Q: Is it worth setting up a 529 account for college? I’ve heard the investment choices aren’t all that great.
A: I think the value of 529 accounts is not so much the investment options — which here in Virginia are fine, in my opinion — as it is the tax shelter. If you are a Virginia resident contributing to a Virginia 529 account and are younger than 70, you can deduct up to $4,000 of your contributions per account per year on your state income filing.
If you pay state taxes at a rate of 5.75%, $4,000 deducted reduces your tax payment by $230. If you contribute more in a year, you can carry the excess forward to future tax years. Account owners older than 70 can deduct their full contributions.
While you hold the 529 accounts, before withdrawals, you are not taxed on the earnings in the account, much like retirement accounts. Finally, as long as your withdrawals are used for eligible college expenses, you do not owe taxes on such withdrawals. All these avoided tax payments could add up considerably.
Q: I just inherited a good bit of money. Should I pay off my mortgage or save it all for retirement?
A: I think the final answer relates to your comfort with owing money.
If you are comfortable owing money, and are not having difficulties paying the monthly mortgage payment, then I like the idea of investing the money for your retirement. Depending on how much you inherited and how long until you retire, the power of compounding over many years could make this a fantastic boost to your retirement savings.
However, if owing money bugs you or keeps you up at night, I think you should just pay it off. Ignore the arguments about possibly having more money in retirement if you invest the inheritance.
If paying off your mortgage will make you sleep better, then go for it. Investing at the expense of your health sounds like a bad choice to me. Then, you can make it a discipline each month to invest the principal and interest amount that you no longer owe. Over the years, this added investment habit could add up quite nicely, too.
Jorgen Vik is a certified financial planner and partner with SKV Group LLC.