No matter how “comfortable” I become financially, I can still always appreciate a good deal. And believe me, if you plan to finance your child’s education, there is no better deal than a 529. By Chris Malgieri, MD
In a nutshell: A 529 plan is an investment fund that you own, and your child is the beneficiary. As these funds grow with the stock market, the proceeds can be realized tax free if they are used for qualifying education expenses such as tuition, housing, books, and computers.
Up to $18,000 can be deposited by a parent or gift-giver annually. A two-parent household can give $36,000 each year. Alternatively, contributors can give a lump five-year sum if they wish. Each state has their own sponsored 529, and using your home state often comes with certain benefits. In my home state of Rhode Island, for example, a portion of my deposit can be excluded from state income tax. (You are not required to use your home state’s fund, however. Though I live in Rhode Island, my funds are deposited in the Nevada 529 managed by Vanguard.)
Given the stock market’s average return of 9.75% over the past 20 years, you can appreciate how much a fund like this might, well, appreciate. Yet like most things we learn as doctors, the advantages of a 529 are best demonstrated in a case-based fashion. Consider the stories of Winston, who has well-to-do parents and family money; Brianna who has parents with high income but low wealth, and Elmer, who has no money at all. All three have been accepted to their “reach” school, the Dream Institute of Technology (D.I.T.), at a cost of approximately $300,000 over four years.
Winston
When Winston was born 18 years ago, both his mother and father celebrated by depositing one, single sum of $28,000 each (56,000 total). Then they forgot the password to his account and moved on with their wealthy lives. Mom and Dad bought Winston cars, vacations, and fancy clothes, but did not dedicate another dime to his education for the rest of his childhood. When it came time for Winston to attend D.I.T., that money had ballooned to over $300,000 (9.75% annual return). While normal investments would at least tax the account holder at a capital gains rate, our tax code decrees that the quarter million dollar proceeds on this fund be realized TAX FREE so long as it’s used for young Winston’s education. Winston’s parents visit him at D.I.T. in a Ferrari they purchased with the savings.
Winston’s cost of college: $56,000 ($86,700 in today’s dollars)
Brianna
Brianna worked hard to gain admission to the Dream Institute of Technology. Her parents are both anesthesiologists and prioritized education. They had Brianna when they were 1st-year medical students. They still have student loans of their own, and only began generating an attending salary when Brianna was 10 years old. At that time, they began to spend considerably on luxuries. She grew up in a nice home in a great school district. When it came time to pay for college, however, Brianna learned that her parents’ lavish lifestyle often exceeded their means. She was distraught to learn that there wasn’t much saved for her to attend college. Luckily, both her parents can earn extra money by working locum’s tenens during vacations and weekends. Working together and sacrificing most holidays and weekends over the course of four years, the couple earns an additional $500,000! Unlike Winston, unfortunately, Brianna’s parents must pay taxes on this money. This leaves just enough to cover her education at D.I.T.
Brianna’s cost of college: $300,000 (required $500,000 income before taxes)
Elmer
Elmer never had much luck. He’s been raised by a pair of well-meaning, but uneducated good Samaritans that found him abandoned as a baby at a country music festival. Despite limited financial resources, Elmer excelled at school and earned admission to D.I.T. His adoptive parents were unable to contribute to his education but connected him with the bank they use to finance their graphic t-shirt business. Between his federal student loan, and his private loan, he has borrowed $300,000 at an average rate of 8% to be paid over twenty years. Elmer does well at D.I.T., and is interested in graduate school, but overwhelmed by his ballooning debt. Instead of continuing his education, he takes an entry level job and starts dutifully paying $2,700 monthly for the next twenty years.
Elmer’s cost of college: $647,802 over 20 years
Conclusion
Even if higher education costs level out over time, as some have suggested, the benefits of a 529 won’t go unrealized. Funds can be re-assigned to other beneficiaries if needed and can be withdrawn penalty-free if your child receives a scholarship.
As young attendings, we have a little bit of extra cash that we didn’t have in the past. There are countless ways to spend or invest this windfall, but as a parent, I cannot think of a better use than 529s.
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.
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