(This is part IV of a series of posts about Joe’s mission to find the perfect colleges for his daughters. Check out his first, second and third posts to catch up.)
As mid-2002 came, we had plenty on our plate. Our investment accounts were sagging and we wrestled with an unexpected windfall from my in-laws’ estate.
We were ready to take action. It was time to switch horses. Our mutual fund had languished. I was paying taxes on it as it grew (and sometimes even if it didn’t!). The expenses within the fund were on the rise, fund managers had changed and it was quickly earning a vote of “no confidence.” I also still had that stack of Series EE Savings Bonds. Their value was intact, but interest rates had also fallen to 50-year lows.
Enter the 529
By mid 2002, 529 Plans had been around for several years. They had weathered the recent financial storm and the tax benefits they offered were attractive. Contributions could grow tax-deferred. I could also move around investments within the plan without paying current income taxes – I could start off aggressive, but then move to more conservative investments as college approached – without incurring income taxes. Distributions, when used for college expenses, would be tax-free.
Plus (this was a biggie for us) Mom & Dad could retain control of the account. While we could earmark funds for their college expenses, if it turned out they didn’t need the money, we were free to name another beneficiary (e.g. a sibling or even their future grandchildren).
Call to Action
As summer set in, we settled into a new strategy. We moved money from our taxable mutual fund (that was in our names) into two 529 plans, one for Lauren and one for Kristen. My mother-in-law had been a small-town school teacher for more than three decades. Education was important to her. So, in my in-laws memory, we also used some of the inheritance we received to shore up our college plan.
Lastly, we took a look at our “rainy day” Series EE Savings Bonds. Savings bonds generally grow tax-deferred and taxes are paid on the interest earned when they’re cashed in. However, when savings bonds are used to pay college costs, the interest can be exempt from federal income taxes – but only to certain income limits. At the time, I could foresee our income rising beyond those limits by the time the girls reached college age, negating their benefit.
So, over the next several months, we gradually moved funds into 529 plans for each of the girls. As 2003 dawned, we’d made significant strides. The markets were starting to recover, balances were starting to grow and finally it felt like “we had the right horse.”
So this was our strategy. It’s important to remember what works for us might not necessarily be what’s best for you. More on how to figure out your goals in the next post…
