Best 529s - Kids age 6 & 8

[Vic99]

Wife and I are 43 and 48.  Paid off mortgage last year.  About $525k between us for 401k/403b so far; maxing the 18.5k those out and just started contributing to a Roth.  Probably retire in 10ish years.

The plan is to pay for half of our kids college and let them sort out the other 50% through work, scholarships, loans.  Trying to steer them toward public university.  We live in MA.

Currently have savings accounts for them.  8 year old - 11k; 6 yr old 8k.  We want to put this money in 529s.  We would start aggressive becoming less so as they age.

Which states do you recommend to put into and/or recommend to stay away from for 529s?  Thanks.

[Vic99]

L.A.S. :

" . . . Many people come to the conclusion that the tax savings aren't that great and its not worth the hassle to do a 529. . . "

"Also, It is my understanding that money in retirement accounts (401K, IRA, etc) is not reported on FAFSA, whereas 529 account balances are."

This is a good point if you are correct.  What do you recommend as a way to save for kids college if you feel a 529 doesn't off a good yield for the effort.  Currently I'm doing a simple savings account which obviously doesn't yield signicant interest and is obviously reportable on a FAFSA.  Thanks.

[EvenSteven]

I've also been trying to decide if it is worth it to contribute to a 529 plan. I still have some room in tax advantaged accounts, so the decision I face is between a 529 and tax deferred space. If the decision is between a 529 and taxable, I think it would be an easy choice to use a 529, with the major risk being the kid not going to college or any trade school.

I filled out a FAFSA to try and see what effect a substantial balance in a 529 account would have on aid available. It seems a little convoluted, and not clear what the value of the aid would be when the only benefit seems to be non-subsidized federal loans.

For my situation, the comparison that needs to be made is the state tax-advantage (my state is a tax parity state) gained, vs the value lost by having the 529 balance count as an asset of the account owner for FAFSA purposes. I'm still trying to get a reasonable estimate for the value of financial aid. The value of aid received from FAFSA will depend on your individual situation when the kiddos head off to school.

If no 529 is used, I think the best option is to cash flow expenses as they arise.

[ZMonet]

I'd go with your home state up to the state tax deduction limit (as long as your state's 529 doesn't have crazy fees).  After that, I'd go with a Vanguard 529, which I think both New York State and Nevada provide.

I'm less concerned about "not needing the money" in the 529 for my child.  If that happens, great as they likely found some alternative way to get their education paid for.  But I doubt that they will have all of their education paid for -- there is always graduate school, etc.  And then if there is still money, I'll either pay the penalty, or better yet, allow it to sit until I potentially have grandchildren.

[FIRE@50]

I'm confused by the FAFSA concerns being expressed here. If your goal is to save money for your child's education, clearly you are trying to avoid the need for student aid.

I just signed up for a 529 for my daughter. MD matches the first $250 of your contribution.

[EvenSteven]

I'm less concerned about "not needing the money" in the 529 for my child.  If that happens, great as they likely found some alternative way to get their education paid for.

Someone can correct me if I'm wrong here, but I believe you can take out an amount from your 529 equal to any scholarships, penalty free.

I'm confused by the FAFSA concerns being expressed here. If your goal is to save money for your child's education, clearly you are trying to avoid the need for student aid.

At least for me, my goal is to pay for college and leave myself in the best financial situation possible. If the tax benefits from a 529 are completely wiped out by a reduction in benefits from financial aid, then a 529 is not beneficial. I can make a good prediction of the tax benefits, but I think getting a good picture of the financial aide benefits in 10 or 18 years is harder.

[jacoavluha]

In MA you only get a $2,000 state tax deduction for your 529 contribution so the front end tax savings are not great. But I wouldn’t minimize the long term benefits of the tax free growth. The trade off is liquidity and flexibility. There are financial aid planners with expertise into how various assets fit into aid calculations. There are some highly knowledgeable folks on the Bogleheads forum, I’d consider posting there if you have questions along those lines. Personally I’d contribute to a 529 over basic savings account for the kids. The typical struggle is between 529 vs taxable brokerage investments.

[jpdx]

I'm funding a 529 but only after I've maxed out all other tax-advantaged accounts. The main reason I'm using a 529 is because of the 9% state income tax savings on up to $4750 contribution. That's like a instant, guaranteed gain.

I also plan to front-load this account while my kid is young (and so the funds have time to grow), and may pull back or stop contributing later on.

[seattlecyclone]

I think funding a 529 only after maxing out all your other available tax shelters can be a fine plan. Maybe your kid ends up not needing some or all of that money, in which case the taxes you'd pay to withdraw it might make it a worse deal in retrospect than a regular brokerage account would have been. However there's nothing saying you need to withdraw it if your kid doesn't use it. Maybe you can pass it forward to their kids, or a niece or nephew, or even use it yourself to pay for some classes at your local community college. If you enroll at least half time you can even withdraw to pay your living expenses, tax free! Lots of options exist.