Friday, February 17, 2012

My (kids) College Savings Plan

College planning for kids is another crucial piece to any thorough and complete financial plan. Yes I am currently in D.I.N.K status (double income, no kids) but paying for my kids’ college is always in my mind and, as with just about everything else in life, it’s so important to have a plan.

I’ve hit on this subject a little in how I would do college over again for myself, and I’ll reiterate here again as well. College is not a one-way ticket to success. A degree only shows that you have successfully passed a series of tests. It allows you to compete in the marketplace for white collar jobs, it does not guaranty you job placement. College is a luxury, not a necessity. I would never cut back on retirement planning before kids’ college. With that said, college is the first luxury on my list that I would like for my family. So if we’re going to plan for something, my rule of thumb is to maximize it to the tilt!

ESA’s are going to be my tool for funding kids’ college. Formally known as the Coverdell Education Savings Account, you can think of this as the “Education IRA.” Like a ROTH IRA, an ESA can be opened and funded with after-tax dollars and all growth, when used for college related expenses, is TAX-FREEEE! I prefer ESA’s over 529 plans because of the flexibility in mutual fund options. 529’s can stick you with only a single family of funds, i.e. only FIDELITY mutual funds, and an ESA allows you to choose from an ocean of mutual funds similar to options through an IRA.

Funding wise I plan to max out what the KGB US Government allows me to in the current year. As of now, an ESA can be funded up to $2,000 per year per child. Broken down into a monthly budget (because you better believe I will) that comes out to $166.67 per month for each kid from 0 through 18. My biggest beef is that I can’t open and start funding an ESA until the kid is born, but that’s the KGB US Government for you.

From 0 to 18 that comes out to a cost of $36,000 in contributions. Within the ESA I plan to follow the same rule of thumb for my ROTH IRA, mutual funds with excellent track records of over 10 years and average annualized returns of over 12% since inception, spread across 4 types of mutual funds: growth, aggressive growth, international and growth & income. With 12% average annualized returns over 18 years the ESA for a single child will have a balance of $127,575.83, if I’m half wrong, I think the kid can make it through! Dave Ramsey’s handy investing calculator spits out the numbers below:

Now whether I share this information with my future children is another story entirely. I want them to take a realistic and honest viewpoint of how much it costs to attend a four-year university. Ideally I want them to come to the realization that the prices at “prestigious pedigree generating” 4-year universities are absolutely outrageous, and that transferring to a state school from a community college is the most effective way to go. Is this plan dubious? Is it manipulative? Probably, but they’ll be my kids so I’m going to manipulate their thoughts and beliefs as much as I can so that my ideas become theirs (hopefully they vote like me too!) J

A few disclaimers though. Funds from an ESA can be used for college, trade schools, vocational and the like, so if my kid genuinely would rather enter a trade than get a B.A., an ESA can do it! Currently, ESA funds can also be used for grad school but have to be exhausted by the kid by the age of 30. Should the kid not use up all the funds going through school (which I’m counting on) then I can transfer the unused funds to the next kids’ ESA and repeat the process. If I over save because my kids are super awesome and get scholarships and choose cost-effective schools, current law allows me to open and transfer unused funds to related family under 30, which, as the KGB US Government defines in current tax law, includes: nieces, nephews, first cousins and children-in-laws. Financial peace, it’s what’s for dinner.


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