Tag Archives: 529 plan

David Bach versus 529 Plan Qualified Expenses, Sometimes Even Financial Gurus Get it Wrong

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Let me start by saying that David Bach is one of my favorite personal finance authors!  You can read about my assessment of David Bach and some of the more popular type of financial authors in this article: “Which Financial Author Should You Follow?”

Okay, now with my statement of admiration with regards to David Bach and other financial authors out-of-the-way, I’ll continue…

Financial authors are just like you and I, except that they are famous and have studied or read up on the personal finance areas.  In fact, they may or may not know as much about some financial areas as you and I.  Take David Bach for instance, perhaps he not planning on using a 529 plan to put his kids through college (I’m sure he’ll have enough money…), so he might not know as much about it as parents that are using such a mechanism. Perhaps that’s why in his newer book “Fight For Your Money” he states the following incorrect line about 529 Plans:

all the proceeds are supposed to be used for your child’s college or graduate school expenses (basically, everything you have to pay for as a condition of enrollment, such as tuition, fees, books, supplies, and equipment – but NOT room and board, living expenses, or transportation).

As I was skimming his book (which I borrowed from my local library), I had to take a double take and re-read the above line 3 times, thinking that I must have misread is somehow!  Everything that I had ever read (including the info at the IRS web site) stated that you can use the 529 money for room and board as qualified expenses in the 529 plan.  To read the official government take on qualified 529 expenses click here!

While we all make mistakes, I just want to put this article out there in case someone is reading about 529s and reads David’s book that “room and board” aren’t qualified expenses and rethinks their college savings stategy based off of that particular mistake.

The funny thing is that almost any nonfictional author has mistakes of some sort.  I remember when I was in college, often times I would put a slash through the incorrect statements in textbooks and put the correct above the slashed out works or figures in pencil.  I used pencil because I wasn’t always sure and wanted to check with my professors first.  Most of the time I was correct and I only had to erase my slash mark once.

The point is, if you believe that something you read from an expert (any expert, not just financial ones) is incorrect, or partially incorrect, look into to it via a higher source.  In my example above, I went to the IRS site to make sure I was right.

Not to pick on David, but I’m sure if I read the book cover to cover I would find some more errors of some type.  But then again, given almost any book, I’m sure we can all could find errors in them if we look hard enough or know a topic area well enough.

Care to share any errors in recent financial books that you read?  Please share them in the comments section if you do.

Bests,

MR

My 529 College Savings Experience

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First, what is a 529 plan and what are it’s benefits!

What is a 529 plan?

These are college saving plans that are operated by state or educational entities.  The “529” numeric element refers to the IRS code with created these types of plan in 1996.  There are typically 2 types of plans:

Prepaid Tuition – You buy credits at today’s prices for future use!  The logic is that it will be cheaper to buy it today at the current prices rather than in the future after cost have skyrocketed (and historically this has typically been the case).

Savings – Typically you put money in investments such as mutual funds, bond funds, fixed income, etc.  These vary vastly with respect to what is offered…

What are the Benefits?

  • Distributions from these plans used for qualified educations expenses are exempt from federal income tax.
  • Contributions to a 529 grow tax free while in the plan.
  • With some states (including mine), the contributions to state 529s are deductible from state income taxes.  This varies in detail from state to state!
  • As long as the student is a half-time student, the distributions are tax free when used for room and board.

*For an excellent Wiki at Wikipedia click here!

My Personal Experience:

When I started the 529 for my son, the market was very high because of the tech bubble, so I lost money the first few years.  To make matters worse, I went with an Age based mutual funds in my plan.  I didn’t lose money but each year they rebalanced the portfolio for me, putting more in bonds and fixed income as my son aged.  So it’s been just a fair investment for my son.

My daughter has done considerable better, at least until this last downturn.  Her balance (since it’s has a higher proportion in equities) lost more money than my sons, but she’s coming back too.

So, in a nutshell, I’ve done okay with the plans, but not as well as I hoped.  Such is life though, I still think it’s worth have them, after all, the important point is to be prepared for the high college cost in the future (which should be substantial, private college may be higher that $200,000)…

If you child decided not to go to college, then the 529 earnings is tax and a 10% penalty will be applied (you might even have to replay the deductions from your state income tax back too)…

So reader, how are you preparing for high future college costs?

-MR

My Upromise Experience and was It Worth It?

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I always try to plan for future expenses.  That why I opened a Upromise account right before my son was born.  Back then I had more expenses and any amount I could save counted!

For that time in my life, Upromise was a perfect vehicle for me to save for my son’s college without it hitting me hard in the wallet.  I’m always thinking about money and ways to make the pennies scream…  After a while those pennies add up!

a million pennies

I’ve had the Upromise account for the last 9 years, how has it treated me?  Overall, I’ve earned $951.48 (not too shabby).  If I was more aggressive with it, I could have made much more.  I use to buy the McDonald’s gift certificate booklets (with a credit card I had linked in Upromise so I got an extra 1%), then use them for my lunch.  Then once a week, I would enter the codes on the back of the booklets into the Upromise site.  Perhaps, I’ll buy a $5.00 booklet this Christmas for nostalgic reasons.  Note, It’s not worth doing the McDonald’s booklets now because they lowered the benefit they gave back to 1%, when I was doing it, it was 5%.

When my son was three, I had been promoted at work and was receiving more money, so I started putting my own money in a 529 plan.  Now, the 529 plan is where the bulk most of his money for college resides.

Back to the Upromise, do I think it was worth it?

Yes, not so much from the incredible amount of money we were able to save (blatant sarcasm).  The benefit came from keeping my son’s college education in the forefront of my mind.

If you participant in the Upromise program, you naturally think about saving for college more.  The more you think about it, the more clever you become in looking for ways to saving for it.  I hate to say it creates a “heightened awareness”, but that’s what it did for me.

With the 529 plan that I’m now in, it automatically take money from my savings account every month and buys the into fund that I signed him (and daughter) up for.

The key is to always think about the big cost in life that will hit farther down the road.  If you take actions now, the hit might not be a like a Mike Tyson hit…  if you perhaps properly, it’ll be more like a Hannah Montana hit, it will still sting but at least you’ll still be standing up. 😀

If you are thinking of going the Upromise route, please leave comment and I’ll provide additional information about my experience!

Don