I’m personally invested in Malia Obama’s college search because, rumor has it, she’s looking at my alma mater — NYU’s Tisch School of the Arts. I think it’d be cool to say, "Oh yeah, the ex-President’s daughter? She goes to the same school I went to." I know no one around me will care, but since I spend most of my day thinking about insurance, I need something else to talk about at cocktail parties.
How are Barack and Michelle going to pay for Malia to go to Tisch? Barack could probably use some of that sweet, sweet taxpayer money he gets as a paycheck ($400,000 annually) without it seriously cutting into his lifestyle — most of his income actually comes from book royalties, and as long as he’s the President, most of his family’s expenses are paid for.
But way back before Barack even knew he was going to be President, both of the Obamas put money into something called a 529 college savings account. It was a smart move that will hopefully cover at least a year of whatever expensive film school (pick Tisch, pick Tisch!) that Malia chooses to attend.
What's a 529 college savings plan?
Only the best way to save for college. They’re a super simple concept: you put money into a 529 plan (typically some sort of investment portfolio), and it grows completely tax free.
What's the catch?
As long as you use the money from the 529 on qualified educational expenses (you know, like, college tuitions), all of your gains are completely tax free. It can get a little complicated once you start withdrawing money, which we go into in more detail on in our guide to 529 plans. But overall, depending on how much you put into the plan, you can save thousands of dollars that otherwise would go to Uncle Sam.
How much money can I put aside every year?
As of 2015, an individual can put aside $14,000 every year into a 529 college savings plan without getting hit by the gift tax. If you’re married, double that — couples can put aside $28,000 each year. If you want to shed a bunch of money from your estate all at once without getting taxed, you can dump $70,000 ($140,000 for couples) into a 529 as long as you don’t contribute any more money in the next five years. ($14,000 times five years is $70,000 — basically, you’re just pre-paying the next five years and getting tax benefits now.)
This is actually what the Obamas did. Way back in 2007, the year before the Presidential election, Barack and Michelle contributed $60,000 each to each of their two children — $120,000 each and $240,000 total. This helped them avoid the gift tax (by just $20,000 per child!) and get a ton of money out of their estate.
Is it really the best way to save for college?
In our opinion, yes — but there are drawbacks and plenty of other options. We go over them in more detail in our big guide to 529 college savings plans, which I highly suggest you read.
Wait a minute, didn't Obama try to get rid of 529 college savings plans?
Yeah, kind of weird, right!? In 2015, Obama announced that he wanted to start taxing the gains on 529 college savings plans. America collectively turned its head and said, "Say whaaaat?" and Obama started walking back that plan almost immediately.
Obama’s argument was that mostly affluent families (like his) were using the plans, and affluent families could afford to pay those taxes and should pay those taxes. Obama was wrong, however — 529 college savings plans are popular among a wide variety of Americans, not just the super rich.
Also, part of me likes to think that after he announced his plan, Michelle took him into a side room and was like, "Uh, you know we have two of those, right?"
Where can I learn more about 529 college savings plans?
If you ignored my earlier plea to read our big guide to 529 college savings plans, you should really pay attention to me right now when I tell you to go read our big guide to 529 college savings plans. We also have a great guide for grandparents who want to help out by contributing to a 529 plan (yes, grandparents can help save, too!) and a list of little-known 529 plan tricks.
Image: Pete Souza