Kids' 529: When is enough enough?

[MilStachian]

All,
I'm trying to determine when I can pull back on contributing towards my kid's 529 accounts and instead save and invest for other goals.

My concern (and let me say I'm lucky to be in this position!) is that my wife and I will over-contribute to our children's 529 accounts and be forced to withdraw the unused balance at a penalty.

Our goal is to fully pay for each child's undergraduate degree.  If at the time they go to college there isn't enough in the 529 account, we would cash-flow the difference.  If there's an unused balance, the kids could use it for graduate school.  Otherwise they could withdraw it at a penalty.

Current balances
Child 1 (2 years old):
529 current balance: $22,500

Child 2 (3 months old):
529 current balance: $19,000

Assume 7% growth until they both turn 20, with $50 contributions to each account, each month.
Child 1 balance in 18 years: $105,000
Child 2 balance in 20 years: $99,850

They'll go to an in-state, public university.  Average current cost of college (in-state public) is about $9000 for tuition, another $7000 for room and board, and assume another $500 for books.  That's $16,500 a year, or $66k for four years.  Assuming inflation jacks up college costs, my wife and I think we'd need to have about $100k per kid. 


When is enough, enough?  Do I need to add significantly to the current balance?  Or can I just let it ride as is with our $50 monthly contributions?  Is my assumption we'll only need $100k per kid off-base?

Thanks everyone!

[Brandon Curtis]

At 3% inflation per year, costs double in 23.5 years.  3% is a bit high compared to recent US inflation rates; however, college costs have been rising much, much faster than inflation:



You might be able to reason that these growth rates have to slow within the next 20 years, but I guess we'll see!  Based on the data and my intuition, $100,000 is probably in the range of what you'll pay.

But what happens if your kid gets lots of scholarships, or decides to do a cheaper program somewhere else, or doesn't even go to college?

Rest assured that you're not screwed if you get caught holding a big bag full of unused 529 Plan money.  As you already mentioned, if your kid ends up going to graduate, business, law, medical, or other professional school (as I have), they can continue to draw down the 529 Plan money there as well.  If there are still leftovers, you can change the account's beneficiary to any of the original beneficiary's extended family members.  You could have a head-start paying for your grandkids' educations!

You probably have enough already, but if you do overcontribute, it's not the end of the world.  A great position to be in!

[pdxvandal]

It's a great start for your kids ... very impressive.

However, you can't get a loan for retirement. I'd recommend dialing it back and focusing on retirement investments. If there is a shortfall in your 529, you can help bridge it with your retirement income, or they can get a small loan.

Good luck.

[lentilman]

Great gift for your kids!

I suspect the rate increase of college costs will be dropping from current rates due to the rise of online instruction and the resulting competition.

The real scandal in higher education is that the schools are pushing loans on kids to pay for costs that are directly resulting from bizarre non-education related expenses.  Pay the head football coach ten million?  Resod the quad area for 5 million?  Hire a layer of administrators for 10 million so the president who is earning 2 million with a golden pension doesn't have to interact with students?  No problem, pass the costs onto the students who will take out a loan (that can never be discharged barring their death) to pay for it.  I'm hopeful the MOOCs will provide an alternative to this funding model.

[Argyle]

Another option is that government savings bonds pay out tax-free if used for education expenses.  (For EE and I bonds issued after 1989.)  The tax exclusion is reduced if you make over a certain amount -- currently $109,250 for married couples filing jointly, etc.  (http://www.treasurydirect.gov/indiv/planning/plan_education.htm)   You need to wait five years to withdraw without penalty.   So if savings bonds were in a category you were going to invest in anyway, you could put some money in those, use it for your kids' education if that's a good use of it when the time comes, and use it for your own stash if not.  NB you can charge bonds on your credit card and get frequent-flyer miles.  (I'm assuming you'd pay the card off immediately.)

[fuzzb]

You might find this college cost estimator from Vanguard useful: http://www.archimedes.com/vanguard/collcost.phtml?

It even includes cost lookup by school.

[Stache In Training]

However, you can't get a loan for retirement. I'd recommend dialing it back and focusing on retirement investments. If there is a shortfall in your 529, you can help bridge it with your retirement income, or they can get a small loan.

+1
Remember that by planning for your own retirement is really a gift to your children, as they will never have to worry about you financially or pay for you.  You're retirement should always be first.  This never occurred to me till just recently, when someone pointed it out. Then it hit me (and I found out) that my while parents helped me with college, they neglected their retirement.  And honestly, I would have preferred to pay for my college, instead of their retirement.
Just something to keep in mind.

[mandies]

Just to chime in with my own experience -- and why we stopped contributing.

We have smaller 529s in NC, but then realized that we were better off maxing our Roths each year, and then contributing any extra to a regular old cash investment account, even if we have to pay capital gains. We used to be able to write 529 contributions off of our taxes each year, but starting in 2014 we can't anymore, so we've stopped contributing altogether. The kids will still have about $15-20k in there when they start college.
 
Mr MM had some great advice -- "don't assume college will be expensive." We're planning on having our kids figure out how to take lots of AP classes and exams, consider two years at a community college and a transfer, or even consider what used to be looked down on as "blue collar" work. I have a four-year degree and I'm still making less than $60k per year after 12 years of what I consider aggressive career-building. I recently talked to an owner of a muffler shop, and realized he makes a lot more than I do. For me, I just didn't want to make the monetary decision in advance about college -- the kids are individuals and I can still invest the money for gains and be there to help them pay for college they need it.

I also plan on having my kids figure out how to make money as teenagers (yard work, re-selling appliances on Craiglist, etc.) to help pay for college as well.