Author Topic: 529 contributions  (Read 1299 times)

stephen902

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529 contributions
« on: April 01, 2018, 09:00:38 AM »
I'm currently putting in 10k at birth and 5k per year in my kids 529. I'm only at age 4, but I'm second guessing the contribution amounts. I'll still hit FI in 2-3 years regardless of what I do. I appreciate everyone's thoughts.

reeshau

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Re: 529 contributions
« Reply #1 on: April 01, 2018, 12:53:49 PM »
How long are you looking to make these contributions?  And, in which way are you second guessing them?  Do you think they are too high, or too low?

And, when you say you will be FI in 2-3 years, is that assuming any level of ongoing contributions, or leftover amount you will need to pay when your child hits college age?

stephen902

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Re: 529 contributions
« Reply #2 on: April 01, 2018, 01:02:26 PM »
The plan was to make these contributions until they hit 18 years old. I feel like I might be contributing too much. FI is including an estimated 5k/child until 18.

mavendrill

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Re: 529 contributions
« Reply #3 on: April 01, 2018, 02:58:17 PM »
It depends on what your goals from the 529 plan is.  If you want them to be able to afford any private 4 year college and afford it without debt: 40k / yr tuition, 15k /yr living and books.  That's 210k total.  I generally don't believe you should count on 529s growth outpacing cost inflation at universities.  So you would need to more than double yearly contribution to meet the private universities no debt goal.

Public schools tuition averages 11k. So a total cost of 104k, or approximately what you are saving.

However, the room/board/books/insurance variable is huge.  Kids can easily save much of the cost of that 15k.  Normal college students waste absurd amounts of money, and there is no rule your kid needs to do so, which would cut down on costs.

  It also changes a lot based on where you live.

reeshau

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Re: 529 contributions
« Reply #4 on: April 02, 2018, 07:05:03 AM »
As mavendrill said, the costs of college are highly variable and, unlike FI planning, they are concentrated in a few areas, none of which you control.  So whether or not you are saving too much depends on which scenario you are most comfortable with:

1)  Not saving anything; the kid will have to borrow / work for anything they want to do
2) Saving enough to be a big help / pay for most of it.  The kid will need to borrow / work / get scholarships for the difference
3) Paying full freight for college.  You might save too much, which will leave you wondering what to do with it.  But your kid will start their working life debt-free.

All I can offer is my strategy, which is somewhat of a blend of #2 and #3.  I am saving $10k per year (my state's maximum tax deduction) for my son for years 0-4.  That $50k will have 14 years to grow, so I expect when he enters school I will have $100-150k.  I expect this will make a good dent in any education he wants.  For the difference, I expect funding will come from one of several sources:  his work / savings, my work / savings, his scholarships, or his borrowing.  What option we go with will depend on his state of mind and life goals.  If he's a bit of a slacker, then I think it would be appropriate for him to have "skin in the game" on his costs, to keep him mindful of just how expensive it is, and not to waste the opportunity.  If he turns out to be profoundly gifted with a desired interest in a field that will be both well-paying and likely beneficial to humankind (i.e. technology, medicine) then I will expect some scholarships and would deem it worthwhile to keep him focused on his studies rather than be distracted by some low-paying campus job.  (although a research assistant position would be good)  If he is just as gifted but wants to pursue a field that does not pay well, then we will have to see:  I will want to support his self-actualization, but we will not want to set him up for a lifetime of financial difficulty.

I see the middle-of-the-road approach as giving me flexibility to answer any of these possibilities, without committing so much to 529 that I expect to have a big surplus at the end with a penalty withdrawal or having to get involved in my wider family's similar choices.  I do expect FI within 5 years, so our situations are similar there, although I don't have ongoing funding planned.  I have no problem picking up work for 4 years or so that would cover tuition.  If it could be seasonal work, all the better.

BeanCounter

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Re: 529 contributions
« Reply #5 on: April 02, 2018, 07:15:52 AM »
We only put up to the state deduction limit in our kids 529s. So $2,500 per kid. Putting more in risks having more in the account than you need. You can always obtain tax free growth somewhere else and tap into that money if you need additional tuition dollars in the future.
I personally don't want to end up with a pile of tuition money that my kid can just burn because we would have to pay a fee to use it for anything else.

Dee18

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Re: 529 contributions
« Reply #6 on: April 02, 2018, 07:24:01 AM »
Keep in mind that money in a 529 is accessible without penalty (you just pay tax on the earnings) if you end up not needing it because the student/beneficiary gets scholarships.

I'm a red panda

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Re: 529 contributions
« Reply #7 on: April 02, 2018, 08:04:30 AM »
Keep in mind that money in a 529 is accessible without penalty (you just pay tax on the earnings) if you end up not needing it because the student/beneficiary gets scholarships.

For us though, the 529 account is a much higher fee than our other investments. So it doesn't make sense to have anything in that account that we don't need for education.

We are only contributing minimally to the 529 and saving the rest as just "savings"

lazy-saver

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Re: 529 contributions
« Reply #8 on: April 02, 2018, 11:11:42 AM »
For us though, the 529 account is a much higher fee than our other investments. So it doesn't make sense to have anything in that account that we don't need for education.

You can have more than one 529. We put the state deduction limit in our state's and some more in a Nevada Vanguard one. (I'm not certain this is better than just making sure miscellaneous investments contain enough for college as well as retirement, for reasons of uncertainty that other people mention, but it is an option)

BeanCounter

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Re: 529 contributions
« Reply #9 on: April 02, 2018, 11:23:47 AM »
For us though, the 529 account is a much higher fee than our other investments. So it doesn't make sense to have anything in that account that we don't need for education.

You can have more than one 529. We put the state deduction limit in our state's and some more in a Nevada Vanguard one. (I'm not certain this is better than just making sure miscellaneous investments contain enough for college as well as retirement, for reasons of uncertainty that other people mention, but it is an option)
I don't understand what the advantage is to doing this? You can contribute as much as you want to a 529 or multiple 529s, but you only get to deduct up to your state's limit.

blinx7

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Re: 529 contributions
« Reply #10 on: April 02, 2018, 11:30:18 AM »

You haven't given us enough information about your assets, income, expenses, goals, etc. for us to provide informed feedback.

But what you are doing is almost exactly what I am doing so without extra information I say rock on.

stephen902

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Re: 529 contributions
« Reply #11 on: April 02, 2018, 11:33:27 AM »
I really appreciate the replies. It helps a lot. I really like reeshau's plan. In fact, I think I'm going to copy it. One point thing I've been told is you can't just withdraw principle without penalty. You have to include an earnings portion of any distribution as taxable income. Second, you have to pay an extra 10 percent penalty on the earnings. So while over-funding isn't the end of the world, it is fairly inefficient.

I'm using fidelity's 'unique' 529 which allows for very low cost and pretty solid investments imo.

stephen902

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Re: 529 contributions
« Reply #12 on: April 02, 2018, 11:35:32 AM »

You haven't given us enough information about your assets, income, expenses, goals, etc. for us to provide informed feedback.

But what you are doing is almost exactly what I am doing so without extra information I say rock on.


Contributing to the 529 isn't substantial in terms of my FI timeline. As far as the goals for the 529 I guess I'm just not certain. I like the idea of a large portion with a possible risk of underfunding. Thanks for your thoughts.

blinx7

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Re: 529 contributions
« Reply #13 on: April 02, 2018, 11:57:06 AM »

You haven't given us enough information about your assets, income, expenses, goals, etc. for us to provide informed feedback.

But what you are doing is almost exactly what I am doing so without extra information I say rock on.

Contributing to the 529 isn't substantial in terms of my FI timeline. As far as the goals for the 529 I guess I'm just not certain. I like the idea of a large portion with a possible risk of underfunding. Thanks for your thoughts.

$10k initial plus $5k for 18 years = 100k.  Will likely appreciate to $200 - 300k by the time the dust settles.  Room and board at our in-state public flagship is $100k now.  Probably will be $150k - $200k by college time. 

If the market booms or your kid gets a scholarship, there could be extra money.  In that case, personally I'll just use that for graduate school or earmark it for grankids.  Or if nobody ever uses it then I'll donate it.  In the unlikely case there is no educational use for the funds but I need the cash (e.g., for medical care) then I guess I'll just pay the penalty. 

If your kid goes to a private college or markets do poorly or the kid takes more than 4 years to graduate, you will need to make up the gap.

You can always choose to contribute less or more in the future if any of these things bother you.  You will have more knowledge as time goes on about how your investments have done, how much tuition has risen and what your and your kids aspirations are with respect to college. 

In the meantime your approach seems entirely reasonable to me. 



Snowman99

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Re: 529 contributions
« Reply #14 on: April 02, 2018, 12:18:35 PM »
To avoid putting "too much" in, we make "rosy" assumptions about the future:

1. Kids will attend public university;
2. College inflation will taper off or not happen (we assume 1%).
3. Market will go up 10%/year.

Making these assumptions, we more or less came up with $10k initial seed money at birth to grow, followed by $1k contribution/year per kid to take advantage of our state's $2k deduction limit.

We used the college savings calculator at Vanguard to come up with these figures:

https://vanguard.wealthmsi.com/csp.php

We will probably end up short, but this is better than having a pile of money you can't use without a penalty.  Any shortfall can be offset from income or an ordinary taxable account. 

One worry we have is that by the time our kids (3 and 1) are going to college, there will be a lot of free options, or college by that point just might be irrelevant.  Another reason why not to put too much money in the 529.

Our plan is with Fidelity, which has a credit card whereby 2% of what you spend is automatically put into the investment account.

YttriumNitrate

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Re: 529 contributions
« Reply #15 on: April 02, 2018, 01:41:55 PM »
I'm also doing $5k a year, but that's just because that's precisely the amount needed to max out Indiana's 20% tax credit for 529 plans. I figure $5k a year starting early should be a reasonable amount for two kids ~20 years from now, but long range predictions are inherently unreliable.

reeshau

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Re: 529 contributions
« Reply #16 on: April 02, 2018, 02:09:37 PM »
For us though, the 529 account is a much higher fee than our other investments. So it doesn't make sense to have anything in that account that we don't need for education.

You can have more than one 529. We put the state deduction limit in our state's and some more in a Nevada Vanguard one. (I'm not certain this is better than just making sure miscellaneous investments contain enough for college as well as retirement, for reasons of uncertainty that other people mention, but it is an option)
I don't understand what the advantage is to doing this? You can contribute as much as you want to a 529 or multiple 529s, but you only get to deduct up to your state's limit.

I would assume lazy-saver is in a state that only allows deductions to their plan.  The question would then be if the tax deduction is enough to overcome the performance difference for an expensive / not-the-best in-state plan.  That is the case for me, in Michigan, but I like our plan; at least, enough not to bother moving it elsewhere.  And the state deduction of $10k per year fits my investment plan.
« Last Edit: April 03, 2018, 06:14:32 AM by reeshau »

lazy-saver

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Re: 529 contributions
« Reply #17 on: April 03, 2018, 01:18:15 PM »
For us though, the 529 account is a much higher fee than our other investments. So it doesn't make sense to have anything in that account that we don't need for education.

You can have more than one 529. We put the state deduction limit in our state's and some more in a Nevada Vanguard one. (I'm not certain this is better than just making sure miscellaneous investments contain enough for college as well as retirement, for reasons of uncertainty that other people mention, but it is an option)
I don't understand what the advantage is to doing this? You can contribute as much as you want to a 529 or multiple 529s, but you only get to deduct up to your state's limit.

I would assume lazy-saver is in a state that only allows deductions to their plan.  The question would then be if the tax deduction is enough to overcome the performance difference for an expensive / not-the-best in-state plan.  That is the case for me, in Michigan, but I like our plan; at least, enough not to bother moving it elsewhere.  And the state deduction of $10k per year fits my investment plan.

Correct. My state has a plan slightly but not much worse than vanguard and has a much lower cap on deductions than yours.

Though maybe the question is about why put in more money in any 529 than the state deduction cap? Because growth is completely tax free.

BeanCounter

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Re: 529 contributions
« Reply #18 on: April 03, 2018, 01:44:30 PM »
For us though, the 529 account is a much higher fee than our other investments. So it doesn't make sense to have anything in that account that we don't need for education.

You can have more than one 529. We put the state deduction limit in our state's and some more in a Nevada Vanguard one. (I'm not certain this is better than just making sure miscellaneous investments contain enough for college as well as retirement, for reasons of uncertainty that other people mention, but it is an option)
I don't understand what the advantage is to doing this? You can contribute as much as you want to a 529 or multiple 529s, but you only get to deduct up to your state's limit.
The growth is only tax free if you use it to pay for qualified educational expenses. If you feel fairly confident that you will need it for educational expenses AND you are maxing out your other tax free growth options-401k, Roth IRA, HRA (possibly) then it might make sense.

I would assume lazy-saver is in a state that only allows deductions to their plan.  The question would then be if the tax deduction is enough to overcome the performance difference for an expensive / not-the-best in-state plan.  That is the case for me, in Michigan, but I like our plan; at least, enough not to bother moving it elsewhere.  And the state deduction of $10k per year fits my investment plan.

Correct. My state has a plan slightly but not much worse than vanguard and has a much lower cap on deductions than yours.

Though maybe the question is about why put in more money in any 529 than the state deduction cap? Because growth is completely tax free.

lazy-saver

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Re: 529 contributions
« Reply #19 on: April 03, 2018, 05:37:23 PM »
For us though, the 529 account is a much higher fee than our other investments. So it doesn't make sense to have anything in that account that we don't need for education.

You can have more than one 529. We put the state deduction limit in our state's and some more in a Nevada Vanguard one. (I'm not certain this is better than just making sure miscellaneous investments contain enough for college as well as retirement, for reasons of uncertainty that other people mention, but it is an option)
I don't understand what the advantage is to doing this? You can contribute as much as you want to a 529 or multiple 529s, but you only get to deduct up to your state's limit.

I would assume lazy-saver is in a state that only allows deductions to their plan.  The question would then be if the tax deduction is enough to overcome the performance difference for an expensive / not-the-best in-state plan.  That is the case for me, in Michigan, but I like our plan; at least, enough not to bother moving it elsewhere.  And the state deduction of $10k per year fits my investment plan.

Correct. My state has a plan slightly but not much worse than vanguard and has a much lower cap on deductions than yours.

Though maybe the question is about why put in more money in any 529 than the state deduction cap? Because growth is completely tax free.

The growth is only tax free if you use it to pay for qualified educational expenses. If you feel fairly confident that you will need it for educational expenses AND you are maxing out your other tax free growth options-401k, Roth IRA, HRA (possibly) then it might make sense.

(I rearranged the quote because I had trouble finding the new text and wanted to save other people the trouble.)

I agree. We are making out 401k and Roth IRAs first. And not knowing how much we will actually spend on college is why I said that I'm not certain it's the correct choice.

But I feel pretty good about it. A large part of why we're doing so well financially is that we have prestigious degrees that we didn't have to pay for, and we want to pass on the favor if possible.