Thoughts on 529 Plans

It's more of a Shelbyville idea

"There comes that phase in life when, tired of losing, you decide to stop losing, then continue losing. Then you decide to really stop losing, and continue losing. The losing goes on and on so long you begin to watch with curiosity, wondering how low you can go.” George Saunders

The other day, I chose a 529 plan for the new youth in my life, and I figured I'd share.

Giving investment advice is a bit of a no win situation. The general idea of "investing" right now is sort've bloated. Many people who have been "investing" recently have been losing, badly, and probably feel scammed to some degree. You can't believe your bad luck.

But, I think stocks are good, generally speaking, and people should be willing to accept some risk with some of their savings. Most people right now are probably saying, "what savings". Actually most people are probably not reading this far because you all subscribed for DevOps spicy takes or whatever. Fair enough. I will be brief.

If you haven't completely lost your shirt, and you are trying to save for your children's college via a brokerage account, maybe you should consider a 529 plan. A 529 plan invests on your behalf in passive strategies that you are already probably familiar with (index ETFs and mutual funds, basically), but in a tax advantaged way. Ala what a 401k might already be doing with your "Retirement" savings.

Unlike a 401k, a 529 plan grows tax free and allows tax free withdraws for "Education" and education related expenses. For most people in the United States reading this, that Education expense will be their kid’s college tuition. If not, or if you just have straight cash, a 529 plan may not be useful for you. That's fine.

But actually even if you don't have to worry about tuition (scholarships, in-state tuition discounts, etc), "education related" is a broad group of expenses that can mean anything from books, to a laptop, to an internet bill, to private k-12 education, etc. So a 529 may still be worth considering with reduced monthly contribution goals.

You see, while money is contributed after tax to a 529 plan (like a Roth IRA), because of the money accrued by tax free growth and compounding, it's going to outperform any similar index investing or college savings you may already via the same investment vehicles in a traditional brokerage account. So the investment advice here is really just me pointing out a relative advantage that 529 plans have over traditional brokerage accounts, if you are investing as a way to pay for your children's college. It isn't really an attempt by me to pound the table on passive index investing.

There are some other details you can learn about in 529 plans, but the idea is that they're administered on a state by state basis, and while you can invest in any single state's 529 plan (yay America), the tax benefits vary by your home state. Some states will even let you treat contributions as a state tax deduction, and there's some special tax treatment to encourage large upfront contributions, which can be a good idea if you have multiple children, as the beneficiary of the 529 plan can be changed without penalty. You may even just be planning to have children in the future, it's possible to open a 529 plan for yourself and change the beneficiary to your child when they are born.

For me, personally, living in a state with no state tax deduction I was eligible for, I chose the Utah 529 plan. The management fee is a few basis points, I think something like 10bps, far less than what nearly any ETF, Robo-Advisor, or management company charges. You can choose a number of vanguard investment options. If you have an issue you can call and there are very nice people who pick up and talk to you. No one is trying to trick you, scam you, or spam you, and I have yet to receive a push notification about my 529 plan's daily winners. It's kind of refreshing actually.

So, you know, maybe that’s useful for you. If not,

“I privately say to you old friend (unto you, really, I'm afraid), please accept from me this unpretentious bouquet of early-blooming parenthesis: (((( )))).” - J.D. Salinger

Cheers,

Eric