Broaching the topic of college savings and investments can be daunting when your child is an infant. It requires you to prepare for the future far in advance. My daughter will graduate high school in 2037 and her college class is the Class of 2041. That seems so far away! This article is about why we chose the New Mexico 529 plan for our daughter’s college savings account.
A 529 plan is a type of investment vehicle that offers tax-free growth for future educational expenses for a specified beneficiary. Every state in the U.S. sponsors at least one type of college savings plan. New Mexico is no exception.
When I started my research, I didn’t know that I had the option to choose other state plans. For example, the New York State 529 plan is very popular. Although you can choose an out of state plan, you may not receive the state tax deductions if you don’t reside in that state. That’s one of the main reasons we chose to stay with the New Mexico 529 plan.
Why is education important to you?
It’s important to answer this question first because the 529 plan pays for qualified expenses related to education only. If you don’t think your child will attend college, then maybe a different investment vehicle is more appropriate for your family. And that decision is completely fine.
I have met other parents who decided not to open education investment accounts. Some opt to open regular savings accounts instead. Some have plans to pay for their child’s first car, down payment for a first house, or even a wedding. Every family will have different financial goals. The important thing is to make a decision on how you plan to help your children in the future.
With that said, I am grateful for my education and I feel extremely lucky to be a college and law school graduate. For most of history, Native American women didn’t have the opportunity to obtain a higher education. My mom and her sisters are the first generation in my family to go to college in the 1980’s. That’s a big deal, considering the first higher education institution came about in the United States in 16361.
So, I want my daughter to have the option to attend college. Everyone knows that college expenses are super expensive and on the rise. For us, having a plan in place brings peace of mind and a sense of financial security.
What type of educational account should I open?
In this process, I researched the 529 plan and the Coverdell ESA. Beyond these two plans, there are other savings options available. Ultimately, I wanted to keep it simple and not be bogged down by the decision making process.
These are the main reasons we chose the New Mexico 529 plan over the Coverdell ESA.
- Annual contributions to the 529 plan are 100% deductible from our state taxable income. New Mexico is only one of four states that offers a 100% deduction.
- Unlike the Coverdell ESA, there are no yearly contribution limits for the 529 plan. Total contributions to a Coverdell account cannot exceed $2,000 per year.
- State sponsored 529 plans provide managed portfolios. Since we are not savvy investors, the idea of simply choosing a portfolio and contributing to it is appealing to me. On the other hand, Coverdell ESAs offer the freedom and flexibility to manage your own investments, which could mean lower investment costs. This may appeal to more seasoned investors.
- Minimum contribution for the New Mexico 529 plan is $1.00. Come on, almost anyone can do that, right?
When should I open the New Mexico 529 plan?
It is never too early or late to open an educational savings account for your child. If you open the account when your child is still an infant or a toddler, you have time and the magical component of compounding interest on your side.
I can understand why people delay opening these types of accounts. Investing is a foreign language for a lot of people. Trust me, it was for me. How do you trust your money in the stock market when you don’t know a thing about it? Or when you hear negative things in the media about Wall Street?
It can be difficult and uncomfortable to overcome those fears. But it is possible by reading and learning about money and investing in general.
My daughter received her first monetary gift when she was around 5 weeks old. It was $20. At the time, I didn’t know what to do with it. I could’ve bought diapers and wipes, but we already had that stuff. Instead, I used that $20 to open her 529 account. That’s it, that’s how we got started.
How should I contribute to the New Mexico 529 plan?
The New Mexico 529 plan offers many ways to contribute to the account, including one-time contributions, automatic investment, or payroll contributions.
After the initial $20 investment into my daughter’s account, my husband and I had to come up with a plan to invest. This involved estimating the approximate amount we wanted to save overall and how much we needed to invest on a monthly basis to achieve that goal. To do this, you can use online investment calculators.
We use the automatic investment option from the plan’s website. We are able to choose frequency and investment amount. I chose my daughter’s birth date of the 25th for the monthly deduction, which comes right out of our checking account every month.
Whenever my daughter receives monetary gifts from friends or family members, whether it be for birthdays or holidays, those gifts go straight to her account as one-time contributions.
When I mentioned the 529 account to my mom, she immediately wanted to contribute on a regular basis. She decided to do this through payroll deduction, so I provided her with the necessary account information to get that started.
No matter how you contribute, just remember that consistency is key in investing.
- Further reading: How to combine finances after marriage when you don’t agree
What are the New Mexico 529 plan fees?
Fees can be found in the Plan Description and Participation Agreement on the plan’s website. This can be confusing because the document is literally 86 pages long. In any document this long, there should be a Table of Contents. Under the Table of Contents, I saw the “Fees” section and went directly to it.
The New Mexico 529 plan charges a yearly account maintenance fee of $20. This may seem hefty but our state tax income savings for contributions to the plan more than covers this cost. For example, the highest income tax bracket in New Mexico is 4.9%. If you contribute $1,000 for the year, your tax savings are $49.
The other investing fee is the “Program Fee,” or the expense ratio. Each portfolio will have a different expense ratio. This is the expense for managing the particular fund.
We invest into the 2036-2037 portfolio (year of high school graduation), which has an expense ratio of 0.14%. This means that for every $10,000 invested into the fund, the yearly cost to manage the account is approximately $14. That’s less than the yearly account maintenance fee.
Let’s say your investment goal is to reach $80,000 by the time your child graduates high school. With an expense ratio of 0.14%, you can expect your annual Program Fee to be approximately $112.
What if my child doesn’t attend college or gets a full scholarship?
I know there’s a possibility that my daughter might not want to attend college or vocational school. There’s also the chance that she receives a full scholarship to attend, which would be great.
There’s no way to accurately predict the future. What if we have another child? What then? Will that child want to go to college? What if neither children go to college? There are so many ‘what ifs’ to consider, it can get exhausting to think about.
Don’t let thinking about these possibilities be all-consuming and prevent you from getting started. It’s easy to complicate matters in this world. If you even have an inkling that your child might attend college, then I would just go for it.
The worst case scenario is that you withdraw the money for expenses not related to education. In that case, you would pay normal income taxes plus a 10% penalty fee on the earnings only.
Final thoughts
As someone who attended four years of college and three years of graduate school, I know the costs are literally endless. I worked part-time jobs throughout my higher education and still graduated with student loans. So, in general, I’m not too worried that we won’t be able to use these funds.
As the cost of attending college continues to increase, we will continue to monitor our plan and make adjustments. When our daughter is at an age where she has a sense of her future and starts making decision about what she wants to do, she can become an active participant in the planning as well.
Citations
- “History of Higher Education in the U.S.” https://cleary.edu/international/history-of-he/.