An Engineer decides to set aside money in an IRS-Approved tax deductible 529 pla

Question

An Engineer decides to set aside money in an IRS-Approved tax deductible 529 plan for his newborns college education. He estimates that their child will need $64,000 on her 18th , 19 , 20th, and 21st birthdays. If he plans to make uniform deposits starting 3 years from now and continue through year 17, what should be the size of each deposit, if the account wars interest at a rate of 7% per year? An Engineer decides to set aside money in an IRS-Approved tax deductible 529 plan for his newborns college education. He estimates that their child will need $64,000 on her 18th , 19 , 20th, and 21st birthdays. If he plans to make uniform deposits starting 3 years from now and continue through year 17, what should be the size of each deposit, if the account wars interest at a rate of 7% per year?

Explanation / Answer

Find the present value of the amount needed at the beginning of year 18.

P = 64000(P/A, 7%, 4)

= 64000*3.3872113

= 216781.52

Now to accumulate this amount at year 18, we deposit annual amount A from 3rd year to 17th year

216781.52 = A((P/A, 7%, 17) - (P/A, 7%, 3)

A = 216781.52/(9.763223-1.8080182)

= $27250.27

Hence the size of each deposit is $27250.27

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