Funding second kid's 529 (without tax deduction)?

[marina]

I recognize that this is a great problem to have, and am wondering what others have done in this scenario.

We're expecting a second child in 2016, and have been funding the first child's 529 with the Michigan maximum of $10k/year/couple to get our maximum state tax deduction since her birth 3 years ago.  The MI state plan is a good one, with low fees (.17%) and ok investment options.

In 2016, should we also fund the 2nd child's 529 with a matching $10k even though it will not be state-tax-deductible?  Other options are to just split the $10k to be $5k each.  We already max out employer-sponsored 401k funds, and are no longer eligible for Roth IRAs because of the income limit.  The only benefit I can see is that the 529 earnings will be federal-tax-free as long as they're used for education in 15-18 years.
  We can't guarantee that both kids will need that much money for college, but since the scenarios are so variable (cheap college, expensive private college, expensive grad school, we ER and stop contributing, more kids, etc), we might as well contribute early while we can, right?  My parents paid for my college tuition and this gave me a HUGE leg up in starting out my adult life, so I'd love to do the same for my kids if possible.

Other options for this money: paying down mortgage early, taxable investing.  Thoughts?

[GoldenStache]

Do you max out your tIRA?

[marina]

@GoldenStache:  We haven't contributed to a traditional IRA because we're both covered by 401k plans, and our income is above the threshold for the IRA $ to be tax deductible.  Do you think it makes sense to do this in lieu of more 529 funding in 2016?  Just reading up on it, seems like a wash or possibly a minus cause the tIRA money won't be available until we're 59.5.  (We're 31 and 34 now)

[FrugalSpendthrift]

@GoldenStache:  We haven't contributed to a traditional IRA because we're both covered by 401k plans, and our income is above the threshold for the IRA $ to be tax deductible.

Maybe you can make a nondeductible contribution to a tIRA and convert it to a Roth  (i.e. backdoor roth)  Do you have any traditional IRA balances that would complicate the conversion?

[Gin1984]

Honestly I would just keep one 529 and just change the name on the beneficiary as needed and only put in $10K.

[GoldenStache]

You should checkout the backdoor roth.  Traditional might save you a ton in taxes right now though, you shouldn't worry about the 59.5, plenty of ways to avoid it.  YMMV but I would do traditional if I was above the limit, maxing out 401ks, and the 10k 529.  Do you have access to a HSA? 

Some saw it as kind of shady, others saw it as working the system but someone on here posted about changing names on the 529 to your name, before the child applies for college.  If it is in your name it only kind of counts against them in financial aid, if it is in there name it really counts against them.  Some also said to put it all in the younger child's name and the oldest will get a cheaper rate (switch it back to their name during the year and switch back when it is time to apply again).  I think eventually (within the next 15 years) this will be stopped but you never know.   

[marina]

@GoldenStache, @FrugalSpendthrift :  I do have a Rollover IRA account.  I suppose I could move this money into my current company's 401k and THEN do the backdoor Roth conversion? This assumes my current 401k has better investment options than  Fidelity, where the Rollover account is held...
Are you saying the tax benefit of tIRA->Roth is that I pay the taxes now and earnings are tax-free?  How is that different from putting the same $ in a 529, assuming I will use the $ for college expenses? (which, granted, is an assumption.)

[seattlecyclone]

Honestly I would just keep one 529 and just change the name on the beneficiary as needed and only put in $10K.

This is a fine plan, as is putting $5k in a 529 for each kid. If you contribute $10k/year for 18 years, the balance at the end should be plenty for two college educations.

[Tjat]

Honestly I would just keep one 529 and just change the name on the beneficiary as needed and only put in $10K.

This is a fine plan, as is putting $5k in a 529 for each kid. If you contribute $10k/year for 18 years, the balance at the end should be plenty for two college educations.

Second this, no need for more than 1 account

[Gin1984]

You should checkout the backdoor roth.  Traditional might save you a ton in taxes right now though, you shouldn't worry about the 59.5, plenty of ways to avoid it.  YMMV but I would do traditional if I was above the limit, maxing out 401ks, and the 10k 529.  Do you have access to a HSA? 

Some saw it as kind of shady, others saw it as working the system but someone on here posted about changing names on the 529 to your name, before the child applies for college.  If it is in your name it only kind of counts against them in financial aid, if it is in there name it really counts against them.  Some also said to put it all in the younger child's name and the oldest will get a cheaper rate (switch it back to their name during the year and switch back when it is time to apply again).  I think eventually (within the next 15 years) this will be stopped but you never know.   

The name of the beneficiary does not matter, as long as the account is "owned" by the parent.

[madamwitty]

Do some projections about how much you expect to need for college. (If you haven't already, learn how FAFSA calculates your Expected Family Contribution "EFC"). If you'll be FIRE'd by then, you may be very eligible for financial aid. In such a case, I suspect you will not need to save $10k per kid every year until you're FIRE'd. Better to spread out the contributions over time to take advantage of the income tax credit in more years.

Honestly I would just keep one 529 and just change the name on the beneficiary as needed and only put in $10K.

I suggest it's a good idea to have two separate accounts if the kids will be in school during overlapping years. You'll probably want to be able to fund each kid's expenses out of their own accounts (i.e. the account on which they are the beneficiary) so that neither counts as "income" to the kid on the next year's FAFSA. Perhaps it should be skewed to have more money in the first kid's account; if the first kid ends up with extra funds left over, you can always switch it to be in the name of the second kid.

Some saw it as kind of shady, others saw it as working the system but someone on here posted about changing names on the 529 to your name, before the child applies for college.  If it is in your name it only kind of counts against them in financial aid, if it is in there name it really counts against them.  Some also said to put it all in the younger child's name and the oldest will get a cheaper rate (switch it back to their name during the year and switch back when it is time to apply again).  I think eventually (within the next 15 years) this will be stopped but you never know.   

I am not sure exactly what this means?

re: "changing names on the 529 to your name, before the child applies for college" - Generally the parent IS the owner of the account (the kid is the "beneficiary") and is assessed at the lower rate of ~5% of asset for EFC. No shadiness involved.

re: "put it all in the younger child's name and the oldest will get a cheaper rate (switch it back to their name during the year and switch back when it is time to apply again)" - If you're talking about switching beneficiary names, I don't think this helps. Certainly it doesn't affect the FAFSA assessment, but perhaps you know some insider at a specific private college where it does make a difference? The way it would make an impact on FAFSA is if you make the 2nd kid the OWNER of the account? I don't understand UGMA/UTMA well enough to make a judgement call on this, but it generally seems like a bad idea to me (FAFSA aside). Probably easier to have a grandparent hold the account so it doesn't show up on FAFSA. Best to use this account for the last 1.5 years of college so it doesn't count as income the following year on FAFSA.

OP - you may be interested in some of the information regarding FIRE & FAFSA on this thread: http://forum.mrmoneymustache.com/welcome-to-the-forum/early-retiree-strategies-for-maximizing-financial-aid/

[a1smith]

Honestly I would just keep one 529 and just change the name on the beneficiary as needed and only put in $10K.

This is a fine plan, as is putting $5k in a 529 for each kid. If you contribute $10k/year for 18 years, the balance at the end should be plenty for two college educations.

It may not be.  I just did a quick calculation:

IRR on investment - 6%
education cost inflation - 5% (average value over last 10 years)
Since Ann Arbor, let's use U of Mich - 2015 cost of attendance for in-state is $27,812

Assume 1st kid starts school at 18, 2nd kid starts when 1st kid finishes.  Both finish in 4 years.

Without looking at taxes and assuming all funds come out of 529 (i.e. you won't qualify for any need based financial aid and you want your kids to graduate debt free) - you need 26 years of contributing $10,800/yr.  So, you are contributing all the way up to senior year of 2nd child.  You only lose deduction of $800/yr which at 4.25% income tax rate is $34.  Not worth losing sleep over.

Just to show how inflation erodes purchasing power - the cost of attendance in 2033 2037 (4th year of 2nd child) will be $81,357.35!!

[seattlecyclone]

I guess I'm assuming that the tuition cost inflation we've seen over the past decade or two isn't sustainable over the long term. Who's going to pay $81k per year in today's dollars to go to college?

[marina]

Thanks everyone for giving me lots of ideas and food for thought.  As it stands, I think the plan should be, in order:

1. Look into backdoor Roth IRA ($5500) - this may not work because it also involves moving my rollover IRA $ into current 401k, which is a 'meh' provider.
2. HSA (maxed it out this year, switching to husband's new insurance so not sure about 2016. will need this $ for birth costs, though!)
3. only THEN do more 529 contributions

I wouldn't put the idea that a public school will cost $80k per year in ~15years into the realm of the impossible.  Plus, what if the kiddos choose a private college and we're stupid enough to agree to pay, and/or we don't end up being eligible for anything on FAFSA (likely)?

[seattlecyclone]

Even if you think $80k/year public school tuition is possible, you may want to avoid saving more in a 529 plan than the minimum you expect to chip in for tuition. You'll be taxed at your marginal rate plus 10% for any earnings in the account that you withdraw because you didn't need them for education. If you're over by a little bit you can just use the money to start a college fund for your grandkids, but if you budget for $80k and only spend $25k, you'll need a lot of grandkids to spend all that extra money after it grows for another 2-3 decades.

[a1smith]

I guess I'm assuming that the tuition cost inflation we've seen over the past decade or two isn't sustainable over the long term. Who's going to pay $81k per year in today's dollars to go to college?

It's $81K in future (2037) dollars.  The ratio between cost of attendance now and when I went to school is about the same with similar time delta.

Hopefully, MOOC's will help tamp down tuition increases.  Eventually, the education "bubble" will burst . . . .