College savings - Fully funded with a decade to go

[merula]

This is the only place that will appreciate this.

I have two kids, ages 9 and 7. When the oldest was born and I was researching saving for college, everything I read was like "Tuition costs are increasing at 10-15% per year!" Given my experience being a college student in the Aughts, I thought that couldn't possibly continue at the same pace, there was already student backlash to tuition/fee increases then, although it hadn't reached a critical mass in the general population.

So I optimistically planned for 5% annual tuition increases, and 8% growth when I started to save. I lost a few years in a managed fund 529 plan before discovering this place and switching to the Vanguard-managed NY plan. (Highly recommend if you're not in a state that ties state tax benefits to their own plan, nysaves.org, 0.19% ER.)

I was telling a family member about 529 plans and college savings, which caused me to re-look at my own savings plan and recent trends in tuition growth. According to https://research.collegeboard.org/trends/college-pricing, public 4-year tuition in my state has increased on average 2% per year on a nominal basis in the past 9 years, and tuition at the public flagship university that's my benchmark has only increased 1.7% per year.

I guess I was more right 9 years ago than I thought.

If I conservatively assume that my investments will earn 8% per year (my actual 5 year IRR is >15%), and tuition/room/board will grow at 3% per year, with no additional contributions, I've still over-funded my kids' 529 plans.

Maybe they'll want to go to grad school?

[AMandM]

Wow, congrats!

[secondcor521]

Congratulations!

A couple of comments from the dad of three college-aged kids:

1.  My kids had what I thought were fully funded college accounts as well.

On the one hand, there were increased costs that I didn't expect (additional semesters of college, private high school), and some college expenses that 529s don't cover (at least not as qualified expenses) such as college visits, SAT/AP test fees, travel back and forth to school, and student health insurance.

On the other hand, they also have received various scholarships and grants that have helped cover the costs.  Plus tax benefits (see #2 below).

In total, I expected to pay for 24 semester-equivalents of college (3 kids x 4 years x 2 semesters per year).  Currently it looks like I'm going to pay for about 21 semester-equivalents of college.

2.  Read up on the AOTC - American Opportunity Tax Credit.  What I settled on as the best strategy for me was to pay for the first $4K of expenses out of pocket and claim the AOTC, getting a $2500 credit on my taxes, then use the 529 for anything left after AOTC, scholarships, and grants.

3.  There are various tax-efficient ways to handle excess 529 money.  Grad school, grandkids, maybe nieces/nephews all work.  Or, and this is what my eldest chose to do, you can distribute the excess in the December of their last year.  The earnings portion of the distribution is taxable income to them, but if they're a full time student and thus low income, most or all of the distribution is covered by their standard deduction, and they'll owe little to no income taxes.  We also claimed the scholarship exemption and avoided the 10% penalty on the earnings portion as well.

4.  Remain flexible.  I naively thought when modeling it out that my kids would start college right out of high school at age 18, and each go to school for four years.  Not so much.  My kids may be atypical, but they've changed schools, changed majors multiple times, taken time off to work / avoid COVID, chosen degrees that are 9 semesters long.  And they ended up going to private high school, which wasn't in the plan but ended up being paid for from 529s anyway.  So have a plan and a funding goal, but be ready to adapt and change as you and your kids figure out which way they're going to go.

[merula]

Thanks @secondcor521. I do volunteer tax prep, so I'm familiar with the AOTC and LLC. My original plan was to not fully-fund the 529s but pay out of pocket for the AOTC (or LLC, if they go longer than 4 years) portions.

When you say you distributed the excess to them in December, do you mean the December when they were still a student, or the December after they graduated?

[Dicey]

PTF. We're about to dump a big pile o'money into accounts for the grandkids. NYsaves looks interesting.

[secondcor521]

Thanks @secondcor521. I do volunteer tax prep, so I'm familiar with the AOTC and LLC. My original plan was to not fully-fund the 529s but pay out of pocket for the AOTC (or LLC, if they go longer than 4 years) portions.

When you say you distributed the excess to them in December, do you mean the December when they were still a student, or the December after they graduated?

Yay for volunteer tax prep!

In the case of my kid, he graduated in December of 2020, and I made the distribution in December of 2020.  So his 529 NQ distribution was in a tax year where he had essentially zero other income because he was a full time student all of 2020.  He started his first job in January 2021.  It worked out really well.

When to make a distribution like this depends on two things.  First, on how much to distribute, which becomes more apparent the closer you get to graduation.  Second, on what the student's tax situation looks like around graduation.  For December graduates like my son, it's really easy because it's December, they're graduating, and you know both how much to distribute and what their tax situation is like that year.

For a May or an August graduate, it's trickier, because you might not know what their income situation is like the rest of that year after they finish school.  And you may or may not want to distribute the money to them around graduation - maybe they need it and you want to supply it, or maybe you're worried they'll be less motivated to work if they can just live on their leftover 529 money for a while.  You could always do one smaller distribution around graduation and then a larger one that December (3-6 months after graduation) once you know their income tax situation.

The general tax planning point is that year they graduate they're probably in a lower bracket than they will be once they're working full time, so if you're going to do a 529 NQ distribution anyway, it might as well be in a lower tax bracket year.

[Blissful Biker]

That's great news merula.

Our plan was to fund just the first 3 years of education for our kids.  We wanted them to have a good set up but thought it was important for them to have some skin in the game.  We stopped contributing years ago but this bull market has blown our plans.  They now each have funding for 4.5 years of post secondary education. 

We've told them the money is theirs and if they are frugal, supplement with scholarships, etc, they might end up with a nice bit of cash when they finish school.  The first starts uni next year but they have really embraced the goal of using their money wisely.  Phew.

[Geppetto]

I'm just jumping into college savings (late), but we're blasting it with all available resources into brand-new 529s. We have a modest goal for supporting each of our 6 kids. They range in age from 14 to newborn. It adds up to about a quarter million of deposits over the next 3 years, just to give them each the equivalent of $15k/year in present value, for 4 years, to work with when they reach college age.

It's weird funding the newborn's account first. But the math adds up of course. The oldest kid is going to have a minimal growth opportunity so we're funding his last.

I hated this concept of 529s and inflexible spending uses for a long time and it means playing catchup now. But now that I've bitten the bullet it's fun to have that target out there and try to accelerate the achievement of it. Then if we can do more for them later (and if they have solid plans for deploying our support), so much the better.

[Abe]

I looked at Fidelity and Vanguard's calculators and they're estimating $450-$500 a month for next 13 years to fund our one child's college public school expenses, or ~$750-$850 a month for private school. That's a lot! Is this roughly what you all are contributing, or am I miscalculating?

[Dicey]

Wouldn't there penalties for using the "leftover" funds for what don't appear to be schooling related expenses? How does that work?

[Geppetto]

I looked at Fidelity and Vanguard's calculators and they're estimating $450-$500 a month for next 13 years to fund our one child's college public school expenses, or ~$750-$850 a month for private school. That's a lot! Is this roughly what you all are contributing, or am I miscalculating?

If you plan to pay sticker price, and fund 100% of that, those numbers sound about right.

But those are non-mustachian assumptions.

And the more you contribute early on, the more heavy lifting the compounding of the investments will do, and the less you’ll have to contribute overall to hit your target.

[boarder42]

I looked at Fidelity and Vanguard's calculators and they're estimating $450-$500 a month for next 13 years to fund our one child's college public school expenses, or ~$750-$850 a month for private school. That's a lot! Is this roughly what you all are contributing, or am I miscalculating?

depends on how the digitization of learning pivots college over the next 13 years.  I'd argue most learning can be done ad hoc today and large scale degree programs may start to become dinosaurs in 13 years then you're left with a bunch of cash to pay for something that has gotten much cheaper.  Lets face it education and healthcare costs are going to reach the point at which technology and the free market overtake the current trends.

[secondcor521]

Wouldn't there penalties for using the "leftover" funds for what don't appear to be schooling related expenses? How does that work?

Generally (for 529s at least):

There are expenses which qualify and are completely tax free.

Anything withdrawn other than that, there is generally ordinary income tax plus a 10% penalty.  This goes on the student's income tax return.

The 10% penalty can be avoided in certain circumstances (most commonly if the student gets scholarships, but there are a number of other exceptions as well).

[Dicey]

Wouldn't there penalties for using the "leftover" funds for what don't appear to be schooling related expenses? How does that work?

Generally (for 529s at least):

There are expenses which qualify and are completely tax free.

Anything withdrawn other than that, there is generally ordinary income tax plus a 10% penalty.  This goes on the student's income tax return.

The 10% penalty can be avoided in certain circumstances (most commonly if the student gets scholarships, but there are a number of other exceptions as well).

Saying "the money is theirs" and discussing post-graduation distribution is confusing to me. I think you both mean, "After the 10% penalty and income taxes", the money is theirs? I.e., it's potentially  available, but there are strings attached. I guess if the parents were high income at the time the accounts were created and the student's first job pays less, there could be some slight advantage, even after the 10% penalty, but is seems like a lot of hassle and uncertainty for minimal gains. What am I missing?

[secondcor521]

Wouldn't there penalties for using the "leftover" funds for what don't appear to be schooling related expenses? How does that work?

Generally (for 529s at least):

There are expenses which qualify and are completely tax free.

Anything withdrawn other than that, there is generally ordinary income tax plus a 10% penalty.  This goes on the student's income tax return.

The 10% penalty can be avoided in certain circumstances (most commonly if the student gets scholarships, but there are a number of other exceptions as well).

Saying "the money is theirs" and discussing post-graduation distribution is confusing to me. I think you both mean, "After the 10% penalty and income taxes", the money is theirs? I.e., it's potentially  available, but there are strings attached. I guess if the parents were high income at the time the accounts were created and the student's first job pays less, there could be some slight advantage, even after the 10% penalty, but is seems like a lot of hassle and uncertainty for minimal gains. What am I missing?

You quoted me, but I never wrote "the money is theirs" so I'm not sure who you're actually replying to.

Yes, there are strings attached.

What you're missing (ignoring?  downplaying?) is the tax free growth for most education expenses.  Also there can be state-level tax incentives for contributions.  And for people who don't like to or who are not good at managing, there are age-level investment options which are analogous to target-date retirement funds.

There's no requirement that you like or use them.  I can't tell if you don't understand or just don't agree.

[Abe]

Wouldn't there penalties for using the "leftover" funds for what don't appear to be schooling related expenses? How does that work?

Generally (for 529s at least):

There are expenses which qualify and are completely tax free.

Anything withdrawn other than that, there is generally ordinary income tax plus a 10% penalty.  This goes on the student's income tax return.

The 10% penalty can be avoided in certain circumstances (most commonly if the student gets scholarships, but there are a number of other exceptions as well).

Saying "the money is theirs" and discussing post-graduation distribution is confusing to me. I think you both mean, "After the 10% penalty and income taxes", the money is theirs? I.e., it's potentially  available, but there are strings attached. I guess if the parents were high income at the time the accounts were created and the student's first job pays less, there could be some slight advantage, even after the 10% penalty, but is seems like a lot of hassle and uncertainty for minimal gains. What am I missing?

I think the benefits in the end are no contribution limit, tax-free earnings growth, and some states give a state tax deduction for contributions.  The big disadvantage is if the kid doesn’t go to any private school or post-secondary training, and there’s no one else in the family (beneficiary’s siblings, cousins, children, niece/nephews, etc) who can use the 529 funds. So for smaller or estranged families, there is that risk. Unfortunately it cannot be donated to a charitable fund, even for scholarships.

[boarder42]

Wouldn't there penalties for using the "leftover" funds for what don't appear to be schooling related expenses? How does that work?

Generally (for 529s at least):

There are expenses which qualify and are completely tax free.

Anything withdrawn other than that, there is generally ordinary income tax plus a 10% penalty.  This goes on the student's income tax return.

The 10% penalty can be avoided in certain circumstances (most commonly if the student gets scholarships, but there are a number of other exceptions as well).

Saying "the money is theirs" and discussing post-graduation distribution is confusing to me. I think you both mean, "After the 10% penalty and income taxes", the money is theirs? I.e., it's potentially  available, but there are strings attached. I guess if the parents were high income at the time the accounts were created and the student's first job pays less, there could be some slight advantage, even after the 10% penalty, but is seems like a lot of hassle and uncertainty for minimal gains. What am I missing?

I think the benefits in the end are no contribution limit, tax-free earnings growth, and some states give a state tax deduction for contributions.  The big disadvantage is if the kid doesn’t go to any private school or post-secondary training, and there’s no one else in the family (beneficiary’s siblings, cousins, children, niece/nephews, etc) who can use the 529 funds. So for smaller or estranged families, there is that risk. Unfortunately it cannot be donated to a charitable fund, even for scholarships.

could possibly use it for yourself to take the UofV Semester at sea program.

[merula]

I looked at Fidelity and Vanguard's calculators and they're estimating $450-$500 a month for next 13 years to fund our one child's college public school expenses, or ~$750-$850 a month for private school. That's a lot! Is this roughly what you all are contributing, or am I miscalculating?

I'm assuming the costs are based on my state's flagship public university's published "total cost of attendance". My issue is that, 9 years ago, that cost was $24,000, and the calculators like what you're looking at assumed 10%+ annual increases, so they were projecting that in 2030, the total cost of attendance would be $130k, and the monthly savings amounts were predictably insane.

I projected 5% instead, which would mean originally I thought 2030 costs would be closer to $58k. However, since it's now at $29k instead, my updated assumption at 3% annual increases is that it'll be $38k in 2030, and I think that's conservative still.

I was originally targeting to save around $1,500 per year per kid in the 529s, but ended up overshooting that a bit when I ran out of other tax-advantaged space, and the growth has been way more than I ever would've predicted.

[Dicey]

Wouldn't there penalties for using the "leftover" funds for what don't appear to be schooling related expenses? How does that work?

Generally (for 529s at least):

There are expenses which qualify and are completely tax free.

Anything withdrawn other than that, there is generally ordinary income tax plus a 10% penalty.  This goes on the student's income tax return.

The 10% penalty can be avoided in certain circumstances (most commonly if the student gets scholarships, but there are a number of other exceptions as well).

Saying "the money is theirs" and discussing post-graduation distribution is confusing to me. I think you both mean, "After the 10% penalty and income taxes", the money is theirs? I.e., it's potentially  available, but there are strings attached. I guess if the parents were high income at the time the accounts were created and the student's first job pays less, there could be some slight advantage, even after the 10% penalty, but is seems like a lot of hassle and uncertainty for minimal gains. What am I missing?

You quoted me, but I never wrote "the money is theirs" so I'm not sure who you're actually replying to.

Yes, there are strings attached.

What you're missing (ignoring?  downplaying?) is the tax free growth for most education expenses.  Also there can be state-level tax incentives for contributions.  And for people who don't like to or who are not good at managing, there are age-level investment options which are analogous to target-date retirement funds.

There's no requirement that you like or use them.  I can't tell if you don't understand or just don't agree.

Whoa, there's no disagreement here whatsoever! I was writing on a small device and multiple quotes are tricky. I did quote your post, and then I put the words of someone else in quotes, to indicate they were separate from yours. I also used the words, "I think you both mean..."

I felt there was a general impression being created that the money was easy to spend after the fact, which is why I was seeking clarification.

Clearly, I missed something, but I am not "ignoring" or "downplaying" anything. I truly want to understand. DH and I are about to dump a bunch of money into our grandkids' 529s and I want to make sure we're doing the right thing in the right way*. FWIW, we are using the Utah 529 Plan. Looks to be even cheaper than NYSaves. I'm not surprised, because I originally learned about the Utah plan on this forum. My state does not offer any tax breaks, so that's not a consideration.

Finally, your last two sentences are kind of very off putting. When someone says "I'm confused" and "How does that work?" isn't it clear they're asking for help? Why have you inferred so much negativity?

*I have questions about how best to do that, but I think I'll keep them separate from this exchange.

[secondcor521]

<snipped to save space>

Whoa, there's no disagreement here whatsoever! I was writing on a small device and multiple quotes are tricky. I did quote your post, and then I put the words of someone else in quotes, to indicate they were separate from yours. I also used the words, "I think you both mean..."

@Dicey, no worries.  Apparently I've been overly sensitive the past couple of days.  That's on me.  Sorry.

Yes, you did, and I noticed both of those things.  It was still confusing to me.

I felt there was a general impression being created that the money was easy to spend after the fact, which is why I was seeking clarification.

Not sure what you mean here by "after the fact".  It's easy to spend the money after the account is opened and funded, especially if on qualified educational expenses.  If you mean after they graduate, then it's similarly easy to spend, although there are tax consequences.

Clearly, I missed something, but I am not "ignoring" or "downplaying" anything. I truly want to understand. DH and I are about to dump a bunch of money into our grandkids' 529s and I want to make sure we're doing the right thing in the right way*. FWIW, we are using the Utah 529 Plan. Looks to be even cheaper than NYSaves. I'm not surprised, because I originally learned about the Utah plan on this forum. My state does not offer any tax breaks, so that's not a consideration.

Finally, your last two sentences are kind of very off putting. When someone says "I'm confused" and "How does that work?" isn't it clear they're asking for help? Why have you inferred so much negativity?

*I have questions about how best to do that, but I think I'll keep them separate from this exchange.

It was clear you were asking for help.  I inferred some negativity for two reasons:  First, your original comments were negative ("lot of hassle", "minimal gain") and did not mention any of the benefits of the 529 plan.  Second, your questions seemed very easily answerable with some quick googling, and I know you're a smart person (you've survived Agile), so it came across as "I don't want to do the research, prove me wrong" - maybe not what you meant, but how it came across to me.

Note I did answer the question when you asked for help.  So did @Abe.

[Abe]

could possibly use it for yourself to take the UofV Semester at sea program.

That gives me the idea - maybe can use the excess to get my captains license and charter sailboats as a “business” in retirement.

[Abe]

I looked at Fidelity and Vanguard's calculators and they're estimating $450-$500 a month for next 13 years to fund our one child's college public school expenses, or ~$750-$850 a month for private school. That's a lot! Is this roughly what you all are contributing, or am I miscalculating?

I'm assuming the costs are based on my state's flagship public university's published "total cost of attendance". My issue is that, 9 years ago, that cost was $24,000, and the calculators like what you're looking at assumed 10%+ annual increases, so they were projecting that in 2030, the total cost of attendance would be $130k, and the monthly savings amounts were predictably insane.

I projected 5% instead, which would mean originally I thought 2030 costs would be closer to $58k. However, since it's now at $29k instead, my updated assumption at 3% annual increases is that it'll be $38k in 2030, and I think that's conservative still.

I was originally targeting to save around $1,500 per year per kid in the 529s, but ended up overshooting that a bit when I ran out of other tax-advantaged space, and the growth has been way more than I ever would've predicted.

Thanks for the insight. I’ll see what my states’ schools’ rates are. And maybe the California system (if he went there we’d move in a heartbeat. But not in the same town. Just the same state!)

[merula]

FWIW, we are using the Utah 529 Plan. Looks to be even cheaper than NYSaves. I'm not surprised, because I originally learned about the Utah plan on this forum. My state does not offer any tax breaks, so that's not a consideration.

Can you help me understand where you found information comparing NY and UT plan fees?

What I see on the Utah plan site is that the fund ERs range from 0.031% to 0.353% (there are some 0.000% ERs, but it's not clear what those are) plus an administration fee of between 0.10% and 0.15%.

What I see on the NY plan site, is that everything is a flat 0.13% ER with no other fees.

So I guess if you had an option with the 0.10% admin fee and 0.000% ER, that would be cheaper than the NY plan, but it's not clear to me which that would be.

I probably wouldn't change at this point over 0.03%, but this whole thing started from advising a family member, and I'd like to make sure I'm pointing them to the best option.

[charis]

My confusion is how are you avoiding the 10% penalty if taking distributions after the student has graduated?

[Dicey]

FWIW, we are using the Utah 529 Plan. Looks to be even cheaper than NYSaves. I'm not surprised, because I originally learned about the Utah plan on this forum. My state does not offer any tax breaks, so that's not a consideration.

Can you help me understand where you found information comparing NY and UT plan fees?

What I see on the Utah plan site is that the fund ERs range from 0.031% to 0.353% (there are some 0.000% ERs, but it's not clear what those are) plus an administration fee of between 0.10% and 0.15%.

What I see on the NY plan site, is that everything is a flat 0.13% ER with no other fees.

So I guess if you had an option with the 0.10% admin fee and 0.000% ER, that would be cheaper than the NY plan, but it's not clear to me which that would be.

I probably wouldn't change at this point over 0.03%, but this whole thing started from advising a family member, and I'd like to make sure I'm pointing them to the best option.

I looked at the same websites that you did. The difference(s) seem like splitting hairs. Someone else can point out the obvious if I'm missing something. Never have I ever presented myself as an expert on this topic. I just know what I've learned thanks to the help of other smart mustachians.

[secondcor521]

My confusion is how are you avoiding the 10% penalty if taking distributions after the student has graduated?

See exceptions on 10% penalty on page 62 of Pub 970 here:

https://www.irs.gov/pub/irs-pdf/p970.pdf

We're using 3a.

Some people assert that the scholarship and the withdrawal must occur in the same year.  I see no such requirement in the IRS documentation.  The IRS has not yet clarified their position on this topic AFAIK.

[moof]

Similar here.  Kiddo just started 3rd grade and has 63k in his 529.  Pretty sure it will cover the worst of college costs with a full decade left to soak in the market.  It is 63k more than I ever had, so not sure I will have much sympathy if he can’t get a decent education with it.

[boarder42]

Similar here.  Kiddo just started 3rd grade and has 63k in his 529.  Pretty sure it will cover the worst of college costs with a full decade left to soak in the market.  It is 63k more than I ever had, so not sure I will have much sympathy if he can’t get a decent education with it.

So are you Fi then?  General question to all here is if you aren't Fi why are you stuffing these accounts. I think a lot of people even here over look the fungibility of money.

[Abe]

Similar here.  Kiddo just started 3rd grade and has 63k in his 529.  Pretty sure it will cover the worst of college costs with a full decade left to soak in the market.  It is 63k more than I ever had, so not sure I will have much sympathy if he can’t get a decent education with it.

So are you Fi then?  General question to all here is if you aren't Fi why are you stuffing these accounts. I think a lot of people even here over look the fungibility of money.

Maxed out all three out my wife and my tax-deferred accounts, over income limits for Roth IRA, and would rather pay for their college with tax-free earnings rather than my brokerage account. Also, the 10% penalty if they end up not using the funds is a minor inconvenience for our budget. Is there a good reason to not use 529s in this scenario?

[charis]

I would say stuffing, but we maxed 2 401ks, 457, 2 IRAs, HSA, and just started maxing 529 tax deductible contribution, plus brokerage after that.

[boarder42]

Similar here.  Kiddo just started 3rd grade and has 63k in his 529.  Pretty sure it will cover the worst of college costs with a full decade left to soak in the market.  It is 63k more than I ever had, so not sure I will have much sympathy if he can’t get a decent education with it.

So are you Fi then?  General question to all here is if you aren't Fi why are you stuffing these accounts. I think a lot of people even here over look the fungibility of money.

Maxed out all three out my wife and my tax-deferred accounts, over income limits for Roth IRA, and would rather pay for their college with tax-free earnings rather than my brokerage account. Also, the 10% penalty if they end up not using the funds is a minor inconvenience for our budget. Is there a good reason to not use 529s in this scenario?

I just run custodial accounts for our kids and harvest gains to reset cost basis up to the max annually. Then plan to get creative to shove this into much more versatile Roth accounts for them. I'm on the side of the fence that college will change both in the way it's administered and the cost. I also have spent alot of time working with local districts on changing HS education around my area. Having a bucket of money basically for a single purpose will influence yours and your kids decision to send them to college even if it doesn't make sense imo.  I mean just look at what Salesforce and google offer today. 6 months out of HS your kids could be making 60k or more a year. This type of education will only grow and change over time imo.

[JJ-]

Personally I would prefer to avoid 529s and have kids pay for their own schooling with help as needed, but DW and I agreed to fund 4 years in state + room and board. Result of different backgrounds as her dad footed the bill for undergrad and grad (both private) while i paid my own. We front loaded 529 accounts and now will just let it sit and hopefully grow to this expected amount.

With 529s and college expenses the AA recommendations are separate from your overall portfolio. With these funds set aside in a separate account you can manage the rising bond component without complicating it across all your accounts.

I think a lot of people even here over look the fungibility of money.

I don't think that's true. Usually in discussions about 529 you see discussions around AOTC and/or LLC and/or UTMA and/or taxable. AOTC explicitly addresses fungibility as it requires non-529 money to collect.

I know this place is a break the mainstream kind of place and while we as parents can control ourselves, we can only guide kids. As much as we can try and push them towards non university degrees the stats are that kids with parents of degrees follow suit. Hopefully in 10 years when our oldest is starting to look at college the landscape is a bit different.

We're not FI. The amount we put into their 529s is somewhere between one and 2 years of savings depending on whether DW and are are fully employed both. It's much easier for us to come up with this amount of money now than it will be for them taking it on earlier in their career. It's a tradeoff we were willing to make but it's 100% personal for each family.

[Captain FIRE]

It's much easier for us to come up with this amount of money now than it will be for them taking it on earlier in their career. It's a tradeoff we were willing to make but it's 100% personal for each family.

+1

We strongly believe in education and also believe we both got an excellent start by going to a top college.  While you absolutely can succeed just as well by being in the top of your class at other schools, getting into that top percent can be much harder.  I've taken classes at community college, a good state college and a top college and definitely noticed a quality difference between each.  We'd like to help our kids by paying for a substantial chunk of college so it's not strangling them when they are starting out, and allows them to go to 4 years of the school they want.  They'll still pay for some to have "skin in the game".  My spouse had all of his college paid for by family and need grants and is very appreciate of that start, particularly as he watches me (us) pay off the rest of my college bill and grad school.  (He received a stipend for his grad school.)  His mom gave him a very generous start by helping him with a downpayment as well, so he feels the need to pay it forward.  It's a personal decision for our family and I recognize that this is sacrilege for many mustachians to fund private college so I don't try to debate our decision with others.

We are aiming for 75% of college costs of a 4 year private college.  We max out the gift limit right now ($30k/year) to maximize the tax advantaged growth with the intent to fund early and just adjust a tiny bit in later years.

4 year old has $160k
1 years has $24k

We are not able to invest in Roth IRAs or HSAs so our priority order is: tax deferred limit to 401k & 457b, gift tax limit to 529s, additional compensation to 401k to bring it up to $59k limit, then regular brokerage accounts.

We're aiming for 75% in 529s to give space if markets do better than expected.  If we overshoot, we'll pay for grad school, take some fun classes ourselves, or withdraw and pay the 10% penalty.

[boarder42]

Personally I would prefer to avoid 529s and have kids pay for their own schooling with help as needed, but DW and I agreed to fund 4 years in state + room and board. Result of different backgrounds as her dad footed the bill for undergrad and grad (both private) while i paid my own. We front loaded 529 accounts and now will just let it sit and hopefully grow to this expected amount.

With 529s and college expenses the AA recommendations are separate from your overall portfolio. With these funds set aside in a separate account you can manage the rising bond component without complicating it across all your accounts.

I think a lot of people even here over look the fungibility of money.

I don't think that's true. Usually in discussions about 529 you see discussions around AOTC and/or LLC and/or UTMA and/or taxable. AOTC explicitly addresses fungibility as it requires non-529 money to collect.

I know this place is a break the mainstream kind of place and while we as parents can control ourselves, we can only guide kids. As much as we can try and push them towards non university degrees the stats are that kids with parents of degrees follow suit. Hopefully in 10 years when our oldest is starting to look at college the landscape is a bit different.

We're not FI. The amount we put into their 529s is somewhere between one and 2 years of savings depending on whether DW and are are fully employed both. It's much easier for us to come up with this amount of money now than it will be for them taking it on earlier in their career. It's a tradeoff we were willing to make but it's 100% personal for each family.

Why do kids of parents with degrees follow suit. Correlation and causation are different things. I've sat at a table with a super intendent who has been preaching alternatives to college education for years as college is not for everyone but he couldn't follow his own advice and after 6 years of college for his oldest son he realized how large this mental block is for people bc go to college has been indoctrinated into society for decades. But real data based on college graduation rates and working in the field of the degree compared to kids who start high school shows maybe 10-15% of kids should attend the standard college higher education path.  Feel free to continue to contribute to the broken system but I don't want money allocated to such a specific use bc for efficient use of dollars I will direct my kids to college if I have this account.

[JJ-]

Personally I would prefer to avoid 529s and have kids pay for their own schooling with help as needed, but DW and I agreed to fund 4 years in state + room and board. Result of different backgrounds as her dad footed the bill for undergrad and grad (both private) while i paid my own. We front loaded 529 accounts and now will just let it sit and hopefully grow to this expected amount.

With 529s and college expenses the AA recommendations are separate from your overall portfolio. With these funds set aside in a separate account you can manage the rising bond component without complicating it across all your accounts.

I think a lot of people even here over look the fungibility of money.

I don't think that's true. Usually in discussions about 529 you see discussions around AOTC and/or LLC and/or UTMA and/or taxable. AOTC explicitly addresses fungibility as it requires non-529 money to collect.

I know this place is a break the mainstream kind of place and while we as parents can control ourselves, we can only guide kids. As much as we can try and push them towards non university degrees the stats are that kids with parents of degrees follow suit. Hopefully in 10 years when our oldest is starting to look at college the landscape is a bit different.

We're not FI. The amount we put into their 529s is somewhere between one and 2 years of savings depending on whether DW and are are fully employed both. It's much easier for us to come up with this amount of money now than it will be for them taking it on earlier in their career. It's a tradeoff we were willing to make but it's 100% personal for each family.

Why do kids of parents with degrees follow suit. Correlation and causation are different things. I've sat at a table with a super intendent who has been preaching alternatives to college education for years as college is not for everyone but he couldn't follow his own advice and after 6 years of college for his oldest son he realized how large this mental block is for people bc go to college has been indoctrinated into society for decades. But real data based on college graduation rates and working in the field of the degree compared to kids who start high school shows maybe 10-15% of kids should attend the standard college higher education path.  Feel free to continue to contribute to the broken system but I don't want money allocated to such a specific use bc for efficient use of dollars I will direct my kids to college if I have this account.

I agree that a majority of students are pushed into the higher Ed system due to "culture" or whatever reasons. Kids are influenced by the choices their parents have made in addition to active counseling.

I don't agree that by owning 529s you're defaulting your kids to college and paying into a broken system. Just like traditional 401k/IRA contributions doesn't lock you into retiring at 59.5. Granted, there are more ways to unlock funds contributed to traditional accounts without penalties than 529s.

I think anybody here would be foolish to believe that it's financially better to spend $100k+ on higher education just because that amount of money lives in a 529 instead of paying the penalties and taxes if your child breaks the mold and chooses alternate paths. As long as you are aware of the bias you can process it accordingly.

My mentality on this is that it's more like banking on a lower tax rate in retirement and leaning more to traditional than Roth accounts. If I'm right, great. If I'm wrong, oh well.

[moof]

Similar here.  Kiddo just started 3rd grade and has 63k in his 529.  Pretty sure it will cover the worst of college costs with a full decade left to soak in the market.  It is 63k more than I ever had, so not sure I will have much sympathy if he can’t get a decent education with it.

So are you Fi then?  General question to all here is if you aren't Fi why are you stuffing these accounts. I think a lot of people even here over look the fungibility of money.

Not FI, 79% of the way there.  It is a choice that predates my FIRE journey by a couple years and we’ve stuck with it..  The goal was to make sure our kid could go to state school debt free.  We max out all the usual accounts, and the 529 gets 9% state taxes avoided on the contributions.  After that there is still a heap going to our brokerage.  I’m well aware of the fungibility of money, I’m also aware of the power of compartmentalizing the account in my kid’s mind as being his college money, no more, no less.

[Geppetto]

I don't agree that by owning 529s you're defaulting your kids to college and paying into a broken system. Just like traditional 401k/IRA contributions doesn't lock you into retiring at 59.5. Granted, there are more ways to unlock funds contributed to traditional accounts without penalties than 529s.

I think anybody here would be foolish to believe that it's financially better to spend $100k+ on higher education just because that amount of money lives in a 529 instead of paying the penalties and taxes if your child breaks the mold and chooses alternate paths. As long as you are aware of the bias you can process it accordingly.

My mentality on this is that it's more like banking on a lower tax rate in retirement and leaning more to traditional than Roth accounts. If I'm right, great. If I'm wrong, oh well.

Exactly. Sunk cost theory in other words. Putting the funds in a 529 should meet a rationality test up front - i.e. is there a significant likelihood that the funds will be used for the restricted higher-ed purpose? Because the choice of where to save does influence the value proposition when the kid is figuring out what to do years later. But it doesn't force anything in particular to happen. "I'll take 100% of those funds and pay them over to college" versus "I'll take 80% of those funds after penalties and start a business" is a perfectly reasonable set of choices to have at one's disposal.

[lifeisshort123]

How much should a "fully funded" account include? $200k? $500k?

[Captain FIRE]

How much should a "fully funded" account include? $200k? $500k?

I imagine it depends on the age of the kid, what you anticipate for returns (if you want to err on the side of too much or too little), what type of school you are saving for (community, public, private, or more expensive private), how much you intend on paying for, etc. We will pause on contributions for our oldest (5) at the end of this year when it’s ~$185k.

[Jesticle]

In Canada, we have RESP's for kids. If we deposit $2500 per year, the Gov't will add $500 on top. My oldest is 3, and I invested her RESP's in oil stocks, as well as dividend payers. Currently worth close to 10K. I believe these Registered Education Savings Plans top out at 50k.

My youngest isn't a year old, and we're going to add $2500 into her account before end of year.

I won't tell the kids about these funds. They will have to work towards post secondary Education, and we will guide them along the way. If they don't use the funds, the funds flow back to the Parents.

[w@nker]

Great work, OP!

I initially struggled with the question of whether a 529 was the right path, but ultimately became committed to the idea that my kids will have every opportunity to pursue higher education without it becoming a financial decision for them in any way.  That is a luxury I didn’t have.  I went to a state school for undergrad (financially motivated) and an Ivy League institution for graduate school.  The contrast in the quality of the education…and personal growth…is night and day.  It also helps that Insee great potential in both of my children.  If they didn’t have the cognitive aptitude, perhaps I would have reconsidered my 529 contributions along the way.