Today you brought your first baby into the world! We are so excited, and mom is in her element. We can’t wait to spoil her. She’ll be joining our annual father/daughter date at the Angels’ home opener.
Doing a little quick math, there are only 220 months until she starts college. If she’s academically skilled and skips a grade like you did, it will be just 208 months. We’re opening a Section 529 plan for her as soon as we get her social security number.
Mom and I have agreed to deposit $100 per month. We’re expecting more grandkids, so we hesitate to set the bar higher than that. If the account earns 8% per year, in 208 months it should grow to about $45,000.
That’s not enough to pay for one year at your alma mater. No one knows the future, but at just 3.7% inflation, in 208 months, a year at Westmont Collegei could exceed $112,000 and four years will cost about a half a million dollars.
If we could save $1,000 per month, we would get pretty close to fully funding her education, but as I mentioned, that’s more than we can commit. Maybe you can get the other grandparents and the aunts and uncles to contribute. The plan does accept gifts from others, too.
But there’s a bit of a problem. We hope to retire in about ten years, and we are not promising to continue funding the plan after the first 120 months. In ten years, at the same 8% growth rate, there will be about $18,400 in the account. That’s a good start and in the final 88 months, even without additional contributions, it could grow to over $33,000.
That should cover her meal plan for four years. Do you remember how much you liked the cafeteria food?
Section 529 Plans provide many advantages when saving for college. The funds accumulate tax-free, and if used for qualified higher education expenses, the earnings remain tax-free. If properly registered, their impact on the student’s financial aid award is minimal. Funding is flexible, requiring as little as $25 per month or allowing one-time contributions of $70,000 without creating any lifetime gift tax issues. If needed, the beneficiary can be changed to other family members, as distant as first cousins.
They also have some constraints. Investment changes are allowed only two times per year. Plan specifics are governed by the individual states, so additional tax benefits may or may not be available. Until recently, some expenses like computers were not considered “qualified.” The rules could change by the time your student matriculates.
Give us a call if you’d like to setup a plan for your grandchildren or children.
The hypothetical examples in the above article are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.