Editor: Crass Cash
I had a kid a little over a month ago. Let's clarify that, my wife did all the work and I held her hand. I've been writing about 529 plans for years, but now was my shot at actually getting to open one! I thought this was going to be a daunting task, but it turned out to only take 15 minutes. Here's how and what I did...
Let me start off by saying that I'm in no way compensated by Charles Schwab the investment firm or any of their affiliates. I've been using their platform for many years and have come to love their customer service, low fees, investment platform, and investment products. So far, this has proven to be another one of those situations.
I'm not telling you what to do in any manner. For this post I'm simply going to run through what I did to show you how easy it was.
Start Here:
http://www.schwab.com/public/schwab/investing/accounts_products/accounts/college_savings/529_plan
If that link doesn't work, just google: Charles Schwab 529. This should take you directly where you need to go to setup one.
Step 1
Before you're able to proceed you need to read the GUIDE AND PARTICIPATION AGREEMENT. This is highly important information that everybody should know concerning their 529 plan. Yes I know this will take 15 mins just to read, but I already knew it, so I skimmed through it.
What type of account are you setting up? I setup a joint account with my wife and I. That way if one of us dies it goes directly to the other for control rather than having to go through probate. If you're not married, you may want to do an individual account. After that, easy stuff, just fill out your name, address, DOB, and SSN. If you do a joint account, you'll have to add your spouse's info as well.
Step 2
For this step, it's very simple as well. Just add in the information for the child who will be the beneficiary. Basic info, name, address, DOB, and SSN.
Step 3
Now you need to choose your investment options. For most people this is going to be the hardest part. Here's what I did and why.
Under the Static Portfolio Options, I chose 100% for the AGGRESSIVE PORTFOLIO (INDEX). I did this for 2 reasons. FEES and RETURN! Indexing has proven to give you the highest RETURN with the lowest FEES. That's a win-win! If it doesn't say "index" in the title than it's a managed fund and it's going to charge higher fees. The difference can be staggering. The highest managed fees will cost you over 12% over a decade, while the index fees are a little over a flat 3%. It may not seem like much, but over 2 decades and ultimately a few hundred thousand, it's HUGE!
Above it you'll also see age based options. This is for the people who don't want to do anything. This is similar to the age based retirement options where you pick the fund for the year that you plan to retire. It will then automatically adjust the stock/bond/cash ratio for you each year. This isn't free though, they charge you. I'm cheap so I'll do that myself.
In the guidelines that I skimmed through they actually give you recommendations on when to change the portfolio options based upon how old junior is. So when he's 10 I'll move 100% to Moderately Aggressive. When he's 13 I'll move it to Moderate. When he's 16 I'll move it to Moderately Conservative. When he's 18 I'll move it to Short-Term. This is done because of when the money will be needed. Which is actually what you need to ask yourself prior to ANY Investment.
Step 4
Funding. How do you plan on funding this account? I simply wrote a check and threw it in with the mail. I believe they require at least $25 to start the account so the check or any other funding means will have to be at least $25. If you're writing a check make sure you fill out the "pay to" part correctly. You DO NOT make it out to your child.
Step 5
Mail delivery options. Simple. How do you want to receive your info? Personally I like for all the basic notifications to be via email with only the tax docs at the end of the year to be printed and mailed to me. That way it's already printed out and I can submit them with my taxes. Easy.
Next, create username and password just like you do with any account.
Step 6
Submit/Enroll and you're done. Congratulations you just greatly improved the life of your child!
Now for the details...
Ok great you've got your account all setup and initially funded. Now what? Well there's basically only two more things you need to do until your little bundle of joy goes to college. Continue funding it and change the portfolio option every few years after the age of 10. That's it!
Portfolio options: I already outlined those above and will have to change it in 10 years.
Funding: How much will your child need to go to college? Great question! It will be different for every person. Here's how I figured mine...
There's a really good chance that he's to go to a public university in Florida. Thank God they're the cheapest in the country (you get what you pay for)! The current yearly tuition rate for the big three is around $6,500 a year. If they continue to go up by 6% for the next 18 years that's run us around $18k a year just in fees and tuition. That puts us at $72k for tuition. Then you have books, rent, and food. You're easily looking at over $120k at this point. So with that said, what do we put away for the little shitting monster now so that there's enough in 18 years? With an initial deposit of $2k, a 6% yearly return, and $3,500 deposited at the beginning of each year over the next 18 years, he should be good for the $120k figure. To be on the safe side let's bump it up to $5k and make sure he's got almost $170,000 in 18 years. Let's also hope he either gets some academic scholarships or he learns how to dunk...not likely!
In Conclusion
So look at what just happened here. It took you 15 mins to setup this tax free college fund. It'll probably take another 15 mins each year after s/he turns 10 and you can even setup an automatic draft from your checking into this account based upon how much you want saved.
As a result of this few hours of work you will give your check one of the greatest boosts in life that anybody in any other country could imagine. Graduating with a college degree in the USA with no debt almost guarantees a successful child. And it only took you 2 hours...
I'm not telling you what to do in any manner. For this post I'm simply going to run through what I did to show you how easy it was.
Start Here:
http://www.schwab.com/public/schwab/investing/accounts_products/accounts/college_savings/529_plan
If that link doesn't work, just google: Charles Schwab 529. This should take you directly where you need to go to setup one.
Step 1
Before you're able to proceed you need to read the GUIDE AND PARTICIPATION AGREEMENT. This is highly important information that everybody should know concerning their 529 plan. Yes I know this will take 15 mins just to read, but I already knew it, so I skimmed through it.
What type of account are you setting up? I setup a joint account with my wife and I. That way if one of us dies it goes directly to the other for control rather than having to go through probate. If you're not married, you may want to do an individual account. After that, easy stuff, just fill out your name, address, DOB, and SSN. If you do a joint account, you'll have to add your spouse's info as well.
Step 2
For this step, it's very simple as well. Just add in the information for the child who will be the beneficiary. Basic info, name, address, DOB, and SSN.
Step 3
Now you need to choose your investment options. For most people this is going to be the hardest part. Here's what I did and why.
Under the Static Portfolio Options, I chose 100% for the AGGRESSIVE PORTFOLIO (INDEX). I did this for 2 reasons. FEES and RETURN! Indexing has proven to give you the highest RETURN with the lowest FEES. That's a win-win! If it doesn't say "index" in the title than it's a managed fund and it's going to charge higher fees. The difference can be staggering. The highest managed fees will cost you over 12% over a decade, while the index fees are a little over a flat 3%. It may not seem like much, but over 2 decades and ultimately a few hundred thousand, it's HUGE!
Above it you'll also see age based options. This is for the people who don't want to do anything. This is similar to the age based retirement options where you pick the fund for the year that you plan to retire. It will then automatically adjust the stock/bond/cash ratio for you each year. This isn't free though, they charge you. I'm cheap so I'll do that myself.
In the guidelines that I skimmed through they actually give you recommendations on when to change the portfolio options based upon how old junior is. So when he's 10 I'll move 100% to Moderately Aggressive. When he's 13 I'll move it to Moderate. When he's 16 I'll move it to Moderately Conservative. When he's 18 I'll move it to Short-Term. This is done because of when the money will be needed. Which is actually what you need to ask yourself prior to ANY Investment.
Step 4
Funding. How do you plan on funding this account? I simply wrote a check and threw it in with the mail. I believe they require at least $25 to start the account so the check or any other funding means will have to be at least $25. If you're writing a check make sure you fill out the "pay to" part correctly. You DO NOT make it out to your child.
Step 5
Mail delivery options. Simple. How do you want to receive your info? Personally I like for all the basic notifications to be via email with only the tax docs at the end of the year to be printed and mailed to me. That way it's already printed out and I can submit them with my taxes. Easy.
Next, create username and password just like you do with any account.
Step 6
Submit/Enroll and you're done. Congratulations you just greatly improved the life of your child!
Now for the details...
Ok great you've got your account all setup and initially funded. Now what? Well there's basically only two more things you need to do until your little bundle of joy goes to college. Continue funding it and change the portfolio option every few years after the age of 10. That's it!
Portfolio options: I already outlined those above and will have to change it in 10 years.
Funding: How much will your child need to go to college? Great question! It will be different for every person. Here's how I figured mine...
There's a really good chance that he's to go to a public university in Florida. Thank God they're the cheapest in the country (you get what you pay for)! The current yearly tuition rate for the big three is around $6,500 a year. If they continue to go up by 6% for the next 18 years that's run us around $18k a year just in fees and tuition. That puts us at $72k for tuition. Then you have books, rent, and food. You're easily looking at over $120k at this point. So with that said, what do we put away for the little shitting monster now so that there's enough in 18 years? With an initial deposit of $2k, a 6% yearly return, and $3,500 deposited at the beginning of each year over the next 18 years, he should be good for the $120k figure. To be on the safe side let's bump it up to $5k and make sure he's got almost $170,000 in 18 years. Let's also hope he either gets some academic scholarships or he learns how to dunk...not likely!
In Conclusion
So look at what just happened here. It took you 15 mins to setup this tax free college fund. It'll probably take another 15 mins each year after s/he turns 10 and you can even setup an automatic draft from your checking into this account based upon how much you want saved.
As a result of this few hours of work you will give your check one of the greatest boosts in life that anybody in any other country could imagine. Graduating with a college degree in the USA with no debt almost guarantees a successful child. And it only took you 2 hours...
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