Get Out of Debt Guy

How Can We Prepare for College for Our Kids? - Sarah

Posted March 21, 2013

WRAL Reader Question

We are a two-income family with two children. We are heavily invested in our 401K and are trying to pay our home off in the next 10 years.

We have two children under the age of 6 that we hope will go to college one day. Should we invest in a 529 plan in NC or another state? How much should we invest annually? Are there any other options for investing for college?



Dear Sarah,

You would think that there would be a clear cut approach to such issues. In fact I would love it if there was.

My point of view is based on those unexpected financial issues I witness on a regular basis. We never plan for them to crop up, yet they do.

The NC 529 plan at (866-866-2362) is different than the prepaid tuition 529 plan I looked at years ago for my daughter. In that plan, in another state, a balance by the time she reached a certain age would guarantee her tuition over four years. The 529 plan does not as far as I can see. It is instead a college savings plan.

While contributions to the NC 529 Plan of up to $2,500 ($5,000 for joint filers) are deductible from NC taxes for North Carolina taxpayers and account earnings grow tax free, there are significant limitations on getting the money out of the program if your children does not decide to go to college or there is a balance left.

According to the NC plan, "If there are assets left in your Account when the Beneficiary has completed college, you can designate a new related Beneficiary of the Account."

The bottom line is that 529 plans can be complex financial investments with significant limitations. They should not be entered into lightly or without completely understand the advantages and disadvantages.

The Securities and Exchange Commission has a great primer on the different types of 529 plans. You can find it here.

For me, the primary consideration based on what you shared is how your investing appears to lock up your money. While I am completely behind saving for college, life taught me a long time ago that things don't always work out as we hoped or planned.

It might be smart to consider investing the college fund money in a mutual fund or some other investment vehicle that is not restricted like a 401(k) or a 529 plan. If the kids decide they want to follow some other passion in life then the money can be used for another purpose.

While the tax advantages may not be present with such an approach, it does give you some greater flexibility to alter the plan if things change.

Steve Rhode

WRAL Get Out of Debt Guy

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About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.