There was a thread in forums which discussed 529 plans and I want to detail my stance here.
My plan includes the following (done in order listed):
1) Have a budget which is 15/5.
Meaning 15 percent to retirement plans
Meaning 5 percent to short term financial goals (pay down mortgage, vacations, new cars, house improvements or other).
2) Making sure retirement accounts (401k and Roth) are maxed for each spouse. This is important early in process.
3) Having mortgage paid off.
4) considering 529 plans once mortgage is paid off. Logic being that if a person earns around 80k or less per year, the above objectives make more sense than 529 plans.
This plan has a lower federal tax bill than reversing the order.
This plan makes sure the parents are stable financially (now and in future).
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Some people with 13 year old see this and think "I cannot pay off my mortgage in 4-9 years before my child goes to college".
That is my point... if a person cannot aggressively find the money for making a higher mortgage payment now (to pay it off early), what makes them think they can afford the price tag of a college which is 14k-40k per YEAR for 4 years?
Pay 40k per year on your mortgage now and that proves you can foot the bill on a 40k education price tag.
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To accomplish the mortgage payoff over a 4-6 year timeframe, a person or family should look at my doubles table.
For example, want to retire at 63, current age of 48.
assume 8 percent annual returns
Age 63 need 25X expenses
age 54 need 12X expenses
age 45 need 6X expenses
This tells me if person did not have 6X already, paying for college and retiring at 63 are out of the question. One of the goals has to give (retirement at 72, pay for college or no college and MAYBE retire at 63).
If the person/family already had 12X expenses, they are ahead (remember current age is 48, they don't need 12X until 54.
I would then take 401k down to point of match, then either fund a 529 or pay down the mortgage (for college). Some of this deals with taxes, some with other considerations.
The main point is to get ahead of retirement checkpoints before starting college funds. Saves on taxes early in life, which puts more money to work early in life.
College savings plan
January 1st, 2009 at 09:55 am
January 1st, 2009 at 12:21 pm
January 1st, 2009 at 05:19 pm
January 1st, 2009 at 08:04 pm
While working, this should help anyone in higher tax brackets (higher than the bottom 2). 401k gives a good tax deduction. Roth hedges that with 1/4 of the contribution of 401k.
If a person has 401k maxed, then gets a raise, there is new money available in taxable accounts. This could be saved to maintain savings rate. Saved for college fund, used to pay down mortgage, or achieve a different short term financial goal.
Main point is if parents look to free up cash flow in HS years (paid off mortgage, no car debt, high disposable income) then paying for college becomes much easier and retirement will also come sooner.