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Why We Are Using The 529 Plan to Save For College


Save for college 529 plan

Yes! The first week of school is going well for our son. He still says he hates school, but he hasn’t cried or hit anyone yet this year. I know that’s a low bar. We just need to have low expectations because RB40Jr usually has a rough time adjusting to a new school year. Oh well, he still has plenty of time left to work on it. He’s only in 2nd grade and there are 11 years left before he goes off to college. That’s a long time, but I’m sure it will pass very quickly. He’ll be 18 before we know it. Anyway, this is a good time to give an update on RB40Jr’s college savings fund. We are using the 529 plan to save for college. I started saving when he was born and the account has done pretty well. Let’s go over the basics of the 529 plan first.

*This article was originally written in 2013. There have been some changes to the 529 plan and I updated the post to reflect them. If you’re familiar with the 529 plan, feel free to skip to the end to check out RB40Jr’s college savings fund. From now on, I’ll update this post at the beginning of every school year.

Why we’re saving for college

If you’re a parent, you’re probably worried about the cost of higher education. The class of 2017 graduated with an average of $39,400 in student loan debt. That’s a huge burden to start your adult life with. I graduated from college in 1996 and I didn’t owe anything. My parent helped with most of my higher education expenses and I’ll be forever grateful to them. My goal is to do the same for our son. That way, he can start building wealth as soon as he begins working full time. It’s much better to start off at zero than in a hole. That will be our legacy to him as we are not planning to leave much if any inheritance. The best gift we can give our son is a good education. He can build his own fortune after that.

How much will college cost?

Oh man, this is going to be a shocker to all the parents who haven’t looked into this yet. In recent years, the cost of higher education has been rising at about 5% annually. College is already expensive and 5% increase per year is kicking it into the stratosphere. How much will college cost 2029? Luckily, there are some online calculators out there to help us figure it out. We’ll use savingforcollege.com’s online college cost calculator.

The following are needed for the calculation.

  • Child’s age: 7 years old
  • Current college savings: $78,000
  • College cost: $36,000. This is the current cost of attending the college. I use the current in-state cost (living on campus) from our alma mater. You can look up your college of choice at the National Center for Education Statistic.
  • Assumptions: I assume RB40Jr will attend college for 4 years on a full-time basis. The default yearly cost increase is 2.95%. I think that’s a bit low so I increased it to 5%. I also assume no scholarship so I can see the full cost.
  • Additional contributions: $400 per month. I assume the rate of return is 6%.

 The Result

The result is a bit discouraging. Check it out.

college cost

  • The estimated total cost of college in 2029 is $265,284.
  • It looks like we’ll be short about $40,000 with the assumptions I used.

This is just an estimate so I’m not worried yet. We will have a more accurate picture as our son grows. I’ll update this post every year so you can see the planning process. We will keep an eye on the $40,000 shortfall. If it grows, then we’ll need to save more or figure something out. Personally, I hope he can get some scholarship and financial aid. That might be enough to bridge the gap.

What is the 529 plan?

One great way to save for college is through the tax-advantaged 529 plan. The confusing thing is that each state has a different 529 plan. You don’t have to invest with your state’s plan either. You can invest with any state you’d like. We live in Oregon and we get a state tax deduction for our contributions. So it’s an easy choice for us.

There are two types of 529 plans, prepaid and savings plan. The prepaid plan allows you to pay tuition at the current price and attend college in the future. The saving plan invests in stock and bond funds. I don’t really like the prepaid plan because it isn’t as flexible as the saving plan. We have no idea where our son will attend college so we’d like to keep it as flexible as possible.

Now, let’s go through the pros and cons of the 529 college savings plan.

Pros of the 529 college savings plan

State tax benefit – Many states provide state income tax deduction for the contribution. For 2018 in Oregon, the tax deduction for tax payers filing jointly is $4,750. Our Oregon tax rate is 9%. So the tax deduction will save us $427.50 this year. That’s not a large amount, but every little bit helps especially if it compound over the years. You can check your state’s 529 tax benefit here.

Federal tax benefit – The distribution for the beneficiary’s college costs are tax free. You don’t have to pay tax on the gain from your investment. Only a few things in life are tax-free so this is a real gift from our federal government. Take advantage of it if you can.

Automatic option – You can set up automatic deduction so you don’t have to worry about it. Many states have age-based funds which will allocate your fund according to when the beneficiary’s age. This makes it easier to save.

Transferable – If RB40Jr declines to go to college, then we can transfer that fund to other qualified members in our family. Perhaps Mrs. RB40 can finally go back to get a Ph.D. Otherwise, we can always gift it to the future generation.

Estate plan – This one is for the grandparents out there who want to help out. They can contribute up to $14,000 ($28,000 for married couples) per beneficiary tax free every year. This is a great way to pass money down to future generations without paying estate taxes while retaining control of the fund. In addition, there is a special rule unique to the 529 plans. You can gift a lump sum of up to $70,000 and still avoid the federal gift tax. We can treat the gift as if it was made evenly over five years. That’s pretty neat.

Financial aid calculation – The 529 college savings account is treated as the parent’s asset. This is good news because only 5.6 percent (or less) of the 529 is used in the calculation for expected contribution toward your child’s college cost. Student’s assets are computed at 20% in the financial aid formula. It’s better to keep the assets under the parent’s name when it comes to FAFSA.

More flexible withdrawal – In 2017, the tax reform package expanded the 529 plan benefits to include tax-free withdrawal for private K-12 schools. This is great if you live in a high tax state and send your kids to a private school. Check your state’s 529 plan to see if this is available.

Disclaimer: Talk to your tax professional when you withdraw or contribute a large amount to make sure you don’t run into any unexpected problems.

Cons of 529

Limited investments – Generally, there are not many investment choices in the 529 plan. The Oregon 529 plan has U.S. equity, International Equity, Social Choice, Fixed Income Index, and Money Market. We can also invest in the age-based portfolios and target allocation portfolios.

Reallocate twice per year – We can only reallocate twice per year in the Oregon 529 plan.

Penalty – The 529 college savings plan is meant to help fund education. If you withdraw from the account and use the money for other purposes, you’ll have to pay tax at the normal rate plus 10% penalty. The state may recapture the deduction as well. An exception to the 10% penalty can be claimed if the beneficiary has passed away or if the fund is not needed because the child received a scholarship.

The 529 college savings plan is a great way to save

Generally, I think everyone should max out their retirement contributions first and then save for college. Your 401(k) and Roth IRA provide great tax benefits and you may not have to pay the 10% early withdrawal penalty if you withdraw the money to pay for college.

I also think it’s a good idea to front-load the 529 to maximize the benefit of compounding. If you put in $70,000 early on, it will earn much more than if you spread it out over 18 years. The earnings will be tax-free so it’s best to get rolling ASAP. The earlier you invest, the longer your fund has to compound.

  • If you save $70,000 when your kid is born, you’ll accumulate $294,040 (assuming 8% annual gain.)
  • If you spread it out over 18 years and save $324/month until your kid is 18, then you’ll have $156,585. It’s still good, but probably won’t be enough to pay for 4 years of college.

The only caveat is to make sure not to go over the $14,000/year gift limit. For the 529, you can contribute $70,000 in one year and treat it as if you were contributing the lump sum over five years.

Unfortunately, we didn’t have $70,000 sitting around when our son was born. We contributed extra in the first 4 years and then stepped down to the max contribution (around $4,600) after that. You can see the contributions in the chart a bit later.

Currently, we have about $78,000 in RB40Jr’s college fund with 11 years left to go. That’s not too bad, right? Our goal is to pay for 4 years of instate public college. If he wants to go to graduate school or attend a private college, then he will have to get some scholarships and take out some loans.

RB40Jr’s college fund

Okay, here it is.

college saving fund

The first few years were slow, but the momentum has picked up significantly since then. That’s how compound interest works. Amazing, isn’t it? It looks like front-loading the college fund is working out quite well.


Recently, it’s been pointed out to me that you need screenshots to establish credibility. Anyone can say they have a million dollar in the bank. So here are some screenshots of RB40Jr’s college savings fund. What’s the world come to, when you can’t trust strangers on the internet anymore? 😉


In 2017, I moved RB40Jr’s 529 account from Oregon to Vanguard. You can read more about the move here – Moving Our Oregon College Savings Plan to Vanguard. This was done to minimize fees and I think it worked out well. The most important point in the post is we didn’t have to pay recapture tax when we moved from OR to Vanguard.

Vanguard 529 college savings plan

Oregon 529 plan

Of course, I still want the tax deduction so I continue to contribute to the Oregon 529 plan. Once the balance is large enough, I’ll transfer it to Vanguard again. You can do this once per year.

Oregon 529

RB40Jr’s Roth IRA

This year, I started paying RB40Jr for his work as a model and photographer for this blog. All of his income goes straight into his Roth IRA. He can use it for higher education so it is part of his college fund on my spreadsheet. The current balance is pretty small at $845, but I’m sure it will keep growing as he contributes more.

Fidelity minor Roth IRA


Here is the summary of RB40Jr’s college fund. Not too shabby, right?

College Fund
Vanguard 529 $67,806
Oregon 529 $9,448
RB40Jr’s Roth IRA $845
Total $78,099


All in all, I think we’re doing pretty well with RB40Jr’s college saving fund. I’m optimistic that we can cover most if not all the cost of higher education when he’s ready for it. We’ll just keep saving and hope he can get some scholarship.

Don’t forget to check back next year to see if we made any progress.

Ok, that’s it for today. Do you use the 529 plan to save for college or do you have a different plan?

*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. I log in almost every day to check on my accounts and cash flow. It’s a great site for DIY investors. Check them out if you don’t have an account yet.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.

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{ 98 comments… add one }
  • Clarrise @ Make Money Your Way October 23, 2013, 12:41 am

    This is scary but this is the fact. Right now my goal is to save more for my daughter’s future.

    • retirebyforty October 23, 2013, 6:20 am

      Good luck! We are saving as much as we can early on too.

    • Mike September 1, 2018, 1:16 pm

      Another thing you could also do is to encourage your daughter to start creating their own passive income while they are at home. It can be used to teach a lot of valuable skills like financial management and marketing while providing them a potential income that they can take with them into adulthood.

  • Andy @ theFIREstarter.co.uk October 23, 2013, 2:10 am

    This is very interesting! You seem to have a lot more options for tax shielding various investment accounts than we do over here in the UK, it’s good to see and I wonder if we’ll have something similar in a few years time with higher education costs also rocketing through the roof. (http://www.thisismoney.co.uk/money/studentfinance/article-2188668/Student-debts-escalate-average-cost-years-university-soars-53-000.html – yikes!). I managed to escape with about a £10k student loan and a couple of overdrafts I think.

    I’m sure it’s been mentioned many a times on these sort of articles as well but if there are any “kids” reading you really should consider whether it’s worth actually forking out for University/College in the first place. I did Music Technology with dreams of becoming an international star DJ (doesn’t everyone? 🙂 ) and now do not work with anything to do with the music industry. With a lot of courses such as that one, if you really want to work in those sorts of areas, you are probably better off using those 3 years to get your foot in the door somewhere even if it means working for peanuts, getting to know people, and getting valuable experience and working your way up. For many other careers though higher education is the obvious (and only) way to go.

    Just my two pence/cents 🙂

    • retirebyforty October 23, 2013, 6:22 am

      Great job escaping with a reasonable amount!
      I also think it’s better to work for certain fields. I don’t know if I’d pay for a Music Technology degree. 🙂
      Thanks for dropping by.

  • Daddy Domestic October 23, 2013, 4:04 am

    Good conversation starter Joe. My wife and I just had a philosophical discussion on whether or not we should commit to saving for our child’s college fund in a separate account. We didn’t reach a clear consensus, but there are definitely pros and cons. For instance, several of my friends went to college only because their parents had a lump sum for them to spend…..and accomplished nothing while goofing off for several years. I wonder if they would have been better served deciding what they wanted to go to college for, and having a little skin in the game. I wonder sometimes if college is pushed on too many people, and has become too available to the masses. Of course we wouldn’t want to base your decision on the million “what ifs”.

    An alternative would be to invest in assets or businesses with increasing cash flow, and then help the kiddos if they decide to attend college. That way me and the Mrs. DD could help them, and ourselves in retirement, no matter what life throws your way. I don’t know that I’m better off because I got my engineering degree and I would have gone either way because of the scholarships, but I don’t see this as a clear cut decision.

    • retirebyforty October 23, 2013, 6:26 am

      If the kid understand that the parents sacrificed to save for college, they would appreciate it more. I knew my parents worked really hard to send me to college and I tried my best. Of course, if our kid doesn’t want to go to college or picked an art major, we’ll probably keep the 529 invested. It can be used if he decided to go back to school or even for future generations.

  • [email protected] October 23, 2013, 6:53 am

    We live in Indiana and our state gives a 20% tax credit on the first $5,000 we save in our kid’s 529 plans. So, it’s a pretty good deal to save at least up to 5K per year. We save monthly but not a ton for them because we’re also worried about saving for our own retirement.

    • retirebyforty October 23, 2013, 8:07 am

      Oh wow, 20% is a great incentive. Retirement is higher priority for us too, but we’re lucky to be able to do both.

  • [email protected] October 23, 2013, 7:00 am

    We opened a 529 plan for Baby LRC but there is only a few hundred dollars in it. Interesting thought about front loading it. I’ll have to try, but it’s tough to come up with a large amount as we’re also looking into buying a place. The tax benefits are great and in NY, most of the funds are low cost Vanguard ones so I like the choices. Both my wife and I went to State Universities so I’m a big proponent of going to State U…so much more affordable!

    • retirebyforty October 23, 2013, 8:13 am

      Good luck! We definitely need to help out as much as we can. Starting out with a big student loan debt is not good.

  • Done by Forty October 23, 2013, 7:40 am

    Hey Joe,

    Phoebe at All You Need Is Enough put in place a 529 plan recently, and I think we’ll follow her path: open a 529 in my name, invest, make a baby, then change the beneficiary to my future child. Do you see any problems with that plan? We’d like to get an early start if possible.

    • retirebyforty October 23, 2013, 8:15 am

      I think that’s a great plan. We should have done that earlier, but we weren’t sure if we were going to have a kid or not. It’s great to get started early.

  • Kids Almost Done with College October 23, 2013, 8:21 am

    We utilized the Private College 529 Plan for our two kids. We were very happy with the program and results. In short, the program has made arrangements with a decent number of private colleges/universities (I would guess about 100 or so) where you can pay for tuition (fractional shares) at today’s rates, and be guaranteed that your investment will cover the same amount of tuition in the future. For example, you can deposit $25,000 today, and thay may, for xample, cover a full year of tuition at school X, and 50% of tuition at school Y. When your kid is ready for college, you are guaranteed that regardless of the current cost, you will still get the same fraction of tuiton covered. (Assuming college costs increase at about 5-6% year, it is not a bad risk free return.) The particiapting schools range from smaller liberal arts colleges, to major research universities (e.g. Stanford, Vanderbilt), so there is a lot of choice, but you are restricted to the colleges in the plan. Also, your kid has to get into the school–the plan only covers costs, it makes no promises about your kids being able to actually gain admitance. There are no state tax deductions/credits available, but you do not (like all 529 plans) pay any taxes on the increase in the value of your investment. It worked for our two kids and us—might be worth a look for some of you with younger kids.

    • retirebyforty October 23, 2013, 11:13 pm

      That’s a great idea. Tuition at private colleges are quite expensive. I just checked Stanford and it’s 42k/year now.
      So this just covers tuition? You’ll have to for for housing, books, etc… by some other means, right?
      I’ll talk with the missus and see what she thinks. Thanks for sharing.

      • Kids Almost Done with College October 24, 2013, 3:59 pm

        Yes—just covers tuition and fees; you can supplement the Private College 529 plan with another 529 plan (perhaps the one sponsored by your state) to save for room and board, books, and other allowable educational expenses.

        I would also add one other piece of info that I think is relevant. My kids were good students (not exceptional, but good), and gained admission to some of the better know universities in the plan—-Tulane and Emory are two that come to mind. The plan could be used at both of these schools. Neither school offered the kids any merit based aid. They also applied to some smaller lesser known schools (and both ultimately went to small liberal arts colleges). Because these schools have to compete for students who could otherwise enroll at larger, better known schools, they have to be more generous with merit based aid. In my kids case, both of them basically got scholarships worth half the price of tuition. My point is that some of the schools in the program are very generous with merit based aid—and added plus. If you save a few bucks while your kids are growing up, make sure the kids do their homework, get involved in a few extra curricular activities, don’t commit any felonies, etc. there is no reason why kids cannot go to a private college (if they so desire) without breaking the bank. Of course, there are many fine state universities that provide a lot of bang for the buck too.

  • aB October 23, 2013, 8:51 am

    Canadian so, RESP (Registered Education Savings Plan), putting in $210 a month. Government matches 20% for first $2500 (up to $7200 or something). When taken out, the gains are taxed to the child (when he is in school, should have little income).

    I agree education is important. For me, was thinking of just maxing the government grants, and top up the dividend account after that. Hopefully, that will cover both education when needed and retirement when needed.

    Front loading sounds good, but that is also the time where the most money is needed (or at least the most change in money priorities is).

    Not sure how well it relates to 529, and not entirely sure how it works.
    I think it is something along the lines of maxing contributions for the tax deferred growth. Principal is post-tax already. Gains and grant money is taxed to the child (at a lower rate than while I am still working). So taxed less.
    Something that just occurred to me is that since the child is taxed, it is income, so am wondering if this is a possible way to increase (his) RRSP contribution room.

    • retirebyforty October 23, 2013, 11:15 pm

      20% match is quite nice. That might be a good way to contribute more to RRSP for the kid if it works. Good luck. 🙂

  • Justin @ RootofGood October 23, 2013, 9:28 am

    Like you, I’m a fan of 529’s once you max out your other tax deferred savings plans. We have enough in our 529’s to cover about half the cost of tuition for our 3 kids to attend one of the local excellent state universities. Unfortunately our state tax deduction in North Carolina is going away effective 2014, so the biggest tax incentive to contribute to 529’s is now gone (for us).

    Like you mention, we will still enjoy tax free status on withdrawals. Another benefit that I didn’t see in your article (unless I missed it) is the tax free status of any income on your 529 investments each year. For example, if you had $10,000 in a taxable account (~1 years tuition), it might generate $300 or so in dividends each year that would be subject to taxation (in a taxable account). Stick the same $10k in a 529, and you don’t pay tax on it each year. On a larger account balance, that can lead to big tax savings each year as your 529 balance grows.

    • retirebyforty October 23, 2013, 11:16 pm

      Sorry to hear about the deduction going away. That sucks.
      I’m not very impress with our local state U. We might move to CA for a year before he starts college.

  • Kurt @ Money Counselor October 23, 2013, 9:46 am

    Holy cow! Yeah you’ve got to get that 529 going. Then ask all of Jr.’s relatives to, instead of buying him lots of junk he doesn’t need for his birthday and holidays, get him a little something and then make a contribution to his 529!

    • retirebyforty October 23, 2013, 11:17 pm

      We deposit all his birthday checks into his 529 account. 🙂

  • payitoff October 23, 2013, 12:30 pm

    can you use 529 for any other options? in case kids decide not to go to school? downpayment for a house maybe?

    • Pat October 23, 2013, 6:11 pm

      From what i understand, If your kid decided not to go o school then you will have to pay tax on it.

    • retirebyforty October 23, 2013, 11:18 pm

      You can, but you will have to pay 10% penalty and all the back taxes. I haven’t found a way to get around that in my research. You can always transfer it to another beneficiary.

  • Pauline @RFIndependence October 23, 2013, 1:37 pm

    It is nice that the penalty doesn’t apply if you get a scholarship, however I am not sure so much college will be needed in 20 years, things are changing fast, with online learning, short careers, even for my generation most people would be better off with two years of trade school and no debt

    • retirebyforty October 23, 2013, 11:20 pm

      I still think college is better than no college. It depends on what fields, but I’m a lot better off with my college experience.

    • Guest November 26, 2013, 7:20 pm

      I share your concerns. I think the college model is broken (who can come up with hundreds of thousands of dollars in today’s economy?) and a combination of AP credits and online learning will replace college years 1 and 2. Maybe high school will be extended to year 13 and a combination of online and offline classes will be college years 2, 3 and 4. Things are changing faster than people can keep up, so maybe college in 20 years will only be for the top 10% of the population (and not 40%).

    • Nicoleandmaggie August 30, 2018, 5:13 am

      All the economists who study this stuff are predicting that more post secondary school will be needed, not less. Note that you can also use 529 plans for technical schooling, not just 4 year colleges.

  • Bryce @ Save and Conquer October 23, 2013, 4:16 pm

    Putting aside $10k for the first five years, and then tapering is a very good plan. That will give compounding a good long time to grow. That’s essentially what we did, although we lump-summed $50k in at the start, and then held off for 5 years. We are only putting in $6k every year now. We already have more than enough in a 529 for our son to go to Cal Poly SLO for 5 years, and UC Berkeley for 4 at their assumed costs in 6 more years. I did not know you could take the money out of a 529 without penalty if the kid has a full scholarship. I will have to look into that. I can use that as incentive for our son to work hard in high school to land a full merit scholarship. (We have a friend who’s son did that at Santa Clara University.) I’d be happy to give our kid the 529 money to use after college if there were no earnings penalty.

    • retirebyforty October 23, 2013, 11:23 pm

      Great job! It would be nice to put down $70k now. Maybe if we have a windfall or something like that….
      That would be great if your kid can snag a full ride. He can use the 529 for a down payment on a house!

  • Steve October 23, 2013, 4:32 pm

    We’re doing something similar for our offspring: front-loading with 5-figure contributions for the first few years of her life.

    Also, note that the one-time, 5-year contribution is per gift-er, meaning the max is double for two parents: $140k. That’s more than enough where a wealthy couple could contribute the max in the first year of their child’s life and then just let it sit back and compound.

    • retirebyforty October 23, 2013, 11:24 pm

      $140k would be a very nice start. That should be plenty for any colleges (I hope.)

  • Pat October 23, 2013, 6:08 pm

    We opened 529 when my son was born. We put 1000 a month ever since. ( He is 6 now) Our plan is with Arizona state which has been working great. my son portfolio is by far the best investment than our own. We will keeping this rate for 3 more years then decide again to let’s it roll or reduce the number.

    • retirebyforty October 23, 2013, 11:26 pm

      Congratulation! $1,000/month is a great accomplishment.

    • Kevin December 28, 2016, 6:28 am

      You have 72k of contributions (probably total of 105k after growth) in there for him and want to add another 36k of contributions in there? You’re saving waaay too much my friend. well, unless you want to send him to a school that’s 50 or 60k a year currently.
      but then again, you can always roll it to a grandchild later on…..

  • Wilson October 24, 2013, 8:36 am

    You’re right about front-loading; I need to pump up our 529 with a few more deposits to really get it rolling. It blows my mind how much tuition at my alma mater has increased in the 17 years since graduation, easily doubling. With my daughter about to turn 3 at the current rate it’ll be in the 6 figures a year when she’s ready. I just don’t see how the current pace is sustainable. As a percentage of income there will be a huge disparity between the price of tuition versus my father’s salary, versus tuition as a percentage of my future income, earnings, or whatever I’m living off of in 15 years. In retrospect, private school 15 -20 years ago was a great bargain. I’m not too keen on technology as a substitute for college, I think there’s value in moving off, living in a drafty old brick building with strangers, spontaneous late night discussions, and poking around dusty old libraries, and I’d like my daughter to experience that too. I hope something occurs that will keep costs in check, but that’s not really a plan so I guess I’m working through lunch the next month and will make an extra deposit for her Christmas present.

    • retirebyforty October 24, 2013, 11:32 pm

      I think going to a 4 year college is a huge plus in anyone’s lives. I’m seeing my college buddies this weekend. The shared experience help you make such good friends. Good luck…

  • k8 October 24, 2013, 10:03 am

    I opened my 529 with another state (NV or IA?) in 2001 because my state didn’t have one. We put a lot away the first 3-4 yrs. Then friends and family began to tell me their children were getting full scholarships on their states’ lottery scholarship programs, so I became concerned about growing it too much. 529s have now clarified that you can take the amount of a scholarship back out without the 10% penalty I think.

    I started an online brokerage account for my son’s savings reasoning that long term capital gains taxes aren’t that high and there would be more flexibility. It’s been an interesting journey because we let him have some control over it. He now adds his own birthday/Christmas gifts to the savings. A few years ago the salesperson at the Apple store said he was the only 9 yr old to ask how to use the stock market app on an iPod.

    In terms of tax shelter, your reader may have been referring to the fact that although the account belongs to the owner, it’s not considered part of their estate for tax purposes. Still seems like the money would eventually have to be used for education to avoid the penalty, but you could pass it on as a 529 after your death to continue to fund education for your heirs.

    • retirebyforty October 24, 2013, 11:34 pm

      It’s great that your son got started so early. It will give him a leg up against most people in his generation.
      I’d probably pass on the 529 if it’s not used. I’m sure future generations would need it even more.
      Thanks for commenting!

  • Donny @ Personal Income October 24, 2013, 10:54 am

    I wish that I would have taken advantage of the 529 plan when saving for college instead of having to pay back all of these loans. It is critical for individuals that are starting college to research their options available before taking out college loans.

  • payitoff October 24, 2013, 10:56 am

    if you were to leave something for your kid, what would it be? i always ask this to the successful people i know and all of them almost have the same answer, either an invested money in the stock market or savings to put down for a house. im surprised why 529 plan had never mentioned, that’s why i havent really looked into this, since i understand that’s its a very restricted plan.

    i asked why money for a house, and they say its the most expensive investment, and they wished they had the money for it instead of working hard to save up when they first bought their house, it will be a good startup for the kids family if parents helped out with buying a home.

    makes a lot of sense to me.

    • retirebyforty October 24, 2013, 11:35 pm

      Our family’s philosophy is to leave the kid with a good education. It makes such a big difference in how you handle your life. A house is good too, but a higher education is even more important.

      • payitoff October 25, 2013, 1:52 pm

        very true.. scholarship might be an option too, but definitely education is a priceless investment, thanks for opening this avenue for me, looking up how to start the 529 now, twins are in PreK so the early the better 😀

  • Brandon Curtis October 24, 2013, 12:52 pm

    A good article on a good plan. It’s too bad that the 529 landscape is complicated by the fact that every state offers multiple plans, and anyone can use any state’s plan. Several people I’ve worked with were initially scared off by this complexity.

    The sites that compare incentives by state are a little helpful, but what people really need is a decision-making flowsheet. I prepared one for choosing a 529 Plan provider: http://www.andhigherstill.com/2013/05/choosing-529-plan.html

  • Buy & Hold Blog October 31, 2013, 7:22 am

    Good Post Joe. I took a different tact for creating a college fund for my kids. I’ve outlined it in this blog post.


    Summary: I live in Georgia that offers 529 through TIAA-CREF. You can only deduct $2000 at 6% income tax. So, tax savings come about $120. But, to save this $120, we’re stuck with TIAA-CREF funds that charge over 1% in expense ratio and offer actively managed funds and often lag in their performance. Of course, the money would grow tax-deferred, but at some point, we’ll have to pay taxes when we’re in our 50’s, the prime income years.

    So, instead of a tax-deferred 529 account, I simply added a Target Retirement Fund that would span for 20 years to my personal individual account. I’m adding money to this fund every week like I’d add to a 529. This also gives us the most flexibility because we can use this pay for non-college expense if emergency arises or if our kids decide to drop out of college to start companies or something drastically changes in the college education landscape or if they decide to pursue their college education abroad.

    I don’t know if I’ve made correct judgement or not. But, we’re sticking to this plan. It is one less account to manage.

  • Jack @ Enwealthen November 7, 2013, 2:41 pm

    The more I see the government meddling with debt and the money supply, the less likely I am to let my money be held hostage by whatever new legislation they decide to pass in the next 20 years.

    While the tax advantages are attractive, I’ll stick to my own investments so I can have the freedom to use the money wherever, however, and whenever I want.

    As for the tax-free transfer, my understanding is anyone can gift up to $14K a year tax free to anyone they want, without triggering the gift tax statutes. Having a 529 gives them a way to make sure it goes to the child’s education, but it’s not required for the transfer to be tax-free.

  • Zhenya May 21, 2015, 12:56 pm

    What a wise strategy! I’ve recently started a 529 for my possible future children, or for myself later in life. But I want to strongly second the advice to check out schools that offer significant merit aid– at least many years from now, when that time rolls around! I got all of my undergrad tuition paid at a private college that way. I only found out about the separate application process for my particular scholarship through my best friend, though, it wasn’t very heavily promoted. It always seems to help to do a little research. Thanks for the awesome website, it definitely helps soothe many of my personal finance fears!

  • Jenn November 3, 2015, 9:58 am

    Hello Joe! I just started reading your site, and am very much enjoying your style of writing and retirement advice. On the subject of planning for your child’s college expenses, what is your opinion on State Prepaid TRANSFERABLE Plans vs. 529? I live in the state of Florida, which offers both, and I’m on the fence on whether to pay for the prepaid plan or contribute to a 529. My child is 7 months and current monthly payment for the prepaid plan is around $140, payable until my kid is ready for college. At that time, the plan will cover 4 years at any State University. A great benefit is that I can also transfer the market value of that plan ( whatever the avg. university tuition cost is for our State at that time), to any out-of-state university as well, and just pay the difference. I’m trying to think of all sides of the equation- tax benefits, financial consequences, impact on eligibility for financial assistance for my child (FAFSA). I know you mention you don’t like prepaid because you don’t know which school your kid would end up going to, but in this case, the prepaid plan is transferable. With that said, I would love to hear what your opinion is! Thanks so much for your blog.

    • retirebyforty November 4, 2015, 10:28 am

      I’m not a big fan of the prepaid plan. Who knows what’s going to happen in 15 years? A transferable plan sounds better, though.
      I’m still sticking with the 529. It’s a lot more flexible.
      Sorry, I’m not very helpful. The 529 has minimal impact on financial aid. I’m not sure about the prepaid plan.

  • Tara Allen April 6, 2016, 11:51 am

    Getting a 529 savings plan is an excellent way to start planning for the future. I like that with a 529 savings plan you are able to set money aside paying for college down the road. That is cool that you can pay directly to the school at the current tuition rate.

  • Kev December 28, 2016, 6:32 am

    We have 3 kids. 4, 4, and 1.5 years old.
    I’ve been contributing about 1600 a month for about 3 or so years…and we have a total of about $76k in all accounts. I struggle with deciding if that’s enough. I have about 14-15 years to grow the money within….and at about 10k a year (currently) in tuition per year per kid, the math is saying we’re almost there and that we should stop contributing very soon. but….i’m not sure……
    401k and IRA are maxed out…but i could use the 1600 elsewhere!
    Maybe i’ll continue at the same rate into the first half of 2017 and then stop….

  • BusyMom August 30, 2018, 3:03 am

    We are way behind. We have $9500 for a fourth grader. And he is already convinced that he is getting a master’s degree.

    There are a few things blocking us – first of all, neither of us went to college here, and we really don’t get how bad the situation is. Sure, we have read about it, but it is not sinking in.

    We don’t know how much we want to help him. I don’t want him to take it for granted. He should have to work for it.

    I am sure you considered that. How did you get to the conclusion that you were going to pay for the whole thing?

    • retirebyforty August 30, 2018, 5:00 am

      Wow, that’s one smart kid.
      My parents helped me and my brothers with our education. I want to do the same for our son. Having student loan debt seems to be a big problem nowadays.
      Paying for the whole thing is just my mentality. I’d rather have too much money, rather than not enough. Mrs. RB40 didn’t go to the college she really wanted to because of the lack of fund. We want our son to have more choices. If he wants to study finance, then I want him to go to the right school to network with the right people. I think this matters more in finance and politic. Engineering and medicine, any school will do.

      I want our son to work for it too. We’ll work something out.

  • Lazy Man and Money August 30, 2018, 4:40 am

    Good work on the savings. It reminds me that we are way behind where I’d want us to be in our savings. We’re up to around $20,000 for the two kids combined.

    We plan to use my wife’s GI Bill to foot half of college though. Hopefully the investment in private school leads to some scholarships and maybe the ability to earn some credits at the local community college while in high school.

    • retirebyforty August 30, 2018, 5:02 am

      Good luck with scholarships. I’ll put that one off until our son is a bit older. We’ll need to do some research and see how to get scholarships. The GI bill sounds great, though. Does that help with tuition and room and board?

  • Mrs. 50 August 30, 2018, 5:49 am

    Hi Joe, We have a first grader and only have $12,000 so far. My husband was unemployed for almost 6 years so we didn’t start his 529 until years later after he was born. I know we are behind. So we are working on that.

    I’ve been thinking about moving our son’s 529 plan to Vanguard. It’s currently with the State of Georgia. Glad to hear that you did/do something similar. Other than the benefit of lower cost, any other benefits as to why you moved/moving your son’s 529 to Vanguard?

    • retirebyforty August 30, 2018, 10:54 am

      I think you’re doing better than most families. Keep at it!
      You should check with Georgia’s plan. They should be able to tell you about recapture tax.
      I moved to Vanguard because they have lower fees and more choices.

  • Adam August 30, 2018, 7:14 am

    It’s so inspirational to me when I hear and read stories about how people are planning for their kids’ future. Having a child is the ultimate act of optimism, and with parents like you it sounds like RB40Jr is in good shape. Thanks for the solid reminder that not everything in the world is going downhill!

    • retirebyforty August 30, 2018, 10:54 am

      Thanks for the encouragement. We try our best. 🙂

  • Sarah August 30, 2018, 9:05 am

    We have older kids who were born when the 529s were new. We didn’t use them as we thought they were too new and unproven. It worked out okay for us. We saved in after tax funds and then cash flowed what we didn’t have covered. We paid off our house two years before the first went to college so saved the mortgage payment for two years and then used the mortgage payment amount towards college during the college years.

    Both boys had skin in the game. Both had to pay for $5k of each year of college. This amount was reduced by whatever scholarships they earned. One worked as a TA/GSI and got free tuition for a semester of undergrad and both semesters of his one year masters so he saved a lot of money.

    We have a boy who graduated from Berkeley with his undergrad and masters and our other boy is a pilot who is accruing house to fly for the airlines. I highly suggest pilot training as there is a huge shortage of pilots.

    The comments are weird. Some are from 2013.

    • retirebyforty August 30, 2018, 10:57 am

      It’s great that you paid off the mortgage before college. That must have helped a ton with cash flow. Great move.
      I like the $5k per year rule. I’ll add it to the main post. I was a TA and tutor when I was in college. It helped a bit.
      Thanks for your comment. Yes, some of the comments are older. I posted this one in 2013 and rewrote a lot of it in 2018. I believe Google likes that better than just writing a whole new article.

  • Mr Fire by 2023 August 30, 2018, 11:35 am

    I agree with the author. This is a very important investment to make NOW, why wait! IN fact, as look back over all of my investments; this is the BEST investment I’ve ever made in my entire life. I started the 529 plans when my 3 children were born and now my oldest is in her senior year at a state university and this 529 fund has covered 100% of her tuition, books, and housing. There will be a small surplus left over when she graduates, which I’ll transfer to her younger sister’s 529 fund (tax free).
    All three of my children will have their college costs covered and this 529 investment is enabling me to retire early (3 more years at age 55) since I don’t have this expense to be concerned with. I encourage ALL parents to aggressively invest in a 529 plan when your children are young, this will mitigate future worries.
    Great article!

    • retirebyforty August 30, 2018, 8:53 pm

      Thanks for sharing! Great job saving for your children.
      Hopefully, we’ll be able to save enough for our son’s education too. We still have a long way to go.

  • freddy smidlap August 30, 2018, 11:41 am

    i was wondering about investment choices, like if you could get a brokerage account with 529 status. it looks like you’re stuck with the few different funds as choices. i don’t know why you can’t just designate it with tax status like an i.r.a. and buy and hold what you really want. we don’t have any kids but it’s good to be able to have a conversation on the topic.

    • retirebyforty August 30, 2018, 9:36 pm

      It’s just a tax rule. I think they made it so it’s simpler to run. Vanguard’s 529 plan has about 20 choices to pick from.

  • Kris August 30, 2018, 12:19 pm

    That’s a really good amount you have in your 529 account for your son. That $265K amount sounds like so much but wouldn’t be surprised if it really costs that much at that time.
    I have just over $10K in our 2 year old’s 529 account in California and we are definitely to beef up our contributions as he gets older and we hope it gets to $150K-200K by the time he gets to college but that might not be enough to cover all costs for college. By that time it might be up to $300K for total college costs. We’re try our best to cover most if not all of his costs.

    • retirebyforty August 30, 2018, 9:38 pm

      The tuition shouldn’t be that bad by itself. It gets expensive when you add room and board, textbooks, and all the other stuff. You’re doing really well so far. Keep at it.
      I hope to get to at least $200k too.

  • Dave in Sunny FL August 30, 2018, 4:40 pm

    I think you should take a look at everything that goes into that “total” cost of college, when figuring out how much to put into a 529. First, that total may include items that are NOT reimbursable from the 529 plan, like transportation costs, entertainment, or whatever. Second, what happens if the kid gets scholarships, grants, or whatever; and you don’t need all the money for educational purposes? That’s a little less of a problem for me, since I have two kids and I’m able to switch between them as needed. A little tougher to figure, with only one child.

    • retirebyforty August 30, 2018, 9:39 pm

      I’m not worried about having too much money in the 529 plan. We have nephews and nieces. If our son doesn’t use it all, we could just change the beneficiary to the future generations.

  • GYM August 31, 2018, 12:00 am

    Hope RB40Jr has a fantastic school year, grade 2 already, time flies!

    The 529 seems very similar to the RESP in Canada (Registered Education Savings Plan) where contributions are tax deferred. With the RESP, the government matches 20% of your contribution room, so you get $500 each year if you contribute $2500. It goes to a max of $7200 in grants total.

    • retirebyforty August 31, 2018, 1:06 pm

      The first week was a little rough, but it’s almost over. Whew!
      Wow, you get a match from the government? That’s awesome. The max isn’t that high. Can you get all $7,200 in one year? Front load?

  • Steve @ familyonfire.org August 31, 2018, 10:50 am

    We have 529’s for both our kids and they work out very well. It allows us to ring fence the money and also allows relatives to contribute should they want. We haven’t added much in lately because we have had no income coming in. But we are ok with that because we don’t want to over fund and not use all the money and thus need to take the 10% tax penalty.

    • retirebyforty August 31, 2018, 1:07 pm

      Great job! I think overfunding is okay. We can always gift it to our nephews and nieces. Or just keep it for RB40Jr’s kid. Compounding would work great in that case.

  • Isaac, Live Fi and Free August 31, 2018, 12:04 pm

    My parents had a 529 for each kid growing up. We ran into a snag though, I started college in 2009, one of the worst economic times to start college. My parents funded much of my first two years in school out of their savings account to allow the 529 account time to recover. My last couple years in school were then funded with the 529. Scary times. And I will be forever thankful that they were able to provide that for me. My other siblings are younger and they were funded out of their 529 plans. Great article Joe. Will be fun to watch RB40Jr’s account grow over time. Especially that Roth. That’s a fun experiment that I will do as well once my wife and I have children

    • retirebyforty August 31, 2018, 1:08 pm

      That was rough. I’m glad it worked out. We’ll just have to be flexible too. Nobody knows what’s going to happen in 11 years.

  • TDubbs August 31, 2018, 3:44 pm

    I’ve been working on retirement for a couple years now. We can retire at 54 and 53 (wife). That’s 2 years away for me and 3 for her. We have an 18 and 15 year old that we’ve been funding a 527 for since their birth and expecting them to go to college. BUT – college isn’t for everyone…….but FIRE can be. I am starting to change my way of thinking about getting my kids to FIRE. I will lay it out as if I were in your shoes.

    So instead of 527 I am thinking about something like this.
    – If I take my 7 year olds $78000 and fund that at 5K per year until his age 18 at 8% he will have a balance of $ 265,095.
    – Now he starts working and contributing $6500 to my $5000 until 21(Happy Birthday). So from 18-21 we invest $11,500 at 8% and his balance grows to $371,277. No student loans to pay back either. He is starting to learn how to earn a save. At this point our contributions stop and its entirely up to him. But we have shown him the way.
    – From 21 – 30 he contributes $10,000 on his own. So at 8% his balance will grow to $867,061. Pretty good so far.
    – From 30 to 40 he will now contribute $15000 one way or the other. Still averaging 8%. What does this do for him??? Gets him possibly FIRED. Balance of $2,089,217 at age 40.

    – If he keeps it up to 45 then — $3,157,745 in the bank.

    —- Maybe they all don’t have to go to college. If we (parents) plan on putting money in a 529 anyway and earning maybe 6%, why not go this route and fore-go the college plan. If they still go to college the money is there anyway. If they don’t it can continue to grow.

    • retirebyforty September 1, 2018, 8:34 pm

      Sure, everyone has to find their own path in life.
      It’s just my family tradition that we prioritize education. He can make his own fortune after he gets a good education. Of course, he could go his own way if he’s more entrepreneurial.

  • Ravi August 31, 2018, 4:49 pm

    I think we will soon be looking at college education costs going flat and then going down in a decade. That said you should be looking at 140k for 4 yrs of college in 2029

    • retirebyforty September 1, 2018, 8:35 pm

      I really hope that would be the case, but I don’t see any evidence. I’ll believe it when I see it. No disrespect to you, of course. I’m just skeptical.

  • Financial Verdict September 1, 2018, 8:13 am

    The 5% inflation rate leads to insane numbers if you chart this out to 2036 when my newborn daughter will be going to college.

    Vanguard’s college calculator has 4 years at an in-state public school at 5% inflation (current average of $20,700 per year) costing $205,000 (between $48,000 – $54,000 per year in 2036-2040).

    4 years at an expensive private school (currently will cost you $58,000 per year) will cost $575,000 by 2036 (at $133,000 – $153,000 per year from 2036-2040). Yikes!

    • retirebyforty September 1, 2018, 8:36 pm

      I think it slowed down to around 3% recently. Hopefully, it won’t go back to 5% anytime soon. The compound effect really hurts when it works against you. Our kid will definitely need scholarship if he wants to go to an expensive private school.

  • bellbang September 1, 2018, 1:23 pm

    this is not beneficial with many states except for some high state income tax states like nyc oregon etc

    Also the money cant be easily used for purpose other than education. rules keep changing. It is better to save this money in roth ira with a business setup like yours rather than making use of 529 plans in other states

    • retirebyforty September 1, 2018, 8:38 pm

      You really need to look at your own state and see if it’ll work for you. No tax on the gains is really good, though.
      I’m okay with the money being earmarked for education. The future generation will use it.

  • Eric @ Flip n Finances September 1, 2018, 4:44 pm

    There is no doubt that college is expensive. I’m finishing up my last year on college at one of the cheapest state schools in the nation, and yearly tuition costs are still $4,000 (not even including room and board!)

    While we are still young and don’t have any kids yet (except for our fur baby), I am still debating if we will pay for all of our kids’ college or not. I am definitely in favor of paying for half of worthy pursuits of my children, and they will have to get scholarships/loans to pay for the other half.

    But that’s still down the road 🙂

    • retirebyforty September 1, 2018, 8:40 pm

      That’s really not bad at all. Room and board are probably more than $4,000/year. Good luck! It’ll be great to make more money.

  • Patient Wealth September 1, 2018, 5:31 pm

    What if he **GASP** doesn’t go to college? That is one thing I constantly mull over is how many of my 5 (soon to be 6) kids will actually go to college. I don’t want to use a vehicle like this as it doesn’t seem as flexible as a plain vanilla brokerage account. But yes the tax benefits are amazing!

    • retirebyforty September 1, 2018, 8:40 pm

      It’s not a big deal for us. Someone in the future generation will use the money. I’m not worried about that at all.

  • Jason September 1, 2018, 7:55 pm

    So what about us that we have a special kid and he will probably need support for the rest of his life. We’re a family of two with no relatives alive. What is waiting for us? No college and poverty ?
    I cannot put a dime in a 529 for starters because i need the money to survive!

    • retirebyforty September 1, 2018, 8:42 pm

      That’s tough. I don’t have an answer to that difficult question. One of my cousins has a similar issue. Nobody knows what to do.
      I hope you can figure something out.
      Best wishes.

  • Young and the Invested September 2, 2018, 5:45 am

    Hey Joe,

    Thanks for sharing this information and cataloging your child’s journey. Or at least his 529 plan’s journey. It will be interesting to see how the investment account performs over time and how college costs continue to grow. I’m hoping for some abatement as my wife and I get closer to when we decide to have children. We prioritize education just as much as you and intend to contribute to their respective 529 accounts as well when the time comes.

    I am intrigued by the idea of front-loading the 529 investment accounts at $70,000 and letting the power of compounding work its magic. I’ll admit not to having that kind of cash available to deposit directly into a 529. But one strategy I’m considering is establishing 529 accounts in my name and my wife’s name now and beginning to contribute with the understanding that the accounts would be gifted to my children when college time arrives. I figure this might give a few extra years of compounding to work in their favor. It isn’t much, but that could be an extra $25,000 come high school graduation.

    One final reaction to your article is not knowing the investment options were as limited as they are. I just planned to put the funds directly into an S&P 500 ETF with Vanguard and let it compound. I hope that is an available option and will need to look into it soon.

    Thanks for sharing,

    • retirebyforty September 2, 2018, 9:31 pm

      The investment choice is really dependent on what state you live in. I’m sure you can easily find out.
      Good luck!

  • FIRECracker September 3, 2018, 7:53 am

    ” If he wants to go to graduate school or attend a private college, then he will have to get some scholarships and take out some loans.”

    Love this! I’m a big fan of teaching personal responsibility over having the parents cough up money for every decision (good or bad) the kid makes. Otherwise, kids might just decide to get degree after degree, bleeding the parents dry and never going into the workforce (I’ve seen it happen with family members).

    Nice explanation for using a 529 to fund Rby40Jr’s college education. We have something similar in Canada called RESP and it comes with the added benefit of a 20% government match, up a max of $500 per child per year.

    • retirebyforty September 3, 2018, 9:11 am

      We’ll encourage him to work when he’s in school. He’ll need spending money, right?
      I really hope he can get some scholarships, but I’m not too hopeful. He’s not super smart or athletic. He’s just normal like me. 🙁

  • Revanche @ A Gai Shan Life September 3, 2018, 11:56 am

    We’ve been lucky enough to bank a really healthy sum so far for JB’s education. My hope is that we can hit six figures by the time we get partway through elementary school and let that grow enough to cover all the necessary expenses. There’s a part of me that feels like we’re also just hoping really hard to cover an expense I’m not 100% sure that we’ll have because ze isn’t even 4 yet, how do we know what ze is going to want to do when ze graduates from high school? I hate acknowledging that the world is murky.

    • Revanche @ A Gai Shan Life September 3, 2018, 11:56 am

      The FUTURE, I mean. Not the world. Though that is too.

    • retirebyforty September 4, 2018, 10:39 am

      That’s great. Nice job front-loading it. I hope to coast too, but it looks like we have to keep contributing at least $4,500/year. I don’t know what he wants to do after high school, but having an education can’t be bad.

  • Independence Engineered September 5, 2018, 3:23 pm

    Great job Joe. I am going to definitely follow this series. I don’t have a family yet so this is something not immediately in my future, but the information provided is indeed helpful. I do want kids and have thought about doing 529 plan already.

    If I don’t have a kid right now, but want to start saving for my future’s kid 529 plan what would you recommend? Provided of course I have the money.


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