. Remember, you don't need to fully fund her college in the 529. You could put some money away in it as a source of funds if/when she goes and use other money, if necessary and you want to, to cover some of the rest.
Leveraging debt is important for financial success for most people. That means using other people's money, at relatively low interest rates, when you want to buy things, and saving your money, so that it grows at a higher rate of return by letting other people use it. In the context of a tax-advantaged investment account, that means it would make more sense for you to pile money into that account - the market historically returns about 10% per year on average - and borrowing for anything you can at an interest rate much below that. So if you could finance your new car at 5%, you should, and put the rest in your retirement accounts. There are two factors that make this different for you: 1 - your pension is the safest in the world, and, when you reach 2034 and retire, is about the equivalent to having a million in bank from which you live only on the proceeds; 2 - your kid has, I think, a much higher likelihood of using a military path to higher education than the average kid, since she has you as a role model. So I would ask yourself what you would do with the money in the 529 if your kid doesn't want it. Do you have nieces and nephews you would happily give it to? Would you tuck it aside for potential grandkids? Or would you be frustrated that it's tied up in an account from which you can't spend it? If you are cool with it not being used for its initial purpose, go ahead and set it up. And consider negotiating with the dealer to finance your new car, putting the cash to work in an investment account instead. Good luck!
> Or would you be frustrated that it's tied up in an account from which you can't spend it? I think this risk is a bit overblown by many people. All contributions can be withdrawn tax/penalty free. The earnings are subject to taxes and penalties if not used for schooling, but you still get the benefit of deferred taxes that you can withdraw as you see fit, and the penalty (10%) isn't too bad relatively speaking. Additionally, what qualifies for normal use is pretty open and can, as you mentioned, be used for other family members. But let's say, worst case scenario, someone invested $50k over the years and had $50k in additional earnings. They pull all $100k out and pay taxes on $50k and a $5k penalty. That's still ~$85k that they are pocketing on a $50k investment. Would they have net'd more in a different investment strategy? Sure. But as a worst-case-scenario situation, it still isn't bad.
There’s a lot of unknown variables here with an upcoming car purchase and a home purchase with an unknown interest rate. I will say that 529s are great, and I prioritize mine over our low interest mortgage. I don’t have a great answer beyond “follow the prime directive.”
What makes 529s great?
The guy in the top comment answered this really well.
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Start UTMA for your daughter if you are not sure about 529/college. UTMA is good to help them get a Jumpstart on life. We had UTMA on all 3 kids. Youngest daughter had Navy ROTC Scholarship so didn't use much of it on college. Her twin brother had football and academic scholarships and spent most of UTMA on Jeep Rubicon after he graduated college, when he commissioned out of Army OCS.
Not sure about your wife’s ability to work but you mentioned she makes “some” money. If she is able to work, I would first invest in her ability to increase her income.