Author Topic: Method of Putting away for First Child's Future  (Read 1698 times)

nolefan21

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Method of Putting away for First Child's Future
« on: August 22, 2017, 09:04:30 PM »
Expecting first child in November. I expect we'll get some cash from family initially and over the years for her future. We live in NC so no 529 state tax deduction. Thinking of opening a 529 plan to divert some of that money into but wonder what others who may be on the fence about 529 plans, how did you handle $$ received from family AND that you want to put away yourself in general for your kids future?

Did you mostly just focus the money in 529 accounts, your own taxable accounts, start a high yield savings account just for them/UTMA? My main concern with 529 plans is who know what is going to happen with college in 18 years at the talk of change we are seeing, plus the penalties for oversaving or not needing the money for college. I am thinking do the 529 plan but don't go overboard.


Edit: My wife and I save fairly heavily to our retirement accounts and have a fully funded emergency fund.
« Last Edit: August 23, 2017, 04:35:54 PM by nolefan21 »

little_brown_dog

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Re: Method of Putting away for First Child's Future
« Reply #1 on: August 23, 2017, 05:52:51 AM »
We are using 529 accounts for the tax advantaged growth and the gentle treatment they receive in the financial aid calculations compared to other types of accounts. Many people don’t like 529s because of the rules on them (they can only be used for qualified higher ed expenses or otherwise are subject to penalty), but given that we will have multiple children and come from families and cultures where almost everyone goes to higher ed, it is unlikely that we won’t have at least a couple kids go to college. Worst case, none of our kids go and we pay the penalties for taking the money back for ourselves, or using it for non qualified expenses for them (house downpayment, etc). It really isn't that huge of a deal to me. We also don't get a tax deduction for our state, so we went with NY's 529 as it has vanguard funds and low expense ratios.

We personally waited to set up the 529 until around our first was 6mo old, and will do so again for this second baby. We wanted to make sure she got through the birth and her first developmental milestones normally, as children who experience significant delays or birth injuries often go on to be significantly disabled and may not be able to attend higher ed. Once baby was here, safe, and appearing to be cognitively typical as far as everyone could see, we set up the 529. We set a specific max amount for each kids' college fund every year that we hit. Whatever the kids have at age 18 is what they've got, but since we set a generous amount, we expect it to be enough to fully fund an undergrad bachelors education.
« Last Edit: August 23, 2017, 06:12:30 AM by little_brown_dog »

meatface

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Re: Method of Putting away for First Child's Future
« Reply #2 on: August 23, 2017, 07:26:16 AM »
We have a 529 for college. Most people just put money directly into it, if they want the money to go for college savings specifically. Otherwise, we put other money gifts into the kid's savings account if the money wasn't specified to be for college.

bender

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Re: Method of Putting away for First Child's Future
« Reply #3 on: August 23, 2017, 12:33:48 PM »
We also go with a 529 plan for each kid.  We plan to help them with college costs, and this is a much better method than a taxable account.

GizmoTX

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Re: Method of Putting away for First Child's Future
« Reply #4 on: August 23, 2017, 03:21:18 PM »
Your first priority, IMHO, is to adequately fund your retirement & emergency funds. A student can get an educational loan but you won't be able to borrow for your retirement.

When DS was born in 1993, 529 accounts didn't exist, but I still find them too limiting. I certainly would never do an UGMA or UTMA, because you lose control over the funds precisely when you don't want to.

We opted to set up an irrevocable trust for our existing son & any future children (which didn't happen) so we could retain control & to legally avoid paying kiddie tax. We contributed to it annually, invested in tax friendly index funds & dividend stocks, & the trust paid its own taxes at considerably less than our tax bracket. It provides for health & other essential support of our child(ren) in the event of an emergency, not just higher education. DS is entitled but not required to receive 50% of any unused funds at his undergraduate graduation (which happened in 2016), another 50% at age 30, & any residual at age 35 (in case he didn't graduate). Since he received substantial merit scholarships, he & we opted to cash flow his remaining university costs. Since the trust has not been touched & is still growing, it represents a sizable nest egg or FU account. We have always been concerned that this may kill incentive but so far that has not been the case. We've worked with him to instill financial information & self sufficiency, starting in HS -- this is even more important than any fund.

Chesleygirl

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Re: Method of Putting away for First Child's Future
« Reply #5 on: August 24, 2017, 02:41:47 PM »
When DS was born in 1993, 529 accounts didn't exist, but I still find them too limiting. I certainly would never do an UGMA or UTMA, because you lose control over the funds precisely when you don't want to.

Our lawyer recommended UGMA instead of 529. I looked into UGMA and said, no way.

LessIsLess

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Re: Method of Putting away for First Child's Future
« Reply #6 on: August 28, 2017, 08:43:33 AM »
Buy your kids some  bitcoin? 

reeshau

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Re: Method of Putting away for First Child's Future
« Reply #7 on: August 28, 2017, 10:31:41 AM »
We've worked with him to instill financial information & self sufficiency, starting in HS -- this is even more important than any fund.

+1.  Regardless of resources, if a young adult has learned to squander them (through example or neglect) they will.

I set up a 529 when my son was born.  I am in Michigan, so we get tax deductions up to $10k / year as MFJ in our 529, which is managed by TIAA.  I will fund 5 years at $10k (now on year 3) and let that ride for 13 years in an aggressive age-based fund, and expect it to grow 2-3x.  You can't know what college funding will look like in the future, but it has not gone down.  My hope is that this is a "The Price Is Right" strategy--to come close, without going over.  With the mortgage gone by this time, we will have cash flow we can apply if we are under.  And, if we are over, we can manage withdrawals of the excess to be under our current tax rate, even with the penalty.  Or, we can reassign it to a cousin / niece / nephew and share the bounty with family.

529's do seem to attract more discussion than retirement accounts, but I do not understand the significance that the penalty withdrawals pay in people's minds.  I think of it more like insurance:  I am providing a resource for my son's future.  If he is so fortunate not to need it, then it is surplus to be applied elsewhere.  The fact that this isn't the most efficient use of that resource isn't a big deal to me--what is a big deal is that my son has a rewarding life.  Mission accomplished!

To use an analogy:  nobody is cursing their flood insurance premium when the hurricane does not hit them.  That's what it's there for.  I think of a 529 as a college tuition insurance policy.  Only, there may be a residual value to it at the end.  You can always self-insure, but then the hit to your finances is bigger.  (in this case, with full taxes on your investments, and greater impact on financial aid)

Gin1984

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Re: Method of Putting away for First Child's Future
« Reply #8 on: September 04, 2017, 10:26:39 PM »
When DS was born in 1993, 529 accounts didn't exist, but I still find them too limiting. I certainly would never do an UGMA or UTMA, because you lose control over the funds precisely when you don't want to.

Our lawyer recommended UGMA instead of 529. I looked into UGMA and said, no way.
I'd use a educational IRA over a UGMA.

BuffaloStache

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Re: Method of Putting away for First Child's Future
« Reply #9 on: October 16, 2017, 08:16:51 AM »
...
We opted to set up an irrevocable trust for our existing son & any future children (which didn't happen) so we could retain control & to legally avoid paying kiddie tax. ...

I'm guessing this option required some costs/fees to set it up and required a sizeable minimum amount to set up? This seems like a good option if you have the resources, so I'd be interested in learning more.

We set up a 529, but also have taxable investment accounts for our son. We don't want to put all of our eggs into one basket for him.
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acroy

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Re: Method of Putting away for First Child's Future
« Reply #10 on: October 16, 2017, 08:36:09 AM »
congratulations!!

After much debate, we decided to invest the kiddo money in Vanguard taxable accounts.
-low fees
-not locked into spending on college
-with a bunch of Mini Money Mustaches, I'm not spending a lot on income taxes anyway.

When the kiddo needs it, it'll be there; for school, starting a business, whatever.

good luck!!
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Goldielocks

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Re: Method of Putting away for First Child's Future
« Reply #11 on: October 16, 2017, 11:48:59 AM »
Sounds like your 529's are a lot more restrictive than Canadian RESP's.   When I looked into it the following are the "penalties" on RESP's if your kid does not go to one of the 4000+ approved schools (3/4 of them outside of Canada, it is highly flexible):

1)  Have to wait until the kid is 21 and the plan is at least 10 years old, or deceased.  (If you created the plan when the kid was 15, you need to wait until kid is age 25).
2)  Can withdraw your original contributions with zero penalty.
3)  The tax rebate / matching money (which was 20% of the dollars put in, up to a limit), goes back to the government if not spent on education-- that's fair.
4)  The Accumulated income on both the match and your contributions, can be rolled into your retirement account, (if you have room), OR you can take it as cash.  The Government takes 20% of it (their share of the growth of the money that they provided through the matching) and you pay income tax on the rest.

Note: If your kid takes even 1 semester FT nearly anywhere, then you have access to a lot of the matching money and the income, and it does not need to be spent only on tuition / books / residence fees.

In other words, it is a highly fair and flexible system, that give you the opportunity for a 20% match on the amounts you put in there. 


For states that offer a tax benefit on 529's is your "penalty" in the event the child does not go to school so much different?   

 

Laura33

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Re: Method of Putting away for First Child's Future
« Reply #12 on: October 16, 2017, 12:27:46 PM »
Sounds like your 529's are a lot more restrictive than Canadian RESP's.   When I looked into it the following are the "penalties" on RESP's if your kid does not go to one of the 4000+ approved schools (3/4 of them outside of Canada, it is highly flexible):

1)  Have to wait until the kid is 21 and the plan is at least 10 years old, or deceased.  (If you created the plan when the kid was 15, you need to wait until kid is age 25).
2)  Can withdraw your original contributions with zero penalty.
3)  The tax rebate / matching money (which was 20% of the dollars put in, up to a limit), goes back to the government if not spent on education-- that's fair.
4)  The Accumulated income on both the match and your contributions, can be rolled into your retirement account, (if you have room), OR you can take it as cash.  The Government takes 20% of it (their share of the growth of the money that they provided through the matching) and you pay income tax on the rest.

. . . .

For states that offer a tax benefit on 529's is your "penalty" in the event the child does not go to school so much different?

I really don't think 529s are that different.

1.  We don't have a time limit.  But we can change the beneficiary over to someone else with no tax consequences.  So if DD doesn't need all that we have saved for her, I can redesignate her brother as the beneficiary -- or even myself, if I want to go take some college classes for fun in retirement.

2.  This is true for 529s as well.  The "penalty" is limited to the growth in the account.

3.  We don't have matching money.  But the consequence of spending the money on non-educational expenses are (i) instead of taking out the money tax-free, you pay taxes on the growth in the account at your regular income tax rate, and (ii) you pay a 10% penalty on that same figure.  That sounds fairly similar to your losing the 20% benefit the gov't provided (but would obviously be higher or lower depending on the individual's tax bracket).  Note also the penalty (but not the tax) is waived if the beneficiary dies/becomes disabled, receives a scholarship, or attends a military academy.

4.  We do not have the option to roll it into a retirement account, which would be awesome.  Then again, our retirement accounts don't have lifetime maximums but do have annual contribution limits; I imagine allowing rollovers from a 529 into an IRA would trigger a lot of 529 contributions by the high-income folks to circumvent the annual 401(k)/IRA contribution caps.*  However, the "take it in cash" option sounds very similar, as per 3 above.

I do not know what the individual state plans require, but I imagine they follow the same rules as the IRS, so the tax hit would be federal + state.  Which makes sense, as in those states you get a state tax deduction in the year you contribute, so it's only fair you pay that back if you don't use the money for its intended purpose.

I think all of the hand-wringing about 529s tends to be overstated if you are in a state with a good plan.  I get $10K in state tax deductions every year, plus that money grows tax-free (federal and state) in a low-fee index fund, plus my kids can then take out that money tax-free (federal and state) for a huge swath of educational expenses, including their rent and dining hall and laptop and such while they are at college.  That is pretty close to the "triple tax-free" benefit that you get from an HSA (just missing the federal deduction for the initial contributions).  Yet everyone here totally raves about HSAs, while 529s are largely scorned as too limited.  I don't get it.

*There are caps on total $$ in a 529 between @$235-500K, but that's a significant chunk of change compared to the $5500/yr IRA limit.
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GizmoTX

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Re: Method of Putting away for First Child's Future
« Reply #13 on: October 16, 2017, 12:50:43 PM »
...
We opted to set up an irrevocable trust for our existing son & any future children (which didn't happen) so we could retain control & to legally avoid paying kiddie tax. ...

I'm guessing this option required some costs/fees to set it up and required a sizeable minimum amount to set up? This seems like a good option if you have the resources, so I'd be interested in learning more.

There was a fee of our estate lawyer's time to properly word the trust document for our state, but we were also changing our wills to provide guardianship for our new son. We applied for the trust's TIN with the IRS ourselves & file an annual 1041 return. There's no minimum funding required other than what the chosen investment requires, in our case Vanguard. We funded it yearly with an amount under the annual gift tax maximum -- this has compounded nicely.

While DS is entitled to claim 50% of the trust funds now because he's a university graduate, he has opted to leave it in the trust rather than eventually doing a prenup. We are still the trustees.

Goldielocks

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Re: Method of Putting away for First Child's Future
« Reply #14 on: October 16, 2017, 01:36:57 PM »
Quote
4)  The Accumulated income on both the match and your contributions, can be rolled into your retirement account, (if you have room), OR you can take it as cash.  The Government takes 20% of it (their share of the growth of the money that they provided through the matching) and you pay income tax on the rest.
. . . .
For states that offer a tax benefit on 529's is your "penalty" in the event the child does not go to school so much different?

I really don't think 529s are that different.

3.  We don't have matching money.  But the consequence of spending the money on non-educational expenses are (i) instead of taking out the money tax-free, you pay taxes on the growth in the account at your regular income tax rate, and (ii) you pay a 10% penalty on that same figure.  That sounds fairly similar to your losing the 20% benefit the gov't provided (but would obviously be higher or lower depending on the individual's tax bracket).  Note also the penalty (but not the tax) is waived if the beneficiary dies/becomes disabled, receives a scholarship, or attends a military academy.
  The RESP "matching" money is very similar to state tax deduction, if you have a high income tax state
Quote
4.  We do not have the option to roll it into a retirement account, which would be awesome.  Then again, our retirement accounts don't have lifetime maximums but do have annual contribution limits; I imagine allowing rollovers from a 529 into an IRA would trigger a lot of 529 contributions by the high-income folks to circumvent the annual 401(k)/IRA contribution caps.*  However, the "take it in cash" option sounds very similar, as per 3 above.
 
  Our cap, like yours, is on the annual contribution limit, so if you have no more contribution limit, no rollover.  A big difference is that we don't lose prior year's contribution limits... they roll into the next year if you don't contribute fully, so many people can have large room for contributions in their retirement accounts.
Quote

.

I think all of the hand-wringing about 529s tends to be overstated if you are in a state with a good plan.  I get $10K in state tax deductions every year, plus that money grows tax-free (federal and state) in a low-fee index fund, plus my kids can then take out that money tax-free (federal and state) for a huge swath of educational expenses, including their rent and dining hall and laptop and such while they are at college.  That is pretty close to the "triple tax-free" benefit that you get from an HSA (just missing the federal deduction for the initial contributions).  Yet everyone here totally raves about HSAs, while 529s are largely scorned as too limited.  I don't get it.

*There are caps on total $$ in a 529 between @$235-500K, but that's a significant chunk of change compared to the $5500/yr IRA limit.

When I realized that most of the education savings money could be reclaimed for anything penalty free, including your own retirement accounts, and the remainder spent on anything if the kid goes to any kind of school, having matching funds (or income tax deduction) plus the tax free growth is terrific...

Without the matching funds, obviously fully fund the retirement accounts first.   With the matching funds or another tax deduction, it is up to your personal situation.