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pinkandblue
Our family is complete, maybe
Member since 9/05 32436 total posts
Name:
Stephanie
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529 plans - totally stupid question
So I was explaining to DH that I want to set up a 529 plan for Mikayla....he was asking why not just get bonds and accumulate them over time for her. I was unsure as to how to explain this to him (I do not fully understand it myself)
His thinking is that we MAY lose money with a 529 plan since they invest in mutual funds where as with a bond, you know that you are getting at least face value at maturity....
Can anyone shed some light as to why (if) a 529 plan is better than just buying savings bonds?
TIA
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Posted 8/2/07 9:32 AM  |
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Long Island Weddings
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Bxgell2
Perfection
Member since 5/05 16438 total posts
Name:
Beth
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Re: 529 plans - totally stupid question
It's true - bonds are a safer investment. But, the point of investing for your child's college education is that you CAN be a little more risky, as you have close 18 years to ride out the ups and downs of the market. Presumably, with a 529 that is invested wisely, you'll make a better return on your money, so you can invest less than you would with bonds. Bonds are safe, but a relatively low return.
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| Posted 8/2/07 9:35 AM |
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pinkandblue
Our family is complete, maybe
Member since 9/05 32436 total posts
Name:
Stephanie
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Re: 529 plans - totally stupid question
Posted by Bxgell2
It's true - bonds are a safer investment. But, the point of investing for your child's college education is that you CAN be a little more risky, as you have close 18 years to ride out the ups and downs of the market. Presumably, with a 529 that is invested wisely, you'll make a better return on your money, so you can invest less than you would with bonds. Bonds are safe, but a relatively low return.
see that is what I don't get....lets say you buy a $25 bond....by the time it matrures, it is worth $50....so isn't the "return" like 100% (you pay 25 and you get 50)?
I am SO confused...... 
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| Posted 8/2/07 9:36 AM |
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Bxgell2
Perfection
Member since 5/05 16438 total posts
Name:
Beth
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Re: 529 plans - totally stupid question
True, but in 18 years, that kind of return isn't all that impressive, especially considering inflation. With a good, slightly riskier investment, you should be able to triple your investment.
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| Posted 8/2/07 9:39 AM |
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pinkandblue
Our family is complete, maybe
Member since 9/05 32436 total posts
Name:
Stephanie
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Re: 529 plans - totally stupid question
Posted by Bxgell2
True, but in 18 years, that kind of return isn't all that impressive, especially considering inflation. With a good, slightly riskier investment, you should be able to triple your investment.
gotcha, I will be showing this to dh, thanks
One more question, so if you were to do a 529 plan, would you do aggressive, or moderately aggressive? Thanks for your help Beth 
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| Posted 8/2/07 9:50 AM |
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Ang-Rich
Beyond Compare
Member since 5/05 17988 total posts
Name:
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Re: 529 plans - totally stupid question
Isn't there also a tax benefit to the 529 plan...you can deduct a portion?
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| Posted 8/2/07 9:54 AM |
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Bxgell2
Perfection
Member since 5/05 16438 total posts
Name:
Beth
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Re: 529 plans - totally stupid question
Posted by Ang-Rich
Isn't there also a tax benefit to the 529 plan...you can deduct a portion?
It depends on the State you live in, and your income bracket. In PA, it's deductible for State taxes, but it isn't deductible for federal tax purposes. For us, our income bracket is too high to reap the tax deductible benefit anyway.
To decide whether a 529 is the best option as opposed to your own independent investment, you should really consult with your accountant or financial planner.
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| Posted 8/2/07 9:57 AM |
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Bxgell2
Perfection
Member since 5/05 16438 total posts
Name:
Beth
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Re: 529 plans - totally stupid question
Posted by stephanief
Posted by Bxgell2
True, but in 18 years, that kind of return isn't all that impressive, especially considering inflation. With a good, slightly riskier investment, you should be able to triple your investment.
gotcha, I will be showing this to dh, thanks
One more question, so if you were to do a 529 plan, would you do aggressive, or moderately aggressive? Thanks for your help Beth
The general rule of guidance is the longer amount of time you have, the more risky you can be, because it gives you time to ride the waves of the market. For us, personally, we're starting as aggressive, but will change our investment as we get closer to college-age to reflect a more secure, less risky investment. But, really, that's truly a personal choice and what you feel most comfortable doing.
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| Posted 8/2/07 9:59 AM |
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CookiePuss
Cake from Outer Space!
Member since 5/05 14021 total posts
Name:
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Re: 529 plans - totally stupid question
Posted by stephanief
So I was explaining to DH that I want to set up a 529 plan for Mikayla....he was asking why not just get bonds and accumulate them over time for her. I was unsure as to how to explain this to him (I do not fully understand it myself)
His thinking is that we MAY lose money with a 529 plan since they invest in mutual funds where as with a bond, you know that you are getting at least face value at maturity....
Can anyone shed some light as to why (if) a 529 plan is better than just buying savings bonds?
TIA
Bonds such as corporates come with their own set of risks such as reinvestment risk, inflation risk, market risk, call risk, etc. Savings bonds are a safe investment but you could get a better return in a money market or cd right now. I would not investment dollars being saved for education in 10+ years in a savings bond.
Also, investing in savings bonds only gives you a tax benefit is they are registered correctly and used for higher education.
A 529 plan is a type of investment account that provides the platform to invest dollars in a tax preferred way for college expenses. There are 100's upon 100's of investment choices within the various plans that range from low risk to high risk. Investing in a 529 plan (named after tax code) allows the owner of the account to invest for the beneficiary's higher education costs with tax preferences. Contributions are made with after tax dollars and grow tax deferred at which point they can be withdrawn tax free in specific situations. This means that you never pay taxes on the growth of the investment. That can be a big deal.
As far as what to invest in, most, if not all, 529 plans offer age based investments. So the younger the beneficiary, the more aggressive the portfolio is and it gradually becomes more conservative the closer the beneficiary comes to using the dollars. These portfolios are run by professional money managers and takes the investment decisions off of the investors hands.
Historically, the market has always increased with time and has outperformed bonds, cash, and treasuries. In in the recent events of the stock market, it's up about 20% year over year (12 month trailing). Even with the subprime worries, the extent of the subprime market is 1 billion with is only 100bp or 1% of the S&P 500 so it is not that significant of a risk if all subprime defaulted.
I suggest doing some research on investing and 529 plans before you make a decision.
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| Posted 8/2/07 10:46 AM |
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Dee
LIF Adult
Member since 6/05 932 total posts
Name:
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Re: 529 plans - totally stupid question
I know that we all hope the best for our children - but what if thier decision is not got to college - That money needs to go towards college I think so what happens if they decide not to go to college?
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| Posted 8/2/07 11:08 AM |
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CookiePuss
Cake from Outer Space!
Member since 5/05 14021 total posts
Name:
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Re: 529 plans - totally stupid question
Posted by Dee
I know that we all hope the best for our children - but what if thier decision is not got to college - That money needs to go towards college I think so what happens if they decide not to go to college?
You can still withdrawal the money but the withdrawals don't receive any tax preference so you would pay capital gains tax.
Also, the beneficiary can be changed at anytime as long as it isn't an UGMA/UTMA account.
Message edited 8/2/2007 11:23:26 AM.
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| Posted 8/2/07 11:22 AM |
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pinkandblue
Our family is complete, maybe
Member since 9/05 32436 total posts
Name:
Stephanie
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Re: 529 plans - totally stupid question
Posted by shamrock124
Posted by stephanief
So I was explaining to DH that I want to set up a 529 plan for Mikayla....he was asking why not just get bonds and accumulate them over time for her. I was unsure as to how to explain this to him (I do not fully understand it myself)
His thinking is that we MAY lose money with a 529 plan since they invest in mutual funds where as with a bond, you know that you are getting at least face value at maturity....
Can anyone shed some light as to why (if) a 529 plan is better than just buying savings bonds?
TIA
Bonds such as corporates come with their own set of risks such as reinvestment risk, inflation risk, market risk, call risk, etc. Savings bonds are a safe investment but you could get a better return in a money market or cd right now. I would not investment dollars being saved for education in 10+ years in a savings bond.
Also, investing in savings bonds only gives you a tax benefit is they are registered correctly and used for higher education.
A 529 plan is a type of investment account that provides the platform to invest dollars in a tax preferred way for college expenses. There are 100's upon 100's of investment choices within the various plans that range from low risk to high risk. Investing in a 529 plan (named after tax code) allows the owner of the account to invest for the beneficiary's higher education costs with tax preferences. Contributions are made with after tax dollars and grow tax deferred at which point they can be withdrawn tax free in specific situations. This means that you never pay taxes on the growth of the investment. That can be a big deal.
As far as what to invest in, most, if not all, 529 plans offer age based investments. So the younger the beneficiary, the more aggressive the portfolio is and it gradually becomes more conservative the closer the beneficiary comes to using the dollars. These portfolios are run by professional money managers and takes the investment decisions off of the investors hands.
Historically, the market has always increased with time and has outperformed bonds, cash, and treasuries. In in the recent events of the stock market, it's up about 20% year over year (12 month trailing). Even with the subprime worries, the extent of the subprime market is 1 billion with is only 100bp or 1% of the S&P 500 so it is not that significant of a risk if all subprime defaulted.
I suggest doing some research on investing and 529 plans before you make a decision.
Thanks for all of this info, It is very helpful. I had done some research but it became very confusing when trying to explain the benefit of a 529 plan to my DH
I appreciate your help
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| Posted 8/2/07 11:24 AM |
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pinkandblue
Our family is complete, maybe
Member since 9/05 32436 total posts
Name:
Stephanie
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Re: 529 plans - totally stupid question
Posted by Dee
I know that we all hope the best for our children - but what if thier decision is not got to college - That money needs to go towards college I think so what happens if they decide not to go to college?
I thought of this too...a gentleman that I spoke to said it can be transferred as well (to another child or to use for yourself for higher education)
If you do not use it for higher education, there is a 10% penalty on earnings and state and federal tax on earnings. I hope and pray that DD goes to college (I will be instilling this in her as she grows up, how important college is) 
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| Posted 8/2/07 11:26 AM |
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vegalady
Love my family
Member since 6/06 4546 total posts
Name:
SNV
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Re: 529 plans - totally stupid question
this thread was helpful as I was just readng up on info. to start this for my DS. Thanks ladies!
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| Posted 8/2/07 11:54 AM |
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Dee
LIF Adult
Member since 6/05 932 total posts
Name:
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Re: 529 plans - totally stupid question
Posted by stephanief
I hope and pray that DD goes to college (I will be instilling this in her as she grows up, how important college is)
me too!!!!
I enjoyed this thread because we have been trying to figure out what to do for our DS. He has a bank account right now but we really want to do something with that money!
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| Posted 8/2/07 12:27 PM |
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Tah-wee-ZAH
Kisses
Member since 5/05 15952 total posts
Name:
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Re: 529 plans - totally stupid question
I agree, all of the above is great info. I teach finance/economics and wanted to reply earlier but   were waking from a nap so I'll just say...
"What Beth and Shamrock said!"
It is really best to consult a financial advisor because everyone's financial situation is different.
Ask your friends/family who they use, if they are happy and why. It's a lot like finding a doctor, you need to have one that is expereinced, trustworthy and is in it for your best interests.
When my DH and I consolidated our accounts after marriage, I left my advisor for his. He still manages my Dad's accounts. He's third generation so he has this in his blood. When I first got started in the investment game (at 18 w/ my paper route and Foodtown money... lol. ) he really taught me the ins and outs.
I always say, every woman needs a good OB/GYN, a trustworthy mechanic and an experienced financial advisor
Some of you with 401K's... the company that invests your $$ can put you in touch with a specific advisor in order to diversify your investments.
You don't need a lot to start.
Wealth is not built from winning the lottery,
it's built by saving and investing in small increments over a long period.
Good luck.
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| Posted 8/2/07 12:50 PM |
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DandN
Twins are here!
Member since 3/06 3597 total posts
Name:
Deirdre
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Re: 529 plans - totally stupid question
My DH is a financial advisor - if you have any specific questions, feel free to post them or FM me and he said he'll post answers.
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| Posted 8/2/07 12:53 PM |
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pinkandblue
Our family is complete, maybe
Member since 9/05 32436 total posts
Name:
Stephanie
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Re: 529 plans - totally stupid question
Posted by Tah-wee-ZAH
I agree, all of the above is great info. I teach finance/economics and wanted to reply earlier but were waking from a nap so I'll just say...
"What Beth and Shamrock said!"
It is really best to consult a financial advisor because everyone's financial situation is different.
Ask your friends/family who they use, if they are happy and why. It's a lot like finding a doctor, you need to have one that is expereinced, trustworthy and is in it for your best interests.
When my DH and I consolidated our accounts after marriage, I left my advisor for his. He still manages my Dad's accounts. He's third generation so he has this in his blood. When I first got started in the investment game (at 18 w/ my paper route and Foodtown money... lol. ) he really taught me the ins and outs.
I always say, every woman needs a good OB/GYN, a trustworthy mechanic and an experienced financial advisor
Some of you with 401K's... the company that invests your $$ can put you in touch with a specific advisor in order to diversify your investments.
You don't need a lot to start.
Wealth is not built from winning the lottery,
it's built by saving and investing in small increments over a long period.
Good luck.
I work for a financial services company (in internal audit) and they administer 529 plans (I have a 401k and pension plan with them)....I think it will be easier just to add a 529 plan through them as well
Thanks for all the great info ladies
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| Posted 8/2/07 12:59 PM |
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