Author Topic: 529 College Savings: Bad Idea?  (Read 1297 times)

maz_phil

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529 College Savings: Bad Idea?
« on: August 31, 2018, 11:50:11 AM »
Hello Mustachians,

I am a 23-year-old recent graduate. I work full time, but plan on attending graduate school within the next 2 years and are looking into the best methods by which to pay for graduate school (other than student loans). I have looked into 529 College Saving Plans, but in Virginia, most advisory plans come with an approximate 4.25% initial fee on all funds contributed. Since this plan is largely a short-term investment strategy, I feel that it would be more appropriate to look for Direct 529 plans with reduced fees, but now I am wondering if I am missing a better, more effective, strategy altogether?

Any experienced investment mustachians out there with strategies that have work for them or that they would recommend? I am looking forward to hopefully hearing from some of you soon.

Happy Friday,
Maz_Phil

haflander

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Re: 529 College Savings: Bad Idea?
« Reply #1 on: August 31, 2018, 11:53:32 AM »
PTF, sorry I don't have any advice. GF will be in grad school for 2-4 years depending on the program she chooses, starting next year.

reeshau

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Re: 529 College Savings: Bad Idea?
« Reply #2 on: August 31, 2018, 11:58:32 AM »
Why wouldn't you be looking at Invest529, the direct-to-consumer plan with passive portfolios run by Vanguard?

https://www.virginia529.com

The plan seems very highly rated at Savingforcollege.

That said, if you are using all the money for 2 years, I wouldn't invest in equities at all.  You could still use a conservative fund option and gain the up-to-$4,000 state tax deduction.

nereo

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Re: 529 College Savings: Bad Idea?
« Reply #3 on: August 31, 2018, 05:22:31 PM »
hi maz_phil

First off, realize that you do NOT have to enroll in Virginia's 529 plan just because you live in Virginia.  You can actually enroll in *any* state's 529 plan, even if you have never set foot in that state.  Not all state's plans are created equal, and a little homework will dig up plans that offer low-cost investment options with no-load (fees).

Beyond that, make sure that a retirement plan is the best use of your little green soldiers.  On the one hand, saving early and often is the easiest way to ensure you will have enough to pay for your child's education (we estimated that saving ~$500 at birth would more than cover all undergrad expenses).  On the other hand - you don't need to put money in a 529 to pay for his/her college, and you may have a better path.

For example, if you are NOT taking advantage of your 401(k)/403(b), HSA and IRA accounts, do that first. You'll save money on taxes now and have more money to invest (depending on your tax bracket). Of the tax-advantaged accounts, a 529 is a bit less favorable due to its after-tax contributions and restrictions on educational expenses.  A 529 increases your family contribution by 5.64% of the value of the account.  What that means is that if you have $100k in your child's 529, your expected family contribution (EFC) will be $5,640 higher than otherwise, which could influence his/her ability to get subsidized loans and/or need-based grants.  That may or may not concern you, but its something to consider.

Hope that helps more than confuses. 


secondcor521

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Re: 529 College Savings: Bad Idea?
« Reply #4 on: August 31, 2018, 05:50:15 PM »
@nereo, I think OP was planning to save for his/her own graduate school in a few years, not his/her child's college in 20 years.

I would echo @reeshau and put it in a money market or other stable value fund and get the state tax deduction, assuming that is valuable to the OP.

Note that if you open a 529 in another state from your state of residence, you typically do not get the tax break.

Also FYI, I did this when I was going to grad school, and at least in my state, there was no minimum time that the money had to stay in the 529.  So I would contribute $4000 into my 529 on a Monday, write a tuition check for grad school on Tuesday, and request the reimbursement on Wednesday.  The following April I deducted $4000 on my income taxes.  Odd that this is the way it works, but perfectly legal AFAIK.

nereo

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Re: 529 College Savings: Bad Idea?
« Reply #5 on: August 31, 2018, 06:26:00 PM »
Oops - my bad.  Misunderstood.  Carry on...

reeshau

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Re: 529 College Savings: Bad Idea?
« Reply #6 on: September 01, 2018, 12:45:30 AM »
In Michigan, you do not get a tax deduction for a contribution in the same year you make a withdrawal.  I don't know about Virginia, but like everything else 529, it varies by state.

Paul der Krake

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Re: 529 College Savings: Bad Idea?
« Reply #7 on: September 01, 2018, 08:07:53 AM »
@nereo, I think OP was planning to save for his/her own graduate school in a few years, not his/her child's college in 20 years.

I would echo @reeshau and put it in a money market or other stable value fund and get the state tax deduction, assuming that is valuable to the OP.

Note that if you open a 529 in another state from your state of residence, you typically do not get the tax break.

Also FYI, I did this when I was going to grad school, and at least in my state, there was no minimum time that the money had to stay in the 529.  So I would contribute $4000 into my 529 on a Monday, write a tuition check for grad school on Tuesday, and request the reimbursement on Wednesday.  The following April I deducted $4000 on my income taxes.  Odd that this is the way it works, but perfectly legal AFAIK.
Yes, totally legal. And now that 529 monies can be used for all sorts of schooling, not just college, bougie private schools in NY and other states with a generous tax deduction are informing parents to do just that.

PDXTabs

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Re: 529 College Savings: Bad Idea?
« Reply #8 on: September 02, 2018, 12:03:39 PM »
For example, if you are NOT taking advantage of your 401(k)/403(b), HSA and IRA accounts, do that first. You'll save money on taxes now and have more money to invest (depending on your tax bracket).

This is my take. Also, if you max out all of your pre-tax accounts and still have some money to invest you might consider a taxable brokerage account instead, since capital gains are taxed pretty low and presumably while you were in grad school your income would be pretty low as well (probably low enough that you pay 0% capital gains). That way, if you don't go to grad school, your money isn't trapped in a 529.

jacoavluha

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Re: 529 College Savings: Bad Idea?
« Reply #9 on: September 02, 2018, 01:59:37 PM »
with such a short time horizon the tax-free growth is worthless to you, or at least worthless in the sense that you probably shouldn't risk putting the funds in equities

The only real benefit to you is the $4000 state tax deduction which probably amounts to about $200-$230 savings for you yearly, assuming you're a Virginia resident. So let's say you contribute yearly for 6 years, maybe you save $1200-$1500 dollars. That's not nothing. But you lose the flexibility and liquidity of the funds you put in. So I guess it depends on your cash flow and other needs.

I would not put more than $4000 in yearly.

All this is worthless if my assumption of you being a VA resident is wrong.

Ricksun

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Re: 529 College Savings: Bad Idea?
« Reply #10 on: September 02, 2018, 08:00:56 PM »
The only real benefit to you is the $4000 state tax deduction which probably amounts to about $200-$230 savings for you yearly, assuming you're a Virginia resident. So let's say you contribute yearly for 6 years, maybe you save $1200-$1500 dollars. That's not nothing. But you lose the flexibility and liquidity of the funds you put in. So I guess it depends on your cash flow and other needs.

I would not put more than $4000 in yearly.

All this is worthless if my assumption of you being a VA resident is wrong.

Note, the specific law is $4000 per account, there technically is no limit on how many accounts, which I'm told different classes of assets each count as different accounts.