I imagine that this topic has been broached before, so I apologize if it has been covered in detail.
I am interested in saving for my childrens college. I am an active investor who likes to invest in stocks. I have been researching 529 plans and am wondering if they are a good idea for my situation.
Pros:
Tax free.
Cons:
Pretty poor performance.
Fees.
I haven't looked at a lot of them. Most of the available data says to expect 5% - 6% annual growth. When you factor in the fees, you are probably looking at making 4% - 5% per year. Please correct me if I am wrong on this.
Investing in the stock market, I generally get 10% - 20% annual gains. No fees. As my kids are 4 and 6, most of the money made would be taxed as long term capital gains (currently 15%, may increase to 20%). Consider this example:
529 plan:
Invest 5000/year for 12 years. Total investment = 60,000
Make 5%/year
Balance after 12 years = 83,564.91
Stock market:
Invest 5000/year for 12 years. Total investment = 60,000
Make 10%/year
Balance after 12 years = 117,613.56
Profit = 117,613.56 - 60,000 = 57,613.56
Taxes = 57,613.56 * 0.2 = 11,522.712
Amount for college = balance - taxes = 117,613.56 - 11,522.712 = 106,090.848
That means for the same investment, I have 83,564.91 from the 529 plan and 106,090.848 from stock trading. I was conservative with the stock market example (10% gains) and liberal with the 529 plan (5% gains). At a 15% stock market gain, the total available is about 145,000. If the capital gains tax stays at 15%, it's just more money.
I would have to make 6% in the stock market to end up with the same amount as making 5% in the 529.
Please tell me if I am missing something here. I really want to understand this and get it right. I look forward to reading your responses.
Thanks,
Kevin