Best vanguard strategy for child college savings

[Flyfish]

Hey all,
I am sure this topic has probably been addressed before. My sister is interested in setting aside a small amount of money each month to save for her child’s college fund. Her kid is 2, so essentially have about 16 years to save. I know vanguard has a child saver account. Pros and cons? Any better approaches or vanguard funds you would suggest my sister look at? Seems like many index funds have $3,000 minimum. That’s a bit too steep for my sister to get started.

[MrThatsDifferent]

I don’t know how to link threads but did a google search and lo and behold:
https://forum.mrmoneymustache.com/investor-alley/vanguard-investing-for-kids/

[nereo]

I would look into 529 plans, which is a tax-advantaged college savings plan where you contribute post-tax dollars.  Each state has their own 529 plan, but you do NOT have to reside in the state to participate in the plan (ie you can choose whatever plan looks best to you).

Advantages include

• tax free growth of post-tax contributions
• tax free withdraws for qualified education expenses
• many plans have no minimum requirements to open
• generally contributions can be as little as $10
• choose whatever investment(s) you like within your 529 plan

Qualified education expenses is blissfully broad, and can include tuition, room/board, education supplies.  Those expenses need not be at a 4 year university, and can be used for a trade school, graduate school or even private high-school tuition. Should the child earn a scholarship the same amount can be withdrawn tax-free.  Plans are transferable and should the child not need it, the funds can be withdrawn by paying taxes on gains, much like any other investment account.

Of course, the general advice is to take care of your OWN financial security before contributing to a 529 plan (much like putting on your oxygen mask first before assisting your child).

[haflander]

I'm gonna bump this to see if there are any more opinions out there. My specific situation...I'm wanting to build an account that will be split between one nephew (2 yo), one niece (due in June), any other potential nieces/nephews, and my future kids. I'd much rather have only one account for simplicity for now and then figure out the division later. I like to limit the # of accounts I have and definitely don't want to contribute evenly to, say, 4 accounts for 4 separate kids. Plus, I'd give my own kids more of the proverbial pie. I also don't have 3k; I would start with 1000-1500. FWIW, I'm fine with a very high risk tolerance for this. Of course, as college nears, I'd transition to safer options.

I did read through the other thread and as of now it looks like my options for accounts are...

• Taxable account, giving me the biggest flexibility
• 529, figure out which state option I like the most

For the funds, I think I'd be deciding between...

• VTI
• If 529, then whatever fund options it has
• Target date funds, anywhere from 2035-2050

[One]

You could do the 529. There’s also a UTMA account you can set up.

I would invest VTI in your own taxable brokerage account, you can gift the money or the stock to the kids whenever you want. You don’t have to sell the stock. You can gift up to 11 million dollars tax free to the recipient, you just have to fill out a form if over 15,000 in one year.

[secondcor521]

I would look into 529 plans, which is a tax-advantaged college savings plan where you contribute post-tax dollars.  Each state has their own 529 plan, but you do NOT have to reside in the state to participate in the plan (ie you can choose whatever plan looks best to you).

Advantages include

• tax free growth of post-tax contributions
• tax free withdraws for qualified education expenses
• many plans have no minimum requirements to open
• generally contributions can be as little as $10
• choose whatever investment(s) you like within your 529 plan

Qualified education expenses is blissfully broad, and can include tuition, room/board, education supplies.  Those expenses need not be at a 4 year university, and can be used for a trade school, graduate school or even private high-school tuition. Should the child earn a scholarship the same amount can be withdrawn tax-free.  Plans are transferable and should the child not need it, the funds can be withdrawn by paying taxes on gains, much like any other investment account.

Of course, the general advice is to take care of your OWN financial security before contributing to a 529 plan (much like putting on your oxygen mask first before assisting your child).

Except for transferability, the part which I bolded above is inaccurate.

Withdrawals due to scholarships are penalty-free but ordinary income taxes are due on any earnings.  Withdrawing funds for other than qualified higher education expenses will result in both ordinary income taxes on the earnings portion plus a 10% penalty.

Note that some states offer tax benefits for 529 contributions for state residents.  Even if you open a 529 in your own state, you can use it for a beneficiary who lives in another state, and can use it for a school anywhere.  So you could live in Nebraska, open a 529 in Nebraska's plan for a beneficiary who lives in Texas and goes to college in California, and take advantage of any Nebraska state income tax deduction or credit for that 529 plan.

[nereo]

I would look into 529 plans, which is a tax-advantaged college savings plan where you contribute post-tax dollars.  Each state has their own 529 plan, but you do NOT have to reside in the state to participate in the plan (ie you can choose whatever plan looks best to you).

Advantages include

• tax free growth of post-tax contributions
• tax free withdraws for qualified education expenses
• many plans have no minimum requirements to open
• generally contributions can be as little as $10
• choose whatever investment(s) you like within your 529 plan

Qualified education expenses is blissfully broad, and can include tuition, room/board, education supplies.  Those expenses need not be at a 4 year university, and can be used for a trade school, graduate school or even private high-school tuition. Should the child earn a scholarship the same amount can be withdrawn tax-free.  Plans are transferable and should the child not need it, the funds can be withdrawn by paying taxes on gains, much like any other investment account.

Of course, the general advice is to take care of your OWN financial security before contributing to a 529 plan (much like putting on your oxygen mask first before assisting your child).

Except for transferability, the part which I bolded above is inaccurate.

Withdrawals due to scholarships are penalty-free but ordinary income taxes are due on any earnings.  Withdrawing funds for other than qualified higher education expenses will result in both ordinary income taxes on the earnings portion plus a 10% penalty.

Ah, good catch!  I'm important to distinguish that you can take contributions out tax free, but in the case of scholarship(s) earnings will be treated as income for tax purposes. Some administrators will allow the child to take the withdrawal, which might limit or eliminate any taxes paid, depending on how much earned income he/she has.
Ultimately I'd still file this in under "a good problem to have", as you'd avoid any penalties and have that portion of higher education paid for.

[secondcor521]

I would look into 529 plans, which is a tax-advantaged college savings plan where you contribute post-tax dollars.  Each state has their own 529 plan, but you do NOT have to reside in the state to participate in the plan (ie you can choose whatever plan looks best to you).

Advantages include

• tax free growth of post-tax contributions
• tax free withdraws for qualified education expenses
• many plans have no minimum requirements to open
• generally contributions can be as little as $10
• choose whatever investment(s) you like within your 529 plan

Qualified education expenses is blissfully broad, and can include tuition, room/board, education supplies.  Those expenses need not be at a 4 year university, and can be used for a trade school, graduate school or even private high-school tuition. Should the child earn a scholarship the same amount can be withdrawn tax-free.  Plans are transferable and should the child not need it, the funds can be withdrawn by paying taxes on gains, much like any other investment account.

Of course, the general advice is to take care of your OWN financial security before contributing to a 529 plan (much like putting on your oxygen mask first before assisting your child).

Except for transferability, the part which I bolded above is inaccurate.

Withdrawals due to scholarships are penalty-free but ordinary income taxes are due on any earnings.  Withdrawing funds for other than qualified higher education expenses will result in both ordinary income taxes on the earnings portion plus a 10% penalty.

Ah, good catch!  I'm important to distinguish that you can take contributions out tax free, but in the case of scholarship(s) earnings will be treated as income for tax purposes. Some administrators will allow the child to take the withdrawal, which might limit or eliminate any taxes paid, depending on how much earned income he/she has.
Ultimately I'd still file this in under "a good problem to have", as you'd avoid any penalties and have that portion of higher education paid for.

Indeed a good problem to have.  Having leftovers is also a good problem to have.

In my state's 529 program, it seems that any withdrawals are made pro-rata between contributions and earnings.  I am not sure if that is nationwide or federally mandated.  Personally I always withdraw as much as I can on a qualified basis from 529s, even if I turned around that same year and made 529 contributions to bring the balances back up to my target.  That way it lowers the ratio of earnings to contributions in case I hit the scholarship or excess situations after my kids have graduated.

[Orcer]

I am using UESP for my kids. I am happy very with my decision. Very less expenses, zero minimum to open, good plans to choose from and impressive returns so far. I am attaching their program description pdf for your reference. I went ahead with Age based aggressive Domestic plan. This has a combo of VITPX(85%), VBMPX(12%), VFSIX(3%) funds for my 8 year old kid. As age progresses, allocation changes automatically. UESP will take cares of the right combination of funds and allocation. Hope this helps. Let me know if you need a referral.

[mavendrill]

FWIW, I'm fine with a very high risk tolerance for this. Of course, as college nears, I'd transition to safer options.

This is a bit of a weird thing to write about college saving strategies.  I have written about this elsewhere, but I view high risk investments as absolutely terrible tools for preparing for college.  There are a number of reasons:
1) Tax benefits range from none to moderate
2) The average time for investment growth is extremely small.  18 years is a short period to invest in, and considering that most young parents see their income grow significantly in that time, the functional average time invested tends to be closer to ~6 years.  That is too short of a runway.
3) Unlike retirement, college comes once and comes hard.  A down market doesn't hurt retirement investments all that much, because if you plan 20 years retirement, a market crash of 50% that takes 5 years to recover will eat into significant parts of your savings, but ultimately still leave you with half your initial investment, and that investment will grow through the post-crash recovery.  The goal of an education is generally to be finished in 4 years.  The heavy withdrawal rate makes this higher risk for education.
4) Education costs are really high BUT depending on choices, and location, much of the cost is potentially in cost of living (room and board) instead of tuition (For example, Suny stony brook has tuition of ~7500 a year and room and board of ~18000 a year).  Tuition is a beast you cannot control, and a scary and growing one.  but room and board is easily controlled - you already do so for yourself.  If you are a person who has the resources to invest, or could put those together, a far more effective use of your investment might be in rentals/rental knowledge.  Putting yourself in the position to potentially help your kids/nieces etc by allowing them to rent from you for either cheap or free.  Saving/investing so that you can help them by putting them in the position to not pay the insane prices of student housing is a huge benefit.  In some markets, students face restrictions requiring them to live with family (no worries if you own) or in dorms that massively overcharge. (and that frequently require meal plans at prices no sane person would ever willingly pay).
4A) Renting to college students is typically viewed as a low-value rent situation - the turnover is high, the students tend to be noisy, obnoxious and potentially damaging, and all of this lowers profit margins.  While all of those concerns are potentially true, remember that in this case the goal is not to have a rental that is the best use of your money (or even one that beats long term stock rates) but instead one that delivers more value than that corresponding brokerage investments are likely to do on short timeframes.  Plus for the optimist, if you end up really liking this, it gives you something to embrace long-term.

TLDR: I think the best high risk investment for future college is to invest in yourself and sidehustle your way into real-estate and see if you like it, especially near colleges.

[DadJokes]

I think the two biggest arguments against 529s are the lack of flexibility and the fact that they negatively impact FAFSA numbers.

You are funding this for multiple children, so if one or two don't go to college, you can easily transfer the benefits to others.

Because you are setting these up for your nieces & nephews, I believe the 529 would actually be in your name, so it wouldn't show up on their FAFSA, which would potentially allow them to be eligible for more aid.

[TheInsuranceMan]

Just posting to follow.

I have 3 kids, my mother-in-law has opened Edward Jones accounts for them and contributes quite often, and it appears these are invested in mutual funds.
My mom has 529 accounts opened for them, usually contributes once a year.

We have CDs opened in their name, and my goal was to move those funds to Vanguard once they've met the minimum funding requirements of whatever product I was once researching.  Since researching, I got lazy, we had the 3rd kid, and I haven't looked again.  I think my 4 and 2 year old are both over 2k in their CD, and our 7 month old is at like $500-$700 so far (plus whatever the parents and in laws have put away for them too).

So, we have a nice mix, I just don't know what I should do with the funds that we have wasting away in low earning CDs

[Laserjet3051]

The more I learn, the more I'm coming to the realization that, in my particular case (and probably for many others), a ROTH IRA vehicle would have been a far smarter approach than the 529s I have set up for my kids. Of course, underlying funds/AA would be the same, just inside a different wrapper.

YMMV

[nereo]

Just posting to follow.

I have 3 kids, my mother-in-law has opened Edward Jones accounts for them and contributes quite often, and it appears these are invested in mutual funds.
My mom has 529 accounts opened for them, usually contributes once a year.

Edward Jones... Run Away!  Run Away!

[CowboyAndIndian]

I would look into 529 plans, which is a tax-advantaged college savings plan where you contribute post-tax dollars.  Each state has their own 529 plan, but you do NOT have to reside in the state to participate in the plan (ie you can choose whatever plan looks best to you).

Advantages include

• tax free growth of post-tax contributions
• tax free withdraws for qualified education expenses
• many plans have no minimum requirements to open
• generally contributions can be as little as $10
• choose whatever investment(s) you like within your 529 plan

Qualified education expenses is blissfully broad, and can include tuition, room/board, education supplies.  Those expenses need not be at a 4 year university, and can be used for a trade school, graduate school or even private high-school tuition. Should the child earn a scholarship the same amount can be withdrawn tax-free.  Plans are transferable and should the child not need it, the funds can be withdrawn by paying taxes on gains, much like any other investment account.

Of course, the general advice is to take care of your OWN financial security before contributing to a 529 plan (much like putting on your oxygen mask first before assisting your child).

+1

FYI, the 529 from Utah has Vanguard funds. I believe that there may be more 529's which utilize Vanguard.

[haflander]

The more I learn, the more I'm coming to the realization that, in my particular case (and probably for many others), a ROTH IRA vehicle would have been a far smarter approach than the 529s I have set up for my kids. Of course, underlying funds/AA would be the same, just inside a different wrapper.

Would you mind explaining why?

[Laserjet3051]

The more I learn, the more I'm coming to the realization that, in my particular case (and probably for many others), a ROTH IRA vehicle would have been a far smarter approach than the 529s I have set up for my kids. Of course, underlying funds/AA would be the same, just inside a different wrapper.

Would you mind explaining why?

Withdrawal restrictions on the 529 that are virtually absent on a ROTH IRA. For the latter, I could withdraw for whatever reason, not have to show receipts to qualify, and dont have so many onerous rules on how to get $ from point A to B properly. As I use either solo 401K or SEPIRA for the vast majority of my retirement investing, I have a large space to fill each year for the ROTH IRA.....that I dont use because I'm flowing kids college $s into the 529.  Theres no risk of overfunding a ROTH, but one does have such risk with a 529.

For folks who fill their ROTH space every year, this approach may not necessarily work.

[TheInsuranceMan]

Just posting to follow.

I have 3 kids, my mother-in-law has opened Edward Jones accounts for them and contributes quite often, and it appears these are invested in mutual funds.
My mom has 529 accounts opened for them, usually contributes once a year.

Edward Jones... Run Away!  Run Away!

If my inlaws want to give my kids money, and that's the vehicle they want to use to do it, I'm not going to rock the boat.

[EngineerOurFI]

+1 for USEP/My529 - However, you should note that I'm in Texas (where there are no state income taxes), so if you're in a state with income taxes, you should look at in-state options that may allow for credits or matches or reduction in taxes, etc.  Some states, I think, even have options that give matching contributions for reasons beyond income taxes.  Texas does not have any of these options, so in-state option didn't matter for me.  If you think there's a decent chance you might move to a state with income taxes or one of these credits in the next X years, that may also be a consideration to open one in a certain state.

I'm also using UESP (renamed to My529.org recently).  Good investment options, low expense ratios, and the option to auto-adjust portfolio as kid ages.  I'm all about aggressive investing options with longer timeframes, but having the money in 100% stocks when the kid is 18 would be a large gamble, in my view....so we go with the auto-adjust option.  Allows automatic monthly contributions (I set it up to contribute $250 every two weeks, so $500/month).

Plans can vary according to maximum lifetime contributions - this one has a high maximum (probably won't matter unless college costs go way up AND your kid wants to go to grad school/law school/med school AND you want to 100% fund....but I like to have that option and not be limited by arbitrary caps).

Main feature that drove me to My529/USEP plan is the ability to have a "gift code" to give to the grandparents/in-laws/uncle that want to give a gift for Christmas/Birthday.  Basically it's a direct pay link kind of thing.  Can't really do that with folks outside of your "inner circle" due to social acceptability, but we've made it clear that we'd prefer if the grandparents want to spend money on the grandkids that we don't want tons of toys, etc. (kid has plenty) and would prefer if they limit gifts to small token gifts and they're free to give to the college fund directly via gift code.  Grandparents like this a lot - my mom contributes $50/mo automatically and in-laws give gift that way at bday and Christmas.  They all know education is something we value highly.  My brother is on same page as me - we each give gifts to each other's kids via 529 gift link and then just get each others' kids small token gifts for bday/Christmas.  Figure the gift code situation will work out well for graduation party, etc. later down the road.

[Captain FIRE]

Just posting to follow.

I have 3 kids, my mother-in-law has opened Edward Jones accounts for them and contributes quite often, and it appears these are invested in mutual funds.
My mom has 529 accounts opened for them, usually contributes once a year.

Edward Jones... Run Away!  Run Away!

If my inlaws want to give my kids money, and that's the vehicle they want to use to do it, I'm not going to rock the boat.

Just beware that you run a risk having them put it into their 529 accounts rather than your 529 account.  My husband's (paternal) grandparents saved college money for them...that they took away when his parents got divorced.  People can change their minds or lose the money.  Not much you can do about if that's how they want to do it, but it does make you a bit wary of definitively planning on using it.

[TheInsuranceMan]

Just posting to follow.

I have 3 kids, my mother-in-law has opened Edward Jones accounts for them and contributes quite often, and it appears these are invested in mutual funds.
My mom has 529 accounts opened for them, usually contributes once a year.

Edward Jones... Run Away!  Run Away!

If my inlaws want to give my kids money, and that's the vehicle they want to use to do it, I'm not going to rock the boat.

Just beware that you run a risk having them put it into their 529 accounts rather than your 529 account.  My husband's (paternal) grandparents saved college money for them...that they took away when his parents got divorced.  People can change their minds or lose the money.  Not much you can do about if that's how they want to do it, but it does make you a bit wary of definitively planning on using it.

Very good point.  The Edward Jones accounts aren't 529's, and I believe, I'd have to double check, are actually in our kids names with us as the account holder already.
The 529s are with the state, those are in my parents names with my kids on each account.  Not holding my breath for any of it, but if it hangs around for the next 23 years, I'll be happy :)