The Investment Scientist

Opening 529 Plan Accounts for My Newborn

Posted on: January 5, 2012

Saving for College

My son is 6 weeks old. Today, he received his social security card. The first thing I did for him after receiving the card was to open two Maryland 529 plan accounts for him: one with myself as the account holder, and the other with my wife.

In Maryland, the 529 plan deduction limit per parent per child is $2,500. So I put $2,500 into each of the accounts, for a total of $5,000. I invested the money for a target date 2030 fund since that’s the time my child will be of college age. I further set up an automatic contribution going forward: $2,500 will be deposited into each account every year.

Why I am doing this?

With college costs skyrocketing, I’d like to start saving sooner rather than later. There is also another reason …

Two months ago, I was approached by an OBGYN doctor who is making half a million dollars a year. His two kids go to private schools. Because of a lawsuit, he is now $1mm in debt and his oldest kid will be going to college next year. I asked him how much he had saved for his kids’ college education: the answer is a grand total of zero. I think it is very cruel that their children have to find their own money for their college education; they will most likely not qualify for any financial aid because of their parents’ high incomes. Here is the thing; if they had done what I am doing now – putting aside $5,000 every year, a blip in their total incomes – they would have close to $200,000 now, and the money would not be accessible to creditors or plaintiff in a lawsuit. How much of difference this would have made in his children’s lives.

Here are my recommendations regarding a 529 plan:

  1. Start early.
  2. Contribute up to the deductible limit of your state. States usually set the limit so that if you contribute the limit every year, you will likely cover most of the in-state tuition and mandatory fees.
  3. Make contributions automatic. It’s a chore to remember to make a contribution every year. Why not make it automatic so you can set it up once and forget about it.
  4. Invest in a target date fund. Again it’s a chore to manage investments. Investing in a target date fund saves you all the trouble.

Here are more advanced considerations regarding a 529 plan:

Maryland has a pretty lousy 520 program. In fact, neighboring Virginia has a much better program with lower costs. I am a Maryland resident, but I can contribute to the Virginia plan. If I do, I lose the state tax deduction. The better approach is to contribute to the Maryland plan; after the money accumulates to a certain amount, rollover it to the Virginia plan. This way you get the benefit of a better 529 plan without losing state tax deductibility.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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