Author Topic: 529 Plan vs Something Else for college savings?  (Read 1143 times)

Jules13

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529 Plan vs Something Else for college savings?
« on: January 12, 2018, 08:32:49 AM »
So, I've read comments in the past from some who don't use a 529 plan for college savings, but I'm not clear on the reasons against it.

I'd love to hear more about this and what your preferred college savings method of choice is and why. 

Thanks.




MM_MG

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Re: 529 Plan vs Something Else for college savings?
« Reply #1 on: January 12, 2018, 08:42:10 AM »
We do not use 529 accounts.  No tax savings in our state.  We are able to save $20K+ annually into a "mega-backdoor" roth IRA and will use that to help pay for college, if necessary. We'll likely cash flow college when the time comes.   Unless we decide to retire early, and in that case we'll just set aside a portion of our accumulated wealth for school.   

Wings5

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Re: 529 Plan vs Something Else for college savings?
« Reply #2 on: January 12, 2018, 11:44:29 AM »
We divide our kids' education budget in half. We put one half in Coverdell ESAs and the other pays for lessons or camps now.

Coverdells: At only $2,000 per year maximum contribution per child, it's also a way for us to avoid overspending for college. The kids will know they need to work and have skin in the game when they go. Work a job, join the military, or start a side gig.

Spending Money Now: There are plenty of reasons to not save for college. It's only a 3-5 year window and there's plenty that comes before it that builds a person's intellect and character.

We've already capped our college savings contributions at $2,000 per child. Before we maximize that amount, we let each kid pick some kind of educational experience - music or language lessons, computer club, science camp, or something else they normally may not do. Go find what you enjoy and let's get after it!

We're also planning to take a longer family vacation somewhere to learn a foreign language together. After those grow-your-brain activities are paid for, we got back to maxing out the Coverdells.

FireHiker

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Re: 529 Plan vs Something Else for college savings?
« Reply #3 on: January 12, 2018, 11:53:24 AM »
There is no tax advantage in my state, so we will just cash flow it for the oldest and use other savings for the two younger ones (oldest goes fall 2019, then 9 year gap). We easily have enough fat to cut in 2019, plus savings rate, to pay as we go. I prefer the flexibility at this point since I have no idea what the kids will want to do when their time comes (including the oldest who is a high school junior...sigh).

TreeTired

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Re: 529 Plan vs Something Else for college savings?
« Reply #4 on: January 12, 2018, 11:59:39 AM »
We were very lucky with our 529 investments.  At the time (2008, 2009) our sons were approaching college age and the 529 plan trustee used age-based investing so their funds were in short term US Treasuries when the market crashed.

But the 529 plan itself was a PIA.  Two problems,  1. You have to line up college bills with your 529 withdrawals, so if you get a tuition bill in December and pay it in January you create a timing problem.   and 2.  One year we used a tax credit which made the gains in the 529 plan withdrawals taxable. Seemed like a lot of trouble to go through for nothing.

I think the best college savings investment for a young child would be a growth stock with low or no dividends, so with a little market luck in 16 or 18 years you will be taking capital gains.
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nawhite

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Re: 529 Plan vs Something Else for college savings?
« Reply #5 on: January 12, 2018, 12:40:50 PM »
Mostly PTF but one option that I'm a fan of is: once they are old enough to work, you can match their earnings 100% with contributions in their name to a Roth IRA. Contributions can be withdrawn at any time tax and penalty free and any earnings between contribution and withdrawal will continue to grow forever tax free until they retire. The biggest problem is that you can't contribute to it until they start working and then those contributions are limited to however much they earn which will likely be much less than the cost of college.
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Bateaux

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Re: 529 Plan vs Something Else for college savings?
« Reply #6 on: January 12, 2018, 01:12:06 PM »
I used Coverdells Education IRAs.  I opened them when my kids were born and funded them monthly. 
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seattlecyclone

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Re: 529 Plan vs Something Else for college savings?
« Reply #7 on: January 12, 2018, 03:02:29 PM »
We have a 529 for our son. It's not something I would recommend until after you have maxed out every retirement account available to you, but if you have some money to save after that and you are pretty sure it will be used for college you might as well let it grow tax-free.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

AdrianC

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Re: 529 Plan vs Something Else for college savings?
« Reply #8 on: January 12, 2018, 04:59:05 PM »
We have a 529 for our son. It's not something I would recommend until after you have maxed out every retirement account available to you, but if you have some money to save after that and you are pretty sure it will be used for college you might as well let it grow tax-free.

This. It’s like a Roth. It grows tax free. We stopped contributing to our eldest’s 529 cos there’s more than enough, and 50% of it is tax free market gains.

Jules13

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Re: 529 Plan vs Something Else for college savings?
« Reply #9 on: January 13, 2018, 10:40:48 AM »
Thanks for all the viewpoints!  Will probably just continue with my plan to keep adding to their 529 plans and cash flow the rest when the time comes.  Was just wondering what other ideas were out there.  Thanks!

HawkeyeNFO

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Re: 529 Plan vs Something Else for college savings?
« Reply #10 on: January 13, 2018, 03:22:13 PM »
I used Coverdells, because there was no tax benefit for my state and the funds could be taken out for many more things than college, such as private high school.  Until recently that was forbidden with a 529.  The flexibility of the Coverdell made it better for me.

Abe

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Re: 529 Plan vs Something Else for college savings?
« Reply #11 on: January 13, 2018, 03:52:25 PM »
We have a 529 for our son, but he's only 1 so will see how things work out. We'll probably be able to pay for it out of pocket regardless when the time comes. Is this what people mean by "cash flow"?

Strick

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Re: 529 Plan vs Something Else for college savings?
« Reply #12 on: January 13, 2018, 04:24:08 PM »
I used a 529 for my kids mainly because of the pre-paid tuition plan available in my state. You paid for credits so as tuition kept seeming to rise at 5%/year you were basically guaranteed 5% year...times have probably changed now, I can;t imagine tuition is still rising at that rate, so would probably re-think things now.

Tabaxus

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Re: 529 Plan vs Something Else for college savings?
« Reply #13 on: January 13, 2018, 10:59:46 PM »
I used a 529 for my kids mainly because of the pre-paid tuition plan available in my state. You paid for credits so as tuition kept seeming to rise at 5%/year you were basically guaranteed 5% year...times have probably changed now, I can;t imagine tuition is still rising at that rate, so would probably re-think things now.

Tuition is still rising at that rate.  And if anything, since the tax reform bill disincents charitable giving for a pretty substantial chunk of the population and hits college endowments with an excise tax, I bet the speed of the increases doesn't shift very much.

I have a little one imminently on the way.  I'm really torn between fully-funding a 529 (and when I say fully funding, I really do mean fully funding, i.e., doing the 5-year gift tax election and dropping in $150k in year one or two) and keeping things in a taxable account. No meaningful state tax benefit for me to speak of (about $350 a year; I'd be foregoing four years of that if I do a 5-year upfront contribution, but the tradeoff is a longer compounding period).  The ability to use the funds for private K-12 post-tax-reform makes this an even harder decision for me.

nawhite

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Re: 529 Plan vs Something Else for college savings?
« Reply #14 on: January 14, 2018, 06:36:30 PM »
Can you all explain the differences between a Coverdell ESA and a 529?

1) Can I open a Coverdell ESA at Vanguard or do I need a state plan administrator like I do for a 529?
2) Can I deduct contributions to a Coverdell ESA from my Federal income taxes? My understanding is that 529's are only deductible from State income taxes, is that correct?
3) Other than the "recipient must use the money by the time they are 30 years old" and the $2000/year limit on contributions, are there any other differences between the plans now that the new tax bill let 529's be used for primary and secondary school?
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Gin1984

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Re: 529 Plan vs Something Else for college savings?
« Reply #15 on: January 14, 2018, 07:05:43 PM »
Can you all explain the differences between a Coverdell ESA and a 529?

1) Can I open a Coverdell ESA at Vanguard or do I need a state plan administrator like I do for a 529?
2) Can I deduct contributions to a Coverdell ESA from my Federal income taxes? My understanding is that 529's are only deductible from State income taxes, is that correct?
3) Other than the "recipient must use the money by the time they are 30 years old" and the $2000/year limit on contributions, are there any other differences between the plans now that the new tax bill let 529's be used for primary and secondary school?
Coverdell ESA are no longer about to be contributed to as of the new tax law, fyi.

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Gin1984

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Re: 529 Plan vs Something Else for college savings?
« Reply #16 on: January 15, 2018, 06:35:04 PM »
We use both 529s and other investment vehicles. There's always the chance that our kids won't go to college and decide to go another route. We put $5k/year/kid in the 529s and the rest into CDs. I'm more risk averse, so I prefer a good nights sleep over higher risk vehicles (hence the CDs). I'm not in a state with a 529 deduction but if the growth is tax free then why not?
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MaxPowers

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Re: 529 Plan vs Something Else for college savings?
« Reply #17 on: January 16, 2018, 02:28:39 PM »
Can you all explain the differences between a Coverdell ESA and a 529?

1) Can I open a Coverdell ESA at Vanguard or do I need a state plan administrator like I do for a 529?
2) Can I deduct contributions to a Coverdell ESA from my Federal income taxes? My understanding is that 529's are only deductible from State income taxes, is that correct?
3) Other than the "recipient must use the money by the time they are 30 years old" and the $2000/year limit on contributions, are there any other differences between the plans now that the new tax bill let 529's be used for primary and secondary school?
Coverdell ESA are no longer about to be contributed to as of the new tax law, fyi.

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Anything to support this? I was about to open an ESA for my nephew this week. I know it the elimination was originally discussed, then there was talk of it staying. I thought it made it past the reform cut?

you are still allowed to setup an ESA on brokerage websites, but i suppose the reform was so urgent and recent that no one may have actually updated their IT systems to remove ESA if no longer available.

I'm having a difficult time tracking down useful ( not speculative ) information on ESAs in the new tax plan since it was passed a few weeks ago.

seattlecyclone

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Re: 529 Plan vs Something Else for college savings?
« Reply #18 on: January 16, 2018, 02:46:03 PM »
I think the reasoning there was that once the main difference between Coverdell accounts and 529s (the ability to use Coverdell for private school prior to college) was eliminated, there was no need for the two different types of accounts. We could certainly stand to pare down the number of different retirement account types as well. I have no idea whether that bit of sanity carried through to the final bill or not.
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HawkeyeNFO

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Re: 529 Plan vs Something Else for college savings?
« Reply #19 on: January 16, 2018, 06:33:10 PM »
I thought the Senate left it out of their version of the tax bill(?).  Anyone have a link with further info on the future of the Coverdell? 

To answer nawhite's second question, the contributions are not tax deductible from state or federal, but the growth isn't taxed in a Coverdell if the money is spent appropriately.  Sort of like a Roth IRA.