Funding Education – Why 529 Plans Are Bogus
529 Plans Not All They're Cracked Up To Be
Since my children are now 5 years old and 20 months old, and since I just paid the last $4000 on my student loans, I recently looked into my options to help fund the boys’ education.
It seems people are falling for these “pre-paid tuition” 529 plans in droves, so I decided to take a look.
Somehow, these plans are already rubbing me the wrong way and I haven’t even looked at the official literature yet.
First, where can the child go to school with a 529? Apparently, only in one of the schools that is a member of the 529 plan you signed up for.
I have a problem with that. Let’s say you sign your kid up at birth and plan for them to enter college in eighteen years. A lot can happen in those eighteen years: the schools in the plan could decide to step out; their quality could go down the tubes; or they could even go out of business.
For eighteen years you’re paying into this plan, locking up your capital, only to find at the end of the road the school you’ve been paying for isn’t no longer all it’s cracked up to be o isn’t even there. Unless you are wealthy enough to have alternate funding, you have no Plan B because all your money went into Plan 529.
Don’t get me started on the 529 savings plans. I have ranted to my friends about the idiocy of paying mutual fund managers management fees whether or not they beat their benchmarks and I am really pissed about how employers make 401(k) sweetheart deals with brokerages to skim money from their workers’ benefits. 529 savings plans are more of the same.
In Oregon and Illinois for example, 529 savings plan officials looked the other way while Oppenheimer invested money for “conservative” plans in subprime mortgages. When finally called to task, Oppenheimer settled and offered savers half of their losses, take it or leave it. What happened to the other half? I guess it went to pay for Oppenheimer’s lawyers and hefty bonuses for Oppenheimer’s managers.
Also, state officials in charge of overseeing the 529 plans continued “working” in their positions as if nothing happened.
One official, responsible for buying an SUV using 529 plan funds is now a candidate for Senate.
One gets the feeling that little if any of the money put into 529 plans is actually used for education …
Where are the punitive damages? Where are the firings? Heads should roll for this sort of thing.
Get this kid a Coverdell ... not a 529.
This brings us all to Jared’s bad advice for financing your child’s or children’s education: Don’t bother with 529 plans managed by incompetent state officials making sweetheart deals with greedy financial institutions — you’ll only get ripped off. A better alternative, even though the contribution limit is woefully low at $2000 per year per child, is the Coverdell Educational Savings Account. At least there you are managing the money (you can invest in Phillip Morris and Disney if you wanted). If used for qualified educational purposes, withdrawals are untaxed.
And, when the child reaches 30, remaining funds can be transferred to another family member or can be withdrawn with a 10% + the child’s income tax rate tax charged on any earnings in the account — the initial capital outlay has already been taxed before being deposited into the account, so it is not taxed again.
529s suck; Coverdells are ok.
I mostly disagree with this article. I say mostly because I do agree there are some bad 529 plans out there. Also, I agree that prepaid 529 plans are not good, as well. However, I highly disagree that all “529s suck.”
I first want to make sure that it is clear that almost all regular 529 savings plans can be used for just about any private or public school in the nation. You can have a Nevada 529 and go to school in Virginia.
Next, there are many 529 plans that have great investments with very low expenses. Just one example is Utah’s 529 plan (UESP). It utilizes funds that cost as little as 10 bps (0.1%). The reason why mutual funds are good for the average investor is because funds allow a personal to be diversified. Instead of owning just a few companies such as “Disney” or “Phillip Morris”, you own hundreds if not thousands of companies through mutual funds, enabling you to properly diversify and allocate your funds. Unless you have several hundred thousands dollars to build a highly disciplined, highly structured portfolio with individual equities, mutual funds are generally the best way to go. A small mutual fund fee is nothing compared to the risk you would assume otherwise by just investing in a few stocks.
Second, it is difficult for an average person to get fixed income exposure without mutual funds. Unless you are a high net worth individual, you don’t have the capital to build a diversified bond portfolio.
When a parent only has approximately 18 years to save for his/her kids’ education, the main risk is diversity and controlling volatility in the portfolio. It is very difficult to achieve low volatility with just a few individual equities. And a few is all you would have in a Coverdell since the annual limits are so low. Plus, lets say you are making monthly contributions to a Coverdell, you would be paying a transaction charge for each buy trade. The only way you could be efficient with purchasing individual equities is if you just contributed the $2,000 in a lump sum. However, very few people can do a lump sum payment whether it is because of a financial reason or a lack of will power. But then we come back to the same issue in that $2,000 dollar with won’t buy individual equities efficiently.
annual payments
However, just how there are great stocks and bad stocks, there are great mutual funds and there are bad mutual funds.
To finish up, there are great funds and there are bad funds. It is important to do your home work in not only picking the right 529 plan, but picking the best investment options. A lot of 529 plans are starting to let you build your own custom portfolio using a basket of funds that they offer. Find the right plan that is offering great funds, and you can build an awesome, well performing, inexpensive, and well diversified 529 plan. In doing so, there is no way you can better save for college with a Coverdell or taxable account.