Pop quiz:
If $2600 compounds at 6% for 50+ years what is it worth today
$54,000 or 1 year at Harvard
Next question:
If $54K compounds at 6% for another 50 years what is it worth then?
$995,000 or 1 year at Harvard in 2074 (Personally I’d like to think this won’t happen… but they probably said the same thing in 1971)
Why is this important?
If you got into Harvard you should know how much it costs.
Also, if you want to save for college then you need to know what it will likely cost in the future.
529 Plans are one of the more common ways families save for their children’s education, and they’re great for two reasons.
If you invested $4000 per year into a 529 Plan for the last 50 years, it would be worth $2,300,000 dollars today (enough to pay for 42 years at Harvard).*
The $4K you invested each year was state income tax deductible (in most states), and the $2.3M balance is tax free (as long as you use it for school)
*assuming the $4000 contributions are invested into a S&P 500 index fund inside of the 529*
Sounds great, but here’s the trade off.
If you don’t use the funds in your 529 Plan for school, you will face a 10% penalty + income tax.
So what’s the work around?
You can change the beneficiary of your 529 to a family member without tax or penalty (hopefully they want to go to school).
You can earn a scholarship and take penalty free withdrawals equivalent to your scholarship amount (although you’ll still pay taxes).
E.g. I get a full ride into Harvard and can now take $54,000 out of my 529 without penalty.
You can convert $35,000 of your plan’s account balance to a Roth IRA which will never get taxed.
And you can always suck it up and pay Uncle Sam.
Would you fare better investing the $4k into index funds then using it for whatever you want?