Author Topic: Please help guide my kids' college savings plans  (Read 286 times)

ac

  • Stubble
  • **
  • Posts: 101
Please help guide my kids' college savings plans
« on: October 03, 2017, 11:29:50 AM »
Hi all

If you are skilled in college savings strategies, please help:

We have 3 kids:  6 yo, 4 yo, and 1 yo.  I'm still working but may be independent in 2 years.

Each kid has a 529 and custodial account (UGMA).

We also have an actively managed mutual fund in a taxable account that spits out taxable dividends and capital gains and annually distorts our taxes.  It has about $35k in gains, so I'd rather not just sell it all (I don't want to pay a bunch in taxes).

So I have already stopped re-investing the dividends and cap gains from the actively managed fund, and currently that goes into the kids' custodial accounts.

But I wonder if there's a smarter way to manage that money.  I like the flexibility of the custodial accounts, but I'm not sure how manageable the taxes will be when we sell in many years.  I also understand that the custodial account will hurt the financial aid the kids might get.

So, if anyone has a clear understanding of how I should manage the Adult Taxable account with actively managed fund-529-UGMA constellation for a good balance of
1) tax efficiency
2) financial aid
3) flexibility

I'm all ears!

Snowman99

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: Please help guide my kids' college savings plans
« Reply #1 on: October 03, 2017, 11:51:06 AM »
Think of the 529 as a Roth, except there are no genuine contribution limits (I think the limit is like $400,000.00). Earnings grow tax free. You have to spend it on college related expenses. Some states offer a state income tax deduction up to a certain amount.

We just opened 2 for our kids, 3 and newborn. Our plan is to only put enough in to pay for state school. Since you get more bang for your buck if you contribute early, we are putting in a lot now, but will contribute just up to the state income tax deduction thereafter (only $2k where we live). We don't want to put too much in, because you are penalized if the money is spent on non college expenses.

ac

  • Stubble
  • **
  • Posts: 101
Re: Please help guide my kids' college savings plans
« Reply #2 on: October 03, 2017, 11:56:58 AM »
Thanks snowman

Yes, our state deducts 529 contributions from state income tax too which is great.  I also plan on avoiding putting too much in since it has to be used on education. 

So for my situation the 529 is like a Roth for federal, a HSA for state, and you can only use the money penalty-free for education.   Its the "only for education" part that compels my question. 

I do wonder if I should direct the dividends and cap gains from the active fund to an index fund. 

Snowman99

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: Please help guide my kids' college savings plans
« Reply #3 on: October 03, 2017, 01:19:37 PM »
Vanguard has a really good education planning calculator.

Using that, I made very rosy assumptions in making our plans about the future, as in college is only going to inflate 1%/year (rather than 5% what most financial planners say), and that my investments are going to bring an average return of 9% year (rather than the presumed 6-7% they give you).  Assuming we max out the deduction of $2k/year ($1k for each kid), I basically figured out I need to put $10k in seed money now and watch it grow over the next 18 years whilst funding at $1k each kid per year thereafter.

I put in the rosy assumptions specifically not to overfund the 529 accounts.  I just throw the money in Total Stock Market Index funds.  If it grows to pay 100% for school, great.  If not, the money in my taxable will cover it, or they can go out and do what I did and pay for it themselves.  If I slightly overfund or if my kid decides not to go to college, then I can change the beneficiary to another kid, my nephew, or even a grandkid. 

I truly believe the rate of college inflation will decrease because everyone in my generation is butt-hurt with student loans and is swearing by not having their kids pay the high ticket price for school.  The recent rate of inflation is simply unsustainable, and with innovations of online learning, etc., I just don't see that happening. 

But even if I'm wrong about the future it is no big deal, because it's not like we are going to be short, we are just going to have to pay a little long term capital gains.  I don't want the opposite to happen: overfunding the 529 account and be stuck with a massive 529 plan that I'm not using.

The money I put in the 529, of course, is money I consider "bonus."  It's "bonus" as in I already have my 401k and Roth IRA's maxed out.  This year, we will probably be coming into about $30k bonus in cash.  Half of that is going to the 529s ($7,500 each), and the other half is going into my "early retirement account", a taxable account.  I'll probably make up the $2,500.00 difference to the $10k "seed money" over the course of next year.  Thereafter, it is just putting in up to the maximum tax deduction, and no more.  The rest of the "bonus" goes to the "early retirement account."

The reason I am telling you all this is to show you that you can do your college savings in a way that works best for you.  The Vanguard calculator comes in handy.  I am a big state school advocate and not too keen on those fancy high price private schools.  If fancy is something you want for your kids, though, then you can take a different strategy.

Also keep in mind that as your kids get older, the benefits of the 529 plan decrease as there are less tax savings on the smaller growth you will get.  In other words, investing $10k now is going to see a lot of growth in 18 years.  Putting $100k into a 529 when your kid is 16-17, though, makes little sense, because you are putting restrictions on your cash in receipt of only 1-2 years of growth. 

Another consideration is gift tax, which applies to the 529.  There is an annual gift tax exclusion of $14,000.00, which means you can give $14k and your spouse can give $14k to your kid every year without any gift tax ramifications.  If you give more than that, then it may affect your estate/gift tax later on.  I read that you can "front load" a 529 up to five years.  Since this is not even on our radar screen, we did not look into it that much, but I believe that option is out there if you have a lot of money to spend.

Hope this helps.

Heroes821

  • Pencil Stache
  • ****
  • Posts: 513
Re: Please help guide my kids' college savings plans
« Reply #4 on: October 03, 2017, 01:22:17 PM »
Here's my 2 cents AC.

I am currently a fan of JLCollinsnh advice regarding portfolios and following advice here I am of a mind to focus on my FIRE first and fund 529s after all my ducks are in a row.

That being said I currently am the custodian on 4 529 accounts.  My three kids 8, 4, 2 months, and my niece 4.  I only give each kid $100 at Christmas and $100 on their birthday and any money given to me by relatives or family friends I put into their accounts as well. For investments my state doesn't have much but they have an S&P 500 matching index with a .6 expense ratio I think.  Either way there isn't many options. 

I think simple is much easier when you're talking about in your case 3 accounts.  The single fund portfolio is probably fine. 

You might want to look at the fees in your actively managed fund, I've heard some horror stories.

As to your bolded question. I would get your tax ducks in a row by mid December and look at what kind of hit you'll have if you liquidate that account.  Depending on income you might need to do it over a few years, but I would just shove it all in a taxable account at vanguard that you can manage with minimal effort and ultra low fees.

Also just fyi to the 529s. The Vanguard option is hosted in Nevada, which even if you live/work there you get no deduction.  All 529s can be rolled over to another state's plan once per tax year. So you move from say Ohio to Texas and no longer have state income tax, you can rollover to the Vanguard 529 and get that nice large fund selection.

Personally I plan on moving the accounts to whatever state we are currently living in if they offer deductions.

Oh, and since I'm all over the place in this post. Vanguard 529 initial funding requirement is $3000.  Ohio and South Carolina (the two I've checked out) have $25 minimum initial investment.

retired?

  • Pencil Stache
  • ****
  • Posts: 649
Re: Please help guide my kids' college savings plans
« Reply #5 on: October 08, 2017, 11:12:55 PM »
when I was young and less educated, I chose the GA 529 for our first child.  We didn't live in GA long.

I then chose UTAH's for our second child.  Never lived in Utah, but we lived in TX at the time, so there was no state benefit by choosing the "local" 529.  Utah's has a great rep and low fees.

I admit that I didn't read the entire post.  I never do that when it is that long.  So, forgive if I've missed something.

Now, my focus is on the AOTC, etc. as they are actually nearing college age.  My first child's account has benefited greatly due to timing and happening to choose "aggressive" as the option.  Things go both ways, but I'd chose moderate for my second child's account.

I am watching more closing as the horizon is shrinking.