This fall will mark the beginning of what will likely be three of the most expensive years of my life. My daughter will start college, joining her brother who started last fall. That kicks off three consecutive years where I expect to have two kids earning their degrees at the same time.
Even with a decent income, I can't cover my household's costs of living and two kids' college educations at the same time, just from a paycheck. With two major, multi-year sets of bills coming due, I need a source of cash to cover them. That $275,000 -- safely held in the form of FDIC-insured Certificates of Deposit that mature around the time each semester's bills are due -- is how I plan to cover those charges.
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Where did that money come from?
For all four of my children, I opened 529-style college savings accounts shortly after their births. I've since contributed to those accounts every year, generally striving to max out my state's tax deduction over the course of a year.
Until the need to spend the money in their accounts became clear, I invested those contributions in stock-based index funds. Market growth since then propelled the accounts for my older two children to 6-figures each. As a result, when first my son, and now my daughter, picked their colleges, the account balances were sufficient to make a significant dent -- and potentially even cover -- their costs.
As awesome as those stock-based mutual funds were for building the account balance, stocks are terrible assets to rely on when you need to spend your money. This is because the market can fall as well as rise.
Bills need to be paid on time and in full, or else the penalties, fees, and finance charges can easily exceed even a solid stock market return. As a result, even though the CDs are paying less than the stock based funds could potentially earn, their higher certainty make them a better place to hold the money to cover those bills.
By keeping the money inside the 529 plans, I was able to convert the money from those stock-based mutual funds into the CDs without paying taxes on the sales. As I expect my upcoming withdrawals from the 529 plans to go toward their qualifying college expenses, those withdrawals should also be tax free.
What comes next?
Tuition, room and board, textbooks, fees, and certain computer costs are generally qualifying expenses for 529 account withdrawals for full-time college students. We have already started incurring some of those costs, even before the CDs have matured. As those costs come in, I've been paying them and saving digital copies of the receipts in a spreadsheet.
When the CDs mature, I'll reimburse myself for those qualifying costs, as well as cover the big charges like tuition and room and board costs that will hit closer to the start of the school year. If there's any money left over from the fall semester CDs after those costs are covered, I'll roll the remaining money forward to a future term.
By tracking those qualifying costs in a spreadsheet and including digital copies of the receipts, I'll have a record for tax time. That should make it straightforward to true-up with the IRS and assure that my qualifying withdrawals remain tax free.
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It took nearly two decades of saving and investing to build enough of a nest egg to have that $275,000 available to cover my two older children's college expenses. As powerful as a 529 college savings plan can be, the more time you give it to work, the better your chances are of it getting large enough to cover a significant part of those upcoming educational costs.
So make today the day you take a look at 529 plans as a potential way to help cover your kids' educations. If you reach the point where your savings are sufficient to pay a huge chunk of the bill, you'll certainly be glad you did.
