Author Topic: 529 Plan: When to Stop Funding It?  (Read 7990 times)

oldtoyota

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529 Plan: When to Stop Funding It?
« on: July 11, 2015, 12:17:27 PM »
We have a 529 plan with about $120K in it.

We have one kiddo.
The kiddo is 10, so the money has another 8 years to grow.

I'm thinking it might be time to stop funding the 529.

When I read articles about it, the focused on families with multiple kids (and having leftover money from another 529) and kids getting scholarships. I have no idea if our kid will get a scholarship, of course.

How can I calculate if we're done saving here?




pagoconcheques

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Re: 529 Plan: When to Stop Funding It?
« Reply #1 on: July 11, 2015, 01:00:28 PM »
We funded our kids' 529 plans based on our projection of what the cost of attending the most expensive in-state university would be the year they started.  To calculate that figure, we took the current cost of attending (sometimes called "cost of attendance") and figured it would increase 5% a year.  Then we just did the calculation for the start year, added 5% for the second year, etc. and added up the value of the four years.  Whichever institution runs your 529 plan should have a calculator on the web site for figuring out how much you need now. 

Of course, we did those calculations over 10 years ago and college tuition has gone up more then 5% a year in general.  Also, both our kids moved to cheaper off-campus housing beginning their sophomore year which saved on both housing and those ridiculously abusive meal plans.  To their credit, both also paid their rent when they were able to out of whatever earnings they had from working on-campus and summer jobs. 

Long story short, we overfunded Kid 1's cost and are using it to defray expenses for a MS he is mostly funding himself.  Kid 2 is attending an Ivy and we are having to contribute out of cash flow--she will be on her own for graduate school if that is in the cards.

Looking back, I think the cost of in-state attendance is a good bench mark, though I think it might have made sense to only shoot for about 80% of that cost since there are ways to cut expenses and you can make up the difference from other savings if necessary. 

johnny847

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Re: 529 Plan: When to Stop Funding It?
« Reply #2 on: July 11, 2015, 01:12:16 PM »
Honestly it's a pretty hard calculation to do. You don't know what colleges are going to cost on average by the time your kid goes to college (assuming he or she does in fact go to college...). You also don't know if your kid will end up at an expensive private school or a cheaper public school.

And, how much aid, if any, you will receive.

College tuition has risen dramatically in the past decade (perhaps longer?). I can't fathom how this is sustainable. But who knows how long that will last?


So yea, what I just said wasn't particularly helpful. But here's what I do know:
1) Don't worry about the scholarship thing. If your kid gets a scholarship, then you are allowed to withdraw the amount of the scholarship penalty free (but not tax free).
2) If you aren't already aware, 529 funds can be used for room and board. The amount you can claim for tax free use of 529 funds is the greater of
a) amount actually charged by the school
b) the cost of attendance figures for financial aid published by the school
Notice how if a student lives off campus, it doesn't matter how much in room and board expenses your kid incurs, you can always pull out that published amount in #2 tax free.
I sampled yearly cost of attendance figures for room and board for a handful universities that popped into my head:
Cornell:$13.6k
UIUC: $11k
UMCP: $10.8k
Georgia Tech: $13.1k
Univ Minnesota: $8.7k

Let's take the average (I realize we have only 5 sample points here, but the room and board figures are mostly a function of cost of living of the area, so hopefully they won't vary too much unless we're talking about particularly HCOL areas): $11.4k
So assuming that these 5 samples are actually representative of the pool of schools your kid would apply to, that would mean you can withdraw $57.2k (4 years worth, in 2015 dollars) from the 529 tax free.

Now let's assume your $120k grows at 3% faster than the room and board costs? I'm guessing you're going to have this invested more conservatively as your kid gets closer to heading off to college, so the returns wouldn't be too high.
That would give you $152k

Assuming your $152k only grows with inflation (and I don't mean CPI, but college expenses inflation) after that, that means you've got $57.2k you can withdraw tax free over four years for room and board, leaving you with $100k for tuition.


I made some assumptions above that you can adjust to your own liking. I don't really have a grasp for what assumptions to make. But you can at least look up the cost of attendance figures for schools you want your kid to consider (of course, whether your kid may actually want to go there is a different story...)

Oh yea and honestly depending on your current tax bracket, withdrawing money when you've retired with the 10% penalty may not even be all that bad.

Tjat

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Re: 529 Plan: When to Stop Funding It?
« Reply #3 on: July 11, 2015, 03:02:39 PM »
It's hard to say for sure since I don't know your retirement savings, but if you let is sit and just assume a conservative 5% growth, you'll have almost 180K in 8 years. Assuming you pay for school all at once (which you won't), you can pay for roughly 45K a year tuition. Is your goal to pay for grad school too? 100% of the their undergrad tuition?

I say you have enough and you should redirect the savings to retirement, especially if you still have room in tax advantaged accounts.

Davids

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Re: 529 Plan: When to Stop Funding It?
« Reply #4 on: July 11, 2015, 03:09:30 PM »
For an in state school i think you will have enough. Also if you have plans to FIRE before your kid graduates HS, you can then keep your income low enough to get financial aid as well.

johnny847

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Re: 529 Plan: When to Stop Funding It?
« Reply #5 on: July 11, 2015, 03:24:05 PM »


For an in state school i think you will have enough. Also if you have plans to FIRE before your kid graduates HS, you can then keep your income low enough to get financial aid as well.

True but this assumes that the financial aid rules will remain advantageous for early retirees. Currently all assets are shielded from FAFSA if you have a AGI less than 50k and file a 1040ez or 1040a. If on top of that your AGI is less than 24k your EFC is a big fat zero.

The rules for the calculations of EFC may change to prevent early retirees from being able to shield their assets. Is this likely? Probably not. There aren't that many people who live like that. But it's certainly within the realm of possibility.

The real issue is if the OP were to stop saving because of an estimate of financial aid using today's formulas, and when the time comes for the kid to go off to college, the rules have changed.
If you save too much, it's not ideal but it's not terrible. So you take a 10% hit on leftover funds.
If you save too little, that can mean giving up on some schools or taking out loans.

oldtoyota

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Re: 529 Plan: When to Stop Funding It?
« Reply #6 on: July 11, 2015, 08:07:41 PM »

So yea, what I just said wasn't particularly helpful. But here's what I do know:
1) Don't worry about the scholarship thing. If your kid gets a scholarship, then you are allowed to withdraw the amount of the scholarship penalty free (but not tax free).

I did not know this. Thanks! I knew it was time to look up the rules. =-) I started putting money in about a week after she was born. I was totally out of it then (newborn) and never looked up the rules before jumping in.

I learned so much here. Thank you, everyone!

James1

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Re: 529 Plan: When to Stop Funding It?
« Reply #7 on: July 11, 2015, 09:40:54 PM »
You can also transfer any extra funds to another beneficiary. For example, my sister attended college during the 2008 crash. Rather than use her college fund then, they helped pay for it out of pocket (since the value was so low). Now, every year, my parents transfer a certain amount of her college fund into my children's funds.

Even if you overfund you child's 529 plan, it can always be used for future generations.

oldtoyota

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Re: 529 Plan: When to Stop Funding It?
« Reply #8 on: July 12, 2015, 05:17:38 PM »

Even if you overfund you child's 529 plan, it can always be used for future generations.

Good point. I have a small family. One kid. She would have to have kids for the money to be used ever. DH and I are done with school for good, so we'd not be able to use it either.

johnny847

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Re: 529 Plan: When to Stop Funding It?
« Reply #9 on: July 12, 2015, 05:55:41 PM »

Even if you overfund you child's 529 plan, it can always be used for future generations.

Good point. I have a small family. One kid. She would have to have kids for the money to be used ever. DH and I are done with school for good, so we'd not be able to use it either.

If I recall correctly, if you change the beneficiary to someone else who is not of the same generation, the entire balance of the 529 is subject to a gift tax (the standard gift tax exclusion of $14k currently still applies).

oldtoyota

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Re: 529 Plan: When to Stop Funding It?
« Reply #10 on: July 12, 2015, 07:38:34 PM »

Even if you overfund you child's 529 plan, it can always be used for future generations.

Good point. I have a small family. One kid. She would have to have kids for the money to be used ever. DH and I are done with school for good, so we'd not be able to use it either.

If I recall correctly, if you change the beneficiary to someone else who is not of the same generation, the entire balance of the 529 is subject to a gift tax (the standard gift tax exclusion of $14k currently still applies).


Seems like another good reason to make sure we do not overfund.

wisermiser

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Re: 529 Plan: When to Stop Funding It?
« Reply #11 on: July 12, 2015, 08:02:38 PM »


Good point. I have a small family. One kid. She would have to have kids for the money to be used ever. DH and I are done with school for good, so we'd not be able to use it either.
[/quote]

I'm done with school too.  But, using remaining 529 funds to stay overseas and take language classes doesn't sound so bad. 

http://www.investopedia.com/articles/personal-finance/070815/using-your-529-savings-study-abroad.asp

fa

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Re: 529 Plan: When to Stop Funding It?
« Reply #12 on: July 12, 2015, 08:41:52 PM »
Great question.  We had the exact same amount saved. It turns out that we have way oversaved.  So now we need to figure out what to do with all the 529  money. Taking it out would mean income taxes plus 10% penalty.  I definitely would stop saving now if I were you.  Luckily we are not in hurry to decide what to do.  Yes we could allocate the funds to our non-existent grandkids going to college, but that is probably at least 20 years away.  We will be getting up there in age by that time.  Plus, we don't even know if we will have grandchildren, or if they will go to college.  Nice problem to have but I would prefer not to have to figure that out.  Again, I would stop saving now.

ClaycordJCA

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Re: 529 Plan: When to Stop Funding It?
« Reply #13 on: July 12, 2015, 08:55:11 PM »
I would stop funding. What happens if your child decides a state university is fine for her?  Or she doesn't want to go to college? Or is not suited for academic life?  We stopped contributing to one child's 529 account when it became apparent she would not progress beyond high school. Hoping that she finds her way in a couple of years, but if she doesn't then I won't be staring at taxes plus a 10% penalty on a big balance.

ender

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Re: 529 Plan: When to Stop Funding It?
« Reply #14 on: July 13, 2015, 05:37:16 AM »

Even if you overfund you child's 529 plan, it can always be used for future generations.

Good point. I have a small family. One kid. She would have to have kids for the money to be used ever. DH and I are done with school for good, so we'd not be able to use it either.

If I recall correctly, if you change the beneficiary to someone else who is not of the same generation, the entire balance of the 529 is subject to a gift tax (the standard gift tax exclusion of $14k currently still applies).


Seems like another good reason to make sure we do not overfund.

Quote
The IRS takes an interest in a transfer whenever the transfer involves a shift two steps down from your generation, and "skips" a generation. This skip subjects the account owner (or beneficiary) to the generation-skipping transfer tax‎. This skip is especially pertinent to grandparent's setting up, or shifting beneficial 529 interests to grandchildren. Fortunately, the same tax exclusions applying to the basic gift tax also pertain to the generation skipping transfer tax

Keep in mind - http://www.bogleheads.org/wiki/Generation-skipping_transfer_tax

Quote
The generation skipping transfer tax is a transfer tax imposed at a rate equal to the highest estate tax rate (currently 40%) on gifts or estate transfers where the transferred assets pass, or will pass, to recipients two or more generations below the donor, without being subject to the imposition of estate tax at the intervening generations. Each donor currently has a generation skipping transfer tax exemption of $5,250,000, subsequently indexed to inflation. [1]

oldtoyota

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Re: 529 Plan: When to Stop Funding It?
« Reply #15 on: July 13, 2015, 12:46:36 PM »


Good point. I have a small family. One kid. She would have to have kids for the money to be used ever. DH and I are done with school for good, so we'd not be able to use it either.

I'm done with school too.  But, using remaining 529 funds to stay overseas and take language classes doesn't sound so bad. 

http://www.investopedia.com/articles/personal-finance/070815/using-your-529-savings-study-abroad.asp
[/quote]

I am not a student though. Would this count for those of us who are long past college? The article did not mention that, I don't think.

oldtoyota

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Re: 529 Plan: When to Stop Funding It?
« Reply #16 on: July 13, 2015, 12:51:31 PM »
Great question.  We had the exact same amount saved. It turns out that we have way oversaved.  So now we need to figure out what to do with all the 529  money. Taking it out would mean income taxes plus 10% penalty.  I definitely would stop saving now if I were you.  Luckily we are not in hurry to decide what to do.  Yes we could allocate the funds to our non-existent grandkids going to college, but that is probably at least 20 years away.  We will be getting up there in age by that time.  Plus, we don't even know if we will have grandchildren, or if they will go to college.  Nice problem to have but I would prefer not to have to figure that out.  Again, I would stop saving now.

This is the direction I was leaning in when I posted my question. I have not found any compelling reasons to continue to fund it.