Author Topic: 529 or Not?  (Read 3392 times)

OurNextStop

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529 or Not?
« on: February 17, 2018, 06:09:29 AM »
Please make sure my thinking is correct...

 We have 2 kids, 4 and 6 years old. I am 31 and DH is 41. Our current plan is to leave full time work in 5 years to travel with the kiddos in a tiny house. Our investments should be at about 1.2 million at that time with about 300,000-400,000 in low volatility non tax advantaged funds and 800,000-900,000 in a mix of traditional and roth 401ks/IRAs. In 2018 we will be in the 22% tax bracket. In "retirement" we will stick closer to the 0-12%/15% bracket because expenses will be lower.

 We want to be able to pay for the tuition at a 4 year state school for each of them, should they choose to go that route.

 My thinking is that it is smarter for us to forget about the 529 and to just focus our investing on our other accounts. The only plans that Maryland offers return about 4-5% after fees. The state incentive that is offered is a reduction of $2500 of state AGI per tax year if you make a contribution of that amount. Larger contributions can have that deduction carried forward to subsequent tax years. For us, that deduction would equal a $118 return per year, based on our current tax bracket.

 The issue is that we are already maxing out our retirement accounts so the only place for the extra money to go would be into a non tax advantaged account. To me, it still seems to make sense, given our projected lower tax bracket, to invest in non tax advantaged accounts. We are going to pay our 22% tax on the money going in, regardless of where it goes. If we make 7% on a Vanguard fund we are still going to be better off, even after paying a 12-15% tax rate than we would have been making 4-5% and being guaranteed a 0% tax rate on returns.

 I guess I'm also a little nervous to lock us into saving money for college when we have no idea what path our kids will take in 12-14 years. Throw in the possibility of scholarships and financial aid and it makes it even more uncertain.

 I am still trying to learn about the tax implications of our financial decisions so if I've made any errors in my tax assumptions, please let me know.
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MrsWolfeRN

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Re: 529 or Not?
« Reply #1 on: February 17, 2018, 06:47:46 AM »
Check to see if you can still get the state tax deduction if you invest in another state's plan. I use the Vanguard Nevada 529 and I can still deduct it on my state taxes. I only contribute up to the state tax deduction limit.
« Last Edit: February 25, 2018, 09:02:45 AM by MrsWolfeRN »

Laura33

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Re: 529 or Not?
« Reply #2 on: February 17, 2018, 09:05:58 AM »
Where are you getting your information on the MD fees?  I just looked up their offerings, and they have a S&P500 fund available with .21% fund fees and .05% plan fees, for a total of .26%.

FYI it is also $2500 per kid, per account (and each parent can have a separate account).  That is $10k/yr off your MD AGI - and with state and local taxes being as high as 9+% (6% state and 50-60% of that figure for local), that can be almost $1000 off your taxes.

And don’t forget that you also get tax-free growth for however long you keep the funds.  That is also an advantage over taxable accounts, where you pay taxes on the CGs and dividends that are distributed every year, even if you just have those automatically reinvested.

There are also a huge variety of educational opportunities covered by the 529, including trade schools and now high schools.  And I believe if your kid earns a scholarship, you can take that out of the 529 penalty-free (but confirm that for yourself).

There are valid reasons for not investing in a 529.  But make that decision based on full knowledge of all of the pros and cons.  We are also hedging our bets a bit given the unknowns of what our kids will want to do - we contribute up to the state tax deduction, and then save extra in VTSAX, which we can use for college or for anything else we might need.
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Dicey

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Re: 529 or Not?
« Reply #3 on: February 17, 2018, 09:23:57 AM »
Go Curry Cracker posted on this topic recently.
https://www.gocurrycracker.com/why-gccjr-has-no-529/

We started one for our granddaughter.  It may not be the most efficient method, but it helps in several ways. First, we don't buy her pink plastic crap that she will soon forget. Instead, birthdays, holidays, etc. are commemorated with deposits to her account. Second, it assures that something is put by for her college that can't be touched by others with different goals. In the abstract it may not be the most perfectly optimal utilization of our soldiers, but in time they will still coalesce into a pretty effective team, which is good enough for us.
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Mezzie

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Re: 529 or Not?
« Reply #4 on: February 17, 2018, 09:55:42 AM »
I wanted to start 529s for my nieces and nephews, but the more I looked into it, the more restrictive they seemed. This is especially true in my family where there are many (successful) artists (dancers, musicians, woodworkers, variety artists, etc.), so the likelihood of a non-college path is high.

I've decided (tentatively) to purchase bonds for them. I-bonds used for education get a tax benefit (in that case, I'd have to purchase them in their parents' names, though, and I'm not sure how that would affect their FASFA benefits). T-bonds have appeal for other reasons. I'm still sorting it out, but I've only got a month until the next birthday comes around.

On the plus side, since these aren't my kids, I'm safe in that whatever money their auntie gives them will be a pleasant surprise, not something they were counting on.
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Re: 529 or Not?
« Reply #5 on: February 23, 2018, 06:34:34 AM »
I wanted to start 529s for my nieces and nephews, but the more I looked into it, the more restrictive they seemed. This is especially true in my family where there are many (successful) artists (dancers, musicians, woodworkers, variety artists, etc.), so the likelihood of a non-college path is high.

I've decided (tentatively) to purchase bonds for them. I-bonds used for education get a tax benefit (in that case, I'd have to purchase them in their parents' names, though, and I'm not sure how that would affect their FASFA benefits). T-bonds have appeal for other reasons. I'm still sorting it out, but I've only got a month until the next birthday comes around.

On the plus side, since these aren't my kids, I'm safe in that whatever money their auntie gives them will be a pleasant surprise, not something they were counting on.

I like the thinking Mezzie shares above...

When my two daughters were born, Sec. 529 plans didn't exist. So I just saved money into UGMA-style accounts. (The goal was to plan for four years at a school like University of Washington, our local big state school.)

In the end, it turned out to be really good the money wasn't inside a Sec. 529 plan.

One kid decided after a couple-three years that college was for people who couldn't think outside the box. She used her college funds to buy real estate at the low-point valuations during the Great Recession. Also to start her own business (in which she still works years later.) It was very helpful to her that the money wasn't inside a UGMA-style account.

Note: I didn't know this at the time, but it's very common for that even kids from high income, highly educated families likely do not finish college.

My other daughter, who did finish her four-year degree turned out not to need any college savings money because of scholarships. She also found it usefully flexible to access the money during the Great Recession to buy her first home.
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All In A Day

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Re: 529 or Not?
« Reply #6 on: February 23, 2018, 09:33:58 AM »
This topic has been weighing on my mind a lot lately. When we had our first born we opened a 529 and started contributing. We get a small state tax benefit up to $2000 and we were putting in $2400 a year. She is now 4 but we have stopped contributing and instead have ear marked our Roth IRA's as the potential source for college using only the contributions we put in. When we max out our Roth's at $5500 a year, in 18 years that is $99k! If she doesn't go to college, the money will sit and grow until we need it, but the base amount is there if she does. If a second kid comes around, then the wife's Roth plan will be earmarked for the same.

I know this may not work for all MMM's as some have plans to get out of work in 5, 10, etc... years. But our plan is to work at least until all kiddo's are in college or at least graduate from high school.

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Re: 529 or Not?
« Reply #7 on: February 23, 2018, 09:42:36 AM »
We have a 529 that we use for money from grandparents when they say "this is for the college fund", as they wanted to see if going to the 529.

But the money we intended to use for her college is integrated into our regular investments.  We wanted more flexibility.

reeshau

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Re: 529 or Not?
« Reply #8 on: February 24, 2018, 07:51:59 AM »
My son is about to turn 3.  I have funded his 529 each year to the $10,000 max State deduction, and will stop when he is 5.  This should give us $100k - $150k for college, which I expect to cover most of the cost.  (all costs will have inflated for 15 years by the time we need it)  If I have extra after he is on his own, and I have no other relative that I deem to help with the leftover amount, then I will withdraw with penalties gladly, calling "Mission Accomplished," and move on.

My Roth is for my retirement, which is not secondary to his education.  I fund both, not either/or.

As a note, if your child receives scholarships, you can withdraw an equivalent amount from the 529 penalty free.  (But not tax free)

BuffaloStache

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Re: 529 or Not?
« Reply #9 on: February 24, 2018, 09:08:14 AM »
As a note, if your child receives scholarships, you can withdraw an equivalent amount from the 529 penalty free.  (But not tax free)

This is a point that many people miss, and an important one. My wife and I opened a 529 for our son, but we don't use it as the 'only' vehicle for education/future savings for him. In Colorado the deduction/contribution limit is all the way up to your AGI, so there is more benefit here than in most other states. But we also have regular, taxable investments in separate accounts that are earmarked for him/any future children we may have.

Another point to make is that 529 funds can be used at any 'school' that utilizes FAFSA, and even some that don't. So many trade schools, apprenticeship programs, etc, are eligible for using 529 plans. Additionally, 529's can be used for a lot of varying expenses; Room & Board while at school, a new laptop (if purchased 'for school'), the Child's portion of your family's healthcare costs while they are in school, etc.

I figure, if my child doesn't find any way to use the money, then I'll just enroll in a study abroad program for a random subject at a random university sometime later in life, and time it for when I want to buy a new computer/other large purchases. Or, I will offer that opportunity to the child if they want to take a summer/semester "off" of work or before they start working. It will be a sweet way to travel/learn while using tax-advantaged funds to pay for them.
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MrsWolfeRN

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Re: 529 or Not?
« Reply #10 on: February 24, 2018, 12:55:36 PM »
Thanks, I didn't know it could be used for healthcare

AmberTheCat

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Re: 529 or Not?
« Reply #11 on: March 01, 2018, 03:34:22 PM »
i think your idea of traveling with a tiny house sounds great. I sometimes wish we could have done it when my kids were younger.  I also wish i had 529s for my kids; but i dont. college is pricey and we did not save enough. I just hope you save; i say both roths and 529s. (I have a small roth i'm breaking into next year for one of my college students).

but one thing you mentioned is financial aid in college. Chances are, if you have $1million in assets, you wont receive much - if any - free aid no matter where your kids go. Unsubsidized college loans - yes. Merit aid for grades/sports isnt tied to assets & income usually; and could well be a possibility. But free grants from the colleges or federal government - with your savings -- probably won't happen.

hope to hear more about your travels.
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BuffaloStache

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Re: 529 or Not?
« Reply #12 on: March 04, 2018, 09:29:26 AM »
Good point AmberTheCat. But it really comes down to your goals and what you want to do. If you really want to pay for your children's college education, then maybe OMY syndrome (working an extra year after FI explicitly to boost the college funds for your children) is a sacrifice you'll be ok making. Or something similar...
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Re: 529 or Not?
« Reply #13 on: March 08, 2018, 07:30:44 AM »
i think your idea of traveling with a tiny house sounds great. I sometimes wish we could have done it when my kids were younger.  I also wish i had 529s for my kids; but i dont. college is pricey and we did not save enough. I just hope you save; i say both roths and 529s. (I have a small roth i'm breaking into next year for one of my college students).

but one thing you mentioned is financial aid in college. Chances are, if you have $1million in assets, you wont receive much - if any - free aid no matter where your kids go. Unsubsidized college loans - yes. Merit aid for grades/sports isnt tied to assets & income usually; and could well be a possibility. But free grants from the colleges or federal government - with your savings -- probably won't happen.

hope to hear more about your travels.

That really depends on location.  NYS just implemented a free state school tuition scholarship for residents with an AGI of up to $125,000, and it does not account for assets (at this point).  That is a very healthy AGI from a mustachian or FIRE perspective.

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Re: 529 or Not?
« Reply #14 on: March 10, 2018, 09:01:24 PM »
Our kids grandparents have money they want to set up for kids college. We’re currently researching which plant to pick. We are in CA so no tax break.

After research I found its better for them to gift us the money, we would be under gift tax amount, then we would put the money in and be the owner. This allows us to pass the account down 1 generation to our future grandkids without any withdrawal penalties or generation tax. We figure the odds are pretty high that our kids or maybe future grand kids will use it.

Backup plan: In retirement my wife and I could use it ourselves and attend colleg abroad, take some fun classes and use it for room and board money to live in another country. Or simply pay the penalty and withdraw.

With new tax plan there is also the option to use it for k-12 private education. They are trying to add homeschooling as an authorized use as well.

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Re: 529 or Not?
« Reply #15 on: April 10, 2018, 12:16:45 PM »
due to the restrictive nature of 529 plans, we opted to save in other ways. I am not a huge fan of completely funding my child's education future...especially prior to knowing what route he might decide to take in life. For example, in both DH's and my families, there is a strong military tradition- what if he wants to continue that? What if he has no interest in higher education and wants to be a plumber?

It would be very difficult for me to earmark funds to a somewhat restrictive savings apparatus if one of the above circumstances turned out to be true.

Maybe also, I tend to have the philosophy that if something is given to you, you may not value it to the degree you would if you had to earn it. I want my son to want to go to school badly enough that he is willing to put something on the line as well, so we are unlikely to be fully funding his education if that is what he chooses.


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Re: 529 or Not?
« Reply #16 on: April 23, 2018, 09:23:48 AM »
We're using 529 plans for our 5 and 7 year old kids.  I started them with the notion of the 529 plans covering about half of the expenses, though contributions in the early years were fairly small due to competing interests (trying to max out retirement accounts, saving for house down payment).  Now, I'd like to have enough for most of an in-state tuition + room & board for each, despite cutting off contributions when we retire in a few more years.  We'll see. 

One nice thing, I hope, will be the ability to finance most of those tuition/R&B payments without having to increase our AGI.  Given that we're now planning for early retirement (originally I planned to be working during the college years), that could be helpful for managing our AGI vs. ACA breakpoints, for example.  Yes, I know that those ACA breakpoints may be immaterial 12-15 years from now, but there could be something else, as well. 

BuffaloStache

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Re: 529 or Not?
« Reply #17 on: April 28, 2018, 03:47:31 PM »
...
One nice thing, I hope, will be the ability to finance most of those tuition/R&B payments without having to increase our AGI. 
...

This is a very good point that a lot of people miss, and is a extra special consideration for early retirees looking to minimize their tax burdens.
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dougstash

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Re: 529 or Not?
« Reply #18 on: April 28, 2018, 09:51:09 PM »
Not sure if this helps but I personally would never bet a 10% penalty that they will attend post secondary education, even with tax free growth.  Over a long term tax free growth as apposed to taxable accounts can have a huge impact but with your kids being 4 and 6 we're only talking about 12-14 years, especially if you expect to be in a lower tax bracket in 5 years. I would personally skip on it even with your estimated $118 tax return and just put the money into a taxable account via vtsax (very tax efficient) or another low cost index fund.   Coming from a young carpenter who had never had any desire to ever attend collage

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Re: 529 or Not?
« Reply #19 on: May 21, 2018, 08:11:41 AM »
I live in NJ and have 4 kids.  We max out our retirement accounts AND we hope to fund our child’s eduation.

We said to ourselves, why put money in a taxable brokerage account only to pay taxes on it when we withdraw vs. putting money in a 529 and never paying taxes on the gains?  We invest in Nevada’s plan because its managed by Vanguard.  It offers low-cost funds.

If our child decides not to go to college, we can change the beneficiary to our future grandkids, our nieces, nephews, or a mix of all 3. 

Am I thinking about this wrong?

BuffaloStache

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Re: 529 or Not?
« Reply #20 on: May 21, 2018, 09:41:02 AM »
You are thinking about it correctly in my mind. Plus, with 4 kids it seems highly unlikely that none of them will want to go to a post-secondary institution.
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Re: 529 or Not?
« Reply #21 on: May 21, 2018, 10:11:54 AM »
One other thing to mention:  The scholarship exemption.  If your kid gets any scholarships, an equivalent amount can be withdrawn from a 529 without paying the 10% penalty.  (You will still owe taxes on any earnings.)

My oldest got basically a full ride to a state school where he attended his first year.  That creates a modest five-figured sized window through which I can funnel that amount of remaining 529 money if I need to.  And since 529 money can be shifted between kids, I can move the money from kid to kid like a hand-me-down until I get to my youngest, then shift it back to the oldest, transfer the account to his name, have him withdraw the funds, pay no 10% penalty via the scholarship exemption, pay taxes at his presumably lower rate, then have him gift back to his brother and sister whatever proportions are needed to even things out after they all graduate.

(It's also likely that my middle and youngest will get scholarships too.  At most schools the sticker price is just a higher-than-actual starting point to make you feel good that you got $20K off tuition or whatever.)

That's my plan, anyway.
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