New York State 529 College Savings Plan for Our Son

Last month, I created a plan to save $5,000 a year for my son’s college savings. With a 10% CAGR, a contribution of $5,000 per year should grow to $250,000 in 17 years. At that time, I didn’t know what was the best investment vehicle for this plan. After a lot of research, we finally took the plunge last night and opened a New York’s 529 College Savings Plan (Direct Plan). Our son is not due until this December, so we started the plan under my wife’s name (owner) with her as the beneficiary and myself as the successor.

Piggy bank
Photo from morgueFile

Can we start saving even before our son is born?

The answer is yes! I first learn about this trick from Trent’s “A Prenatal College Fund?” We can start 529 Plan at any time and later change the beneficiary as long as he or she is a member of the family. This will ensure that we can enjoy the New York State tax deduction this year without worrying about our son’s exact birth date. This made me wish I had started this a few years ago.

Why did we choose the New York’s 529 College Savings Plan?

I have been looking at various options, such as:

  • 529 college savings plan,
  • 529 guaranteed prepaid tuition plan,
  • Coverdell Education Savings Account (formerly known as an Education IRA),
  • Roth IRA,
  • Traditional IRA,
  • U.S. Government Series EE Savings Bond,
  • Etc.

But none are as appealing as 529 college savings plan. Although, New York’s was not the best 529 plan, we felt that it was good enough; and the advantages for local residents are just icing on the cake. Here are some of the things that we liked about 529 plans in general, and New York’s in particular:

  • We can start with as little as $25 — we started with $100
  • We can automatically contribute via electronic funds transfer (ETFs) — we will be contributing $425 per month
  • We can claim New York state tax deduction up to $10,000 per year
  • Our money grows tax deferred, and withdrawals are exempt from federal income tax and New York state income tax, as long as they’re used for qualified higher education expenses
  • The total annual fee is relatively low at 0.55%; investment expenses are included
  • New York’s has a good selection of investment options from Vanguard — although I wish the selection includes some international investment and REIT in the mix
  • We can use the money outside of New York

You can find more information about New York’s 529 Plan on their site.

About the Author

By , on Oct 12, 2007
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

Leave Your Comment (10 Comments)

  1. greg says:

    What portfolio did you go with the Mid cap index plan or the msci us portfolio. I am undecided. I do like the mid cap index portfolio. Just checking my options.

    • Pinyo says:

      @greg – My allocation may not be right for you, but here they are

      30% – aggressive growth
      30% – developed markets index
      25% – small-cap
      15% – income

  2. JPF_NYC says:

    Thanks for the article, extremely helpful, I have a “financial advisor” in another state who is pushing me into another 529 – after a little research found out returns are average, higher ratios than NY-529, plus the wonderful feature of some front loads. Although I did not need much convincing, your article will allow me to sleep at night and not worry about doing the wrong thing. Cheers. JPF

  3. Jonathan says:

    thanks for the links to money guy have just being checking these out, I’ve not come across this before.

  4. FMF says:

    Thanks for posting my piece! ;-)

  5. Pinyo says:

    @Eric – neither did I until recently; however, it’s not a big deal because I was focused on our retirement savings which is more important than college savings anyway. If you don’t use it you can give it to someone considered a member of the family.

    You can take the money out, but there is a 10% penalty, and some states (e.g., NY) that give you tax deduction will also ask for that money back as well.

    @christianPF – If you haven’t maxed out your retirement options, then this is a good next step (assuming one of you will be going back to school, or are planning to have a child).

  6. Eric says:

    I had no idea you could start saving before you had kids. I hadn’t even really thought about it. We don’t have kids yet, but it’s pretty likely we will in the future. If you start a 529 before you have kids, and for whatever reason you don’t have kids (or your kids don’t go to college or whatever), how does that work? Can you take the money back (with or without penalties?)

  7. christianPF says:

    This is cool. I didn’t know about getting the tax deductions before the child was born, so this is something for my wife and I to talk about now.

  8. Pinyo says:

    Raymond – Good point! Since we are planning to save only enough for public school (~$250,000), 529 will work just fine. If we wanted to save for private school (~$400,000), then we may have to also use Coverdell ESA as well to make sure we reach our savings goal.

  9. Raymond says:

    Pinyo
    I don’t have kids but after much comparison I think unless you want complete freedom in your investment options or want to grow funds for possible private school usage, you’re correct, 529 plans are much better than Education IRA’s.
    -Raymond

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