Author Topic: Is a 529 account mustachian?  (Read 4402 times)

Giro

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Is a 529 account mustachian?
« on: July 16, 2015, 08:13:52 AM »
I'm trying to determine how much to save for my daughter.  We will retire before she gets to high school.  I'm still contributing to her 529 and I'm wondering if I need to stop the contributions.  I read that the 529 will count against her for financial aid.  Our income in retirement will probably be around $80k.  I'm not even sure we would qualify for anything.  She is currently in private school but I want to transition her to public for grades 9-12 after we retire. 

Any ideas or things I should consider?


thingamabobs

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Re: Is a 529 account mustachian?
« Reply #1 on: July 16, 2015, 05:40:53 PM »
are you in a state that gets tax savings from your contributions?

Gin1984

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Re: Is a 529 account mustachian?
« Reply #2 on: July 16, 2015, 06:35:00 PM »
Why would you want to transition her to public instead of private (aka college prep) for high school?  And no 529s do not count against her for college aid, the are counted the same as any of your assets.  However, based on your expected income, she won't get any governmental aid anyway so it does not matter.

I'm a red panda

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Re: Is a 529 account mustachian?
« Reply #3 on: July 17, 2015, 06:56:57 AM »
Why would you want to transition her to public instead of private (aka college prep) for high school? 

Don't just assume that private is better than public everywhere.  Our private schools offer anywhere from no, to half as many AP classes as our public high schools, for instance.  They also cost more than college does.

Giro

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Re: Is a 529 account mustachian?
« Reply #4 on: July 17, 2015, 07:04:15 AM »
Why would you want to transition her to public instead of private (aka college prep) for high school?  And no 529s do not count against her for college aid, the are counted the same as any of your assets.  However, based on your expected income, she won't get any governmental aid anyway so it does not matter.

What is the limit for any financial aid?  I could avoid pulling money out of investments for a few years if needed.

The reason no private high school is the expense.  Her private elementary school now is VERY affordable ($4300 a year). With uniforms and cheaper before and after school care, the tuition is practically made up throughout the year.  It's a no-brainer for us now.  High school tuition more than doubles (over $9k).  I could get a year of college for that.  DH and I work with her on homework and we try to instill an environment of learning and being kind and good to each other.  I'm hoping she will have a solid foundation by the time she needs to transition. 

I live in Ohio so we do get a break on state tax.  But there's a limit and it's not a large amount of savings.  I think I saved less than $100 total by contributing the max.

AH013

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Re: Is a 529 account mustachian?
« Reply #5 on: July 17, 2015, 08:40:11 AM »
529s count as parental unprotected assets for factoring assistance.  Parents are expected to contribute 5.64% of their unprotected assets annually for their kids college.  You're also usually expected to contribute a minimum of 22% of your income ($17,600) and a maximum of 47% ($37,600).

Like Gin mentioned you probably won't get FAFSA, given you'd be expected to fork over close to $18k minimum plus a good chunk of what's probably in the 529.  So unless she's going to a super-lux institute and didn't earn any scholarships, you're probably going to be paying the full cost.

Consider having the discussion now about colleges: how much you plan to help with $, what she wants to do in terms of a major, where she wants to go (local vs far), how she plans to get there in terms of $ (jobs, loans, scholarships, etc.).  Last thing you want to do is let her become obsessed with QMU (Quarter Million $ University), not have taken the steps in high school to earn academic scholarships or working jobs in high school, and then become frustrated with you that the money isn't there to live that fantasy (or worse, ring up a 6-figure student debt and then bitch about it to you all throughout her 20s & 30s).  That's probably the single best thing you can do and what 99% of parents never do with their kids until they've already received the acceptance letter.

maizeman

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Re: Is a 529 account mustachian?
« Reply #6 on: July 17, 2015, 08:45:37 AM »
Why would you want to transition her to public instead of private (aka college prep) for high school? 

Don't just assume that private is better than public everywhere.  Our private schools offer anywhere from no, to half as many AP classes as our public high schools, for instance.  They also cost more than college does.

Thank you! Private does not always mean better than public. Where I grew up, the public schools weren't good and the private alternative was the local christian school which was terrible. Until I went off to college I didn't realize that for college students who had grown up in some of the bigger cities, going to private schools was a marker for wealth rather than a marker for parents who prioritize their child not learning about evolution above the overall quality of their child's education.

What is the limit for any financial aid?....

High school tuition more than doubles (over $9k).  I could get a year of college for that.

Based on your comment above, I'm guessing you are targeting a in-state public school in Ohio, in which case I agree with Gin1984, it is very unlikely you will qualify for any federal aid if you're expecting to make 80k/year in retirement. On the other hand, if you've saved $2M ($80*25 per the 4% rule), even saving enough to pay the full $36,000 (minus whatever is already in your daughter's 529 plan) without any financial aid should be achievable. With that low a total tuition bill, limited state tax deductions for a 529 in Ohio, a limited number of years until you need to start taking money out of the plan, and significant penalties for saving too much, I think it would be reasonable to stop contributing to the plan and switch to saving equivalent amounts each year in a taxable account.

The reason you'll hear people in the $80k/year range still talking about how to qualify for financial aid is they're targeting internal grants/scholarships at private schools. To take the most extreme example, at harvard families with incomes less than $65k/year don't pay anything and families from there to $150k/year pay 10% of income in tuition (so even a family making $150,000 a year is getting a 2/3 discount on the sticker price of $45,000 a year).

Giro

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Re: Is a 529 account mustachian?
« Reply #7 on: July 17, 2015, 09:39:28 AM »
maizeman - that was very helpful.  thank you.


yoga mama

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Re: Is a 529 account mustachian?
« Reply #8 on: July 19, 2015, 05:12:38 PM »
Interesting post and responses.  I think it is worth considering how much you need to contribute to her college education.  There are plenty of examples here and elsewhere of people who have paid their own way through college.  Depending on her age now, starting to talk about college finances may not be reasonable immediately but I think around 9th/10th grade it is important to set expectations.  We were contributing to 529 for our two children but stopped - we will let the contributions sit and hopefully that will help them by the time they reach college (currently they are 3 yrs and 1 yr) but the uses are restrictive.  What if they don't go to college, or get full ride scholarships, or choose to attend a very affordable state school or junior college and have money left over?  To get back to your original question - I agree with stopping the contributions now, since the tax benefits are minimal and the usage of the account is fairly restrictive, and make a realistic plan on how you will help her and what your expectations will be of her.  At an income of $80K a year, if you only have one child to get through college (it sounds like she is and will be an only child), you will likely be able to help her out a great deal even without continuing to fund the 529.

Gumbo1978

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Re: Is a 529 account mustachian?
« Reply #9 on: July 20, 2015, 08:06:44 AM »
I consider the 529 mustachian if you plan to pay for your child's college education.  Better to save now and use tax free earnings to pay than pay as you go later or deplete a great retirement vehicle (Roth) to pay for it.  Becomes even more Mustachian if your state lets you deduct it (mine stopped a few years ago).

My parents were able to pay for my education and I'm extremely grateful for that.  I plan to do the same for my kids.  I read somewhere recently where a parent explained to their kid that the gift of education is their inheritance.  I plan to give the same talk to my kids.

Keep in mind:
- If they get scholarships, you can withdraw the amount of the scholarship penalty free from the 529.
- I can change recipient, so if my kids can't use it, their grandkids could. 

Gin1984

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Re: Is a 529 account mustachian?
« Reply #10 on: July 20, 2015, 08:16:21 AM »
Why would you want to transition her to public instead of private (aka college prep) for high school? 

Don't just assume that private is better than public everywhere.  Our private schools offer anywhere from no, to half as many AP classes as our public high schools, for instance.  They also cost more than college does.
I did not say they were better, I said that most private high schools are college prep and a public high school cannot be only college prep.  Yes the top kids in both may secede is the same way but the average kids are on different tracks.

I'm a red panda

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Re: Is a 529 account mustachian?
« Reply #11 on: July 20, 2015, 09:16:19 AM »
Why would you want to transition her to public instead of private (aka college prep) for high school? 

Don't just assume that private is better than public everywhere.  Our private schools offer anywhere from no, to half as many AP classes as our public high schools, for instance.  They also cost more than college does.
I did not say they were better, I said that most private high schools are college prep and a public high school cannot be only college prep.  Yes the top kids in both may secede is the same way but the average kids are on different tracks.

But private high schools aren't always focused on college prep- that is a huge assumption.  And that is what I was questioning.  Nothing in OPs post said what kind of private school they were going to currently.

/I'm laughing at the image of kids seceding from high school. 

Giro

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Re: Is a 529 account mustachian?
« Reply #12 on: July 20, 2015, 09:27:45 AM »
Why would you want to transition her to public instead of private (aka college prep) for high school? 

Don't just assume that private is better than public everywhere.  Our private schools offer anywhere from no, to half as many AP classes as our public high schools, for instance.  They also cost more than college does.
I did not say they were better, I said that most private high schools are college prep and a public high school cannot be only college prep.  Yes the top kids in both may secede is the same way but the average kids are on different tracks.

But private high schools aren't always focused on college prep- that is a huge assumption.  And that is what I was questioning.  Nothing in OPs post said what kind of private school they were going to currently.

/I'm laughing at the image of kids seceding from high school. 

I think a lot of kids would like to secede from high school.  I would like to secede from work.