Do I have my son's college savings in the right place (529 fee question)

[*MamaJen*]

I opened up a 529 account for my son right after his birth. I went through a local Edward Jones adviser, and right now I'm only contributing $50 per month, since I'm a po' grad student. In this two-year grad school period, I'm not contributing to my own retirement, and I know what people like David Ramsey would say about that. (I do have other investments and can very reasonably also expect to inherit other assets in the future). But it's really important to me to at least contribute that nominal amount, both for the compound interest and as a philosophical statement that I value education for him.

My question is, I feel like I'm really getting hit by fees in this current 529 that I'm on. It's a CollegeAmerica account through American Funds. The sales fee is 5.74 percent, and it seems like that is really chipping into the value of the portfolio. There's also a $40 annual fee. Granted, they're administering the account so I don't really have to worry about it, and I know that has value.

I've researched it a little bit and I understand that I can buy into my state's 529 plan as an independent investor. Is that a reasonable thing to do? Are there any risks that I should be aware of if I went that route? For example, is my broker monitoring the investments in a way that I would have to take on. I mean, I know that everyone should always monitor their own investments, but while I'm somewhat educated, I'm not a finance professional. Is having a broker ultimately an asset to me in a way that would grow the account more than I likely could, despite the fees? Would I be paying those fees anyway even if I bought into the state plan on my own?

Also, if I did decide to switch to a different 529 plan, would I have to pay any penalties in moving that money? Currently,after three years, I have about $3000 invested in the 529, so it's not a huge amount.

And why am I not more knowledgeable about this on my own? Grrr.

[zinemama]

We have our state's 529 and we signed up for it on our own. I wouldn't invest in any 529 where you were paying those kind of fees. That seems really steep.

If I were you I would look at http://www.savingforcollege.com/ and see what plan works for you. I'm pretty sure that if you are just switching from one plan to another, you don't pay penalties.

[texmati]

This might be a dumb question-- but what is teh benefit of a 529? I knwo that it could be exempt from state taxes, but we don't have state taxes in texas. Have you considered funding a roth IRA instead (if you are eligible)?

[velochic]

OP - there are definitely 529 plans out there that have lower fees.  Check out those that are offered by Vanguard.  I can't remember which states have Vanguard funds.  Your state tax break is probably not going to offset those fees.

Texmati - two things about a Roth... they have contribution limits (5K/yr for most people) and you can only withdraw the principle, not the interest before the age of 59.5.  529s don't have a contribution limit (well, they have a lifetime limit, but those are in the hundreds of thousands) and you can transfer the fund from child to child.  I think it's important to have a retirement plan and if you want to fund college for your kids, that should be a separate line item.  It can become a slippery slope to think about funding your child's education with your retirement funds.  You can't finance retirement.  You can finance an education.

[texmati]

I thought that there was something in the Roth ira laws that allowed you to use that money for your childs educations, but it seems that it's not so. Sorry!!!! Obviously I'm not qualified to answer this topic-- but i am learning alot!

OP, I know this is OT, but being a daughter who does support her MIL, and is worried about supporting her own parents in a decade or so-- please give some thought to planning for retirement. I would much rather have college debt & student loans in my 20's when my expenses are low, adn my obligations few; than have my parents move in with me when I'm 40 and trying to figure out about my own kids college.

I've heard the horror stories about student loans on tv; but the kids with student loans that I know irl had a fire lit under their butt about paying it off. Most of them lived with parents for a few years after school, or, like my husband, lived lean before marriage. Certainly their life wasn't ruined!

Edited by texmati - 3/27/11 at 10:44am

[*MamaJen*]

I think just about any financial planner will tell you to contribute to your own retirement fund before the college fund. I did set up my Roth IRA at the same time that I opened the 529. In this two-year period where I'm in grad school, I'm not contributing to my IRA. I am still putting money into the college fund, but it's basically a nominal amount -- just $50 per month. It would be a bad decision to substantially fund the 529 while ignoring the IRA. But for me, it was basically a philosophical decision to keep on putting a tiny bit of money in the college fund every month. As soon as I graduate and get a job, I'll go back to funding the IRA at a higher level than the 529.

[zebra15]

FWIW I had an Edwards Jones advisor at one time, noticed the annual fees kept creeping up an up, and just recently called the actual mutual funds and had Edward Jones removed.  Now the actual fund is the only one on the account with me.  At this point in my life I dont need any more middle men/third parties.

[TiredX2]

Originally Posted by texmati 

I thought that there was something in the Roth ira laws that allowed you to use that money for your childs educations, but it seems that it's not so. Sorry!!!! Obviously I'm not qualified to answer this topic-- but i am learning alot!

No, I'm pretty sure you are correct.  You can withdraw Roth *contributions* at any time without tax or penalty.  If you are withdrawing Roth *earnings*, though, you can do so PENALTY Free if you are using the earnings for education.  You will still need to pay taxes on the earnings, but no penalties (there are a few things you can do this with, including a first time home purchase).

We have minimal 529 accounts for the kids (only $200/month going into each).  We plan on paying our mortgage off before they go to college and using *that* money for college expenses, but we are also aware that our Roth accounts are possible sources of $ if necessary

[texmati]

This is what I thought too... I wonder if the rules have changed? the last time i searched (i mean, before I wrote this post) was when I opened the account.