Did you catch the recent announcement about President and Mrs. Obama funding a section 529 college savings plan for their two daughters?
I was glad to see that they took advantage of this program…and am somewhat mystified that others who can afford to do so usually ignore this heavily tax advantaged tool.
In fact, the President also took advantage of the superfunding option, allowing parents to contribute five years of annual gifting up front, which allows each parent to contribute $13,000 per year per child.
$13,000 is hardly a drop in the bucket…but let’s do the math. Five years of gifting totals $65,000. From each parent, for a total of $130,000 per child.
And for two children, a cool $260,000 can be sequestered, without incurring a dime of gift tax (providing no other gifting to their children took place during the five year period). They still have their lifetime gifting allowance intact.
This may seem an extravagance during recessionary times, but I can’t think of a better reason to scrimp and save and invest. Investing in your children’s education is an investment in the future…yours and theirs.
All the significant markers of well being can be correlated to the extent and quality of their education.
Health and Wealth and Longevity….for starters.
You may not have a spare quarter million on hand, but you still have freedom to choose among two valid options.
1. Families on a budget should first fund their educational (Coverdell) IRA accounts.
Pretty skimpy at just $2,000 per child per year….plus a funding cutoff when they reach age 18. But you will love the freedom of investing that comes with any IRA, including access to major no load fund financial supermarkets.
Both the Coverdell and 529 plans utilize after tax funding…although some states will allow deductions for investing in their home state 529 plan.
Both plans then compound earnings tax free, as well as distributions for qualifying educational expenses….so Uncle Sugar is helping to subsidize the venture.
2. After maxing out on the Coverdell option, contribute what you can to a 529 plan.
Check out Morningstar’s ranking to sift out the riff raff among these plans. The dirty little secret is that the 529s are creatures of the financial-retirement complex, like 401k plans, and typically feature limited menu options and expensive, poorly performing funds.
Worst of all, these plans allow only one annual portfolio re-allocation. This is the kind of stone age thinking that financial providers like, because it creates less work for them, at the expense of performance. In an ideal world, they would function exactly like their poor cousin, the lowly Coverdell IRA.
Under no circumstances are you obligated to enroll in your home state plan if it is ranked in the doghouse by Morningstar.
And always remember the cardinal rule of investing in your children’s future.
One day….they get to choose which nursing home you go into.