I’ve been reading quite a few articles about the new federal 529 laws, and I feel like I have a good grasp on them.
In a nutshell, the new law presents a very good opportunity, but really only for a handful of people.
Of course I am not a financial planner — and you should talk to your own — but the way I see it:
- The overwhelming majority of Americans have virtually zero savings for retirement.
- Many of those who have saved some money for retirement, don’t have nearly enough.
- Most people don’t have a enough cash in the bank to sustain a $1000 emergency.
- Most students leave college with huge debt because they never saved money in advance.
- So… not that many people currently have the wherewithal to invest in their own future, or their kids’ future, via IRAs, Roth IRAs, 401s, or 529s (for schooling).
But some people DO save for the future…
I started investing in Mutual Funds, IRAs and Roth IRAs when I was 17. It was painful at the time, to make so little, and also set aside $25 every single week. So no matter who you are, it is possible to move the needle, even if just a little bit.
The new 529 rules are good for people who have extra money, and are willing to invest it for the future.
The rules are also good for lower-income people who have the determination to stop buying daily coffees and cable television, and instead save that money for the future.
With 529 plans, the investment you make in California does not currently give you a tax savings RIGHT NOW. Instead, your investment grows and you don’t pay state income tax when you withdraw it for educational expenses.
- A mother puts $1000 in a 529 account. There’s no immediate benefit (in California).
- That money grows to $2000 in 7 years, for example. The mother made $1000 PROFIT, right?
- She can take all of that money out, and she will not pay any income tax on the $1000 she earned. She can give that money (up to $10,000 per year) to the local Catholic School to pay for her child’s tuition.
- So, it took a few years to grow, but she received $1000 of free tuition money! That’s helpful.
Let’s say that LONG ago a family has put a large amount of money in their kid’s 529 for college. Let’s say that money grew and grew and is now $80,000 value. The family can take some of that money out now and pay for the kid’s tuition. (They just won’t have that money growing for college down the road… so it’s a very big decision.)
At the end of the day, I see the “big” opportunity as:
- Schools can go to parents of (0-5 year old children) and say, “If you can, put money in a 529 account right now. When your child is in 8th grade, the account will be worth quite a bit more, and so you will have enough to pay for most if not all of the 8th grade year, and you won’t pay tax on that income.”
- Similarly, the young family could set aside money right NOW for Catholic HIGH School that won’t start for 9-14 years. That’s enough time for the account to grow tremendously… and pay for most of school for all four years, depending on the initial investment.
Again, this is all only possible of the family 1) has the extra money to invest, and 2) has the guts to set it aside for something that does not start for so long from now. This is really tough, and both of these reasons are why most americans have very little savings for retirement!
This new 529 opportunity is something to (first CONFIRM) and then communicate NOW to parents of newborn babies, recently baptized, daycare, preschool, tk, and kinders… so they can take advantage of the growth many years from now.
NOTE: Each state has its own laws on deducting tuition expenses. In Missouri, for example, families can deduct the cost of private school from their STATE income taxes, and this is indeed great for their pocketbooks (and the local schools). As far as I know, right now Californians don’t yet have that luxury. Federally, there is no deduction for private school costs. When parents can deduct the annual cost of private school in CA, that will be good for our schools, and will be another reason to attend. We’ll have to wait for that though.
— Thom Hiatt