Need advice on how to save for college - financially dumb parents and tricky situation

[Anonymous]

We have two kids (6 and 9) and we have not saved anything for college so far so we need to start doing something. We need advice on the best way to save at least something for them. we are 49 and 51. kids are dual citizen US - EU and frankly one option I hope we have is having them go to the University in my home country (where at least now tuition is like $1000 a year and most faculties have open enrollment) or in the UK, where the cost would still be a fraction that in the US. If they like science or medical school, they can certainly study there. But we would like to save money in case they decide to stay in the US for any reasons, and also to pay I part to go to Europe if they decide do go there.

what is the best way to save in this situation? if one of them or both end up studying outside of the US (or not going to college at all) is there a way we can get the money back without losing a lot? I understand some college funds allow students to study abroad but there is a limited number of foreign institutions where a kid can go and use the money. sorry if this is confusing, but we need to start saving and we do not know what is best in our case.

[Anonymous]

Are you maxing out 401ks and IRAs? You'll be able to start withdrawing from them with no penalty at age 59.5. You can use those as a college savings vehicle.

[Anonymous]

Anonymous wrote:Are you maxing out 401ks and IRAs? You'll be able to start withdrawing from them with no penalty at age 59.5. You can use those as a college savings vehicle.

Bzzt. No! Do not use retirement money for college!

529 plans are state tax deductible college savings vehicles that are also accepted outside the U.S.

[Anonymous]

Use a 529 for tax-free college savings. If they don't use it, you will have to pay capital gains tax on your gains (just like you would have if it had been in a regular investment account)- but you get all the money. You can also use it for the benefit of someone else.

[Anonymous]

The point is it is more tax efficient to max out your retirement accounts before opening that 529, and it's money you can use for whatever purpose you want. No point locking money into a 529 when there's still room in your retirement account.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Are you maxing out 401ks and IRAs? You'll be able to start withdrawing from them with no penalty at age 59.5. You can use those as a college savings vehicle.

Bzzt. No! Do not use retirement money for college!

529 plans are state tax deductible college savings vehicles that are also accepted outside the U.S.

There's nothing worse that an obnoxious person who is also wrong.

The PP first asked if the OP is maxing out their 401k/IRAs. If the OP is not contributing to an IRA, and is not looking to put away more than $12k total, then a very sensible thing to do would be to open IRAs because those funds can then be used either for education or for retirement. A traditional IRA may give you a federal tax deduction, but a Roth will give you tax free appreciation, which is likely better. A 529 will give you a state tax deduction and tax-free appreciation, but you run the risk of overfunding their education and paying a 10% penalty to use the funds for something else (many but not all foreign schools will be eligible expenses for 529 purposes).

[Anonymous]

OP here. thanks. I work in the private sector (no pension) and I am maxing out the 401(k), my husband is a fed, is not maxing out the equivalent of the 401(k) but he will have a pension. so I guess the first step would be for him to max it out. I did not know we could withdraw without penalty at 59. once we max out retirement, what other instrument should we used? we are in DC but were advised against using the DC 529 (friends suggested VA or Utah)

[Anonymous]

The 529 plan is the way to go for college savings. I recommend the NY plan (the way 529's are set up, the State's actually manage the investments). NY's plan gives you a lot of customization and has the lowest fees for management of the account. You can find it here: https://www.nysaves.org/content/home.html. Studies show that over a decade or so (which is about your time horizon here) that the lowest fee investment strategies tend to have the best overall accumulation. The 529 really only benefits you because the money you invest can grow and be used on approved college expenses without having to pay capital gains taxes. If you don't end up using the money on college expenses (there are a lot of college related expenses it can go towards -- e.g., computer, housing, etc... -- so just try and you can use whatever you save) then there is a penalty (10%, I think) on top of capital gains tax for withdrawing it. You can pass any remaining money on to future generations, so if you don't use it--just let it sit and grow and pass it along as a gift to a grandchild (or needy kid you want to help out) one day.

Beyond the investment vehicle--the hardest part of saving for college is setting aside money each month for college. Once you set up the 529 plan, find a way to create an automatic system for depositing a certain amount each month into the account. There are lots of formulas for how much out there, but the key is to start with SOMETHING and then adjust based on what you feel comfortable doing.

Lastly, oversees education could be the way to go if it is much cheaper. US institutions, like health care providers, set the sticker price really really high and then discount it back for the desired students (i.e. smart or significantly different from the kids filling XX% of the seats already). US subsidies to colleges come in the form of federal loans (institution paid by government risk free, government has to collect from student), other countries subsidize education through direct grants that keep tuition prices lower. We operate on the idea that kids should pay the government back directly for subsidizing their education. Other countries collect that debt indirectly through taxes on a graduate with a higher income (potential0 and creating a more educated populace creating a more dynamic economy .... a better theoretical model in my opinion, but i don't know if it actually works.

Good luck! and start saving now.

[Anonymous]

How old are you, and how old are your kids?
Are you definitely going to remain in the US when you retire?
Will you have generous pensions already?

Depending on the answers to these questions, the 529 plans may still be a very good option. All the Universities in the UK are eligible, for example. You can use this to check whether the ones in your mysterious home country are too:
http://www.savingforcollege.com/eligible_institutions/

If you have saved nothing so far, then I suspect that overfunding their education is not an immediate risk. Start worrying about that when you have $50K or so saved up for each of them - don't forget that 529s can cover room and board too.

[Anonymous]

When it comes time to calculate the expected family contribution 529 money will count as the kid's asset instead of the parent's, which reduces financial aid awards.

[Anonymous]

Anonymous wrote:When it comes time to calculate the expected family contribution 529 money will count as the kid's asset instead of the parent's, which reduces financial aid awards.

No, not the way it works now, as long as the parent's name is on the 529. It used to be an issue, but not now. Also, the 10% penalty is on earnings, not on the total assets withdrawn

[Anonymous]

Anonymous wrote:The 529 plan is the way to go for college savings. I recommend the NY plan (the way 529's are set up, the State's actually manage the investments). NY's plan gives you a lot of customization and has the lowest fees for management of the account. You can find it here: https://www.nysaves.org/content/home.html. Studies show that over a decade or so (which is about your time horizon here) that the lowest fee investment strategies tend to have the best overall accumulation. The 529 really only benefits you because the money you invest can grow and be used on approved college expenses without having to pay capital gains taxes. If you don't end up using the money on college expenses (there are a lot of college related expenses it can go towards -- e.g., computer, housing, etc... -- so just try and you can use whatever you save) then there is a penalty (10%, I think) on top of capital gains tax for withdrawing it. You can pass any remaining money on to future generations, so if you don't use it--just let it sit and grow and pass it along as a gift to a grandchild (or needy kid you want to help out) one day.

Beyond the investment vehicle--the hardest part of saving for college is setting aside money each month for college. Once you set up the 529 plan, find a way to create an automatic system for depositing a certain amount each month into the account. There are lots of formulas for how much out there, but the key is to start with SOMETHING and then adjust based on what you feel comfortable doing.

Lastly, oversees education could be the way to go if it is much cheaper. US institutions, like health care providers, set the sticker price really really high and then discount it back for the desired students (i.e. smart or significantly different from the kids filling XX% of the seats already). US subsidies to colleges come in the form of federal loans (institution paid by government risk free, government has to collect from student), other countries subsidize education through direct grants that keep tuition prices lower. We operate on the idea that kids should pay the government back directly for subsidizing their education. Other countries collect that debt indirectly through taxes on a graduate with a higher income (potential0 and creating a more educated populace creating a more dynamic economy .... a better theoretical model in my opinion, but i don't know if it actually works.

Good luck! and start saving now.

THIS - open a New York Direct 529 plan at www.nysaves.org. I opened one in maybe 10 minutes. It's so easy. I think I picked the mid-cap fund for 100%.

I am a fed too - your husband can go to his MyPay payroll website - https://mypay.dfas.mil/mypay.aspx - and create an "allotment" so that every paycheck money goes into the 529 fund. NY gives you the account routing number and account number right when you sign up (save or print the record!!).

Also, open a uPromise account - takes 5 minutes. Download the RewardU application too. That way you get 5% cash back put into the 529 plan when you shop online at most online stores - like Walmart, Overstock, clothes retailers, etc - a button appears at the top of the screen asking if you want the 5% cash back and just click it - it's that easy. You get 7-8% on some hotels and plane tickets too.

Use the 529 plan because the money is withdrawn TAX FREE. All earnings are TAX FREE. It's a no brainer.

[Anonymous]

Anonymous wrote:

Anonymous wrote:When it comes time to calculate the expected family contribution 529 money will count as the kid's asset instead of the parent's, which reduces financial aid awards.

No, not the way it works now, as long as the parent's name is on the 529. It used to be an issue, but not now. Also, the 10% penalty is on earnings, not on the total assets withdrawn

Also, if one is a fed and the other earning enough to max out 401k, they are not going to get any financial aid anyway, so this would never be a concern.

[Anonymous]

Not if the kids are in college once they are retired.

[Anonymous]

23:40 is right if you children are young.