Author Topic: How much to save in 529?  (Read 4529 times)

Goldy

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How much to save in 529?
« on: March 29, 2021, 08:00:40 PM »
Now that we have a infant I have been reading up on college costs and savings plans but I canít decide how much is a good amount to have in a 529.  I ran some ďwhat will college costĒ calculators and the numbers can be down right scary (600k for worst case future private school) but I also donít want to get hit with that 10% penalty if she decides to go a different path.  I do however like the idea of front loading the 529 and let compound magic do itís thing. 

I was thinking of setting a target of 200k by 18 years from now which should cover full tuition at a state school and 1/3 of private. 

What savings goals do you have for 529ís?

joe189man

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Re: How much to save in 529?
« Reply #1 on: March 29, 2021, 08:34:58 PM »
i just did this exercise. i have two kids a little older than you. i took the more expensive state school's all in cost and applied an inflation factor of 5%* and extrapolated out to when the kiddos would be in college. for example ~$30k a year total tuition + R&B grows to an average of $64k a year 15 years, multiply that by 4 and you get way to much money for tuition ~$250k or ~$500k+ for both

from their i calculated how much we should start saving now to cover 50%, 75% and 100% of costs. i.e. $700 a month for 15 years at 8% return = ~$250k

my current plan is to do the above ~$700 a month at least to start then re-assess, the kids daycare is ~$2800 a month so we still come out way a head even figuring for other activities

*a CFP friend of my told me she uses an average of 4.5% tuition inflation for her clients

yachi

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Re: How much to save in 529?
« Reply #2 on: March 30, 2021, 03:50:18 PM »
I saved some in a 529 plan when my oldest was little, but stopped.  I have an 11-year old, and only 10k -15k in the two plans.  I also have 3 more kids.

Here's why I stopped:
Money in 529 plans count against the student in FAFSA calculations
IRA's are better
401(k)'s are better
I simply didn't have any money left in our budget.

Have you seen the Investment Order thread?  It's very good: https://forum.mrmoneymustache.com/investor-alley/investment-order/

Maryland had a decent incentive, where you could put money in pre-state tax.

Calculations that include cost of college are depressing to my FIRE number because it costs so much.  So my plan is to Fire before my oldest starts college (if the markets cooperate), or bankroll college from my job (if the markets do not).

secondcor521

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Re: How much to save in 529?
« Reply #3 on: March 30, 2021, 05:06:38 PM »
I have three adult offspring - DS26 who has his college degree and a job, DS21 who's a sophomore at an out-of-state private university, and DD19 who is a sophomore at an in-state public university.  I saved in a variety of UTMAs, ESAs, and 529s.

First, I started with data.  I wanted an objective, comprehensive, updated, and understandable data set.  I chose this:

  https://research.collegeboard.org/trends/college-pricing

It's updated every year in the late fall or early spring and has all sorts of data slices in it.  I don't read the whole thing any more; I just go to the data tables to get the numbers I need.

Then I chose a target based on what I wanted to provide.  You really just have to make an educated guess here, I think.  I chose 4 years of the average in-state 4-year-university tuition/room/board/fees/books/travel.

I then did a spreadsheet figuring out when they'd go, how much it would cost then, how much I had already, how much it would grow to, etc.  It was simple at first and then got more detailed over time.

Personally I chose to segregate their education funding, so I just kept contributing as much as I could when I could until the spreadsheet said there would be enough with a bit left over.

As my kids' plans change, I've been updating the spreadsheet.  So eventually it switched for each of them from "generic 4 year university from 18 to 22" to "a bachelor's degree in X at school Y starting August 2019 ending May 2024".

I still aim to have just a bit left over when the youngest two graduate.  If I think I have too much, then I work on tax-savvy strategies to take out the excess (there are tricks).  If I think I have not enough, then I will just spend it all and then supplement from my own FIRE stash whatever is needed at the end.  If I'm not sure (like now), then I just sort of do the middle ground of reimbursing myself for the obvious big tuition bills.

It does make it easier if you have more than one kid, because you can sort of do an average guess and it's more likely to work out.  My oldest was relatively low cost, my middle is relatively high cost, and my youngest is low cost so far but may become high cost depending on how things work out.  Plus you can roll 529s down from kid to kid, which helps.
« Last Edit: March 30, 2021, 05:08:48 PM by secondcor521 »

Tyler durden

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Re: How much to save in 529?
« Reply #4 on: March 30, 2021, 08:11:15 PM »
Hi

I struggle with this question as well.

Currently my wife and I are blending our contributions. We do about 1/2 to 529 and the other half in a separate account labeled "kids college savings". It's just a brokerage account with index funds. This way we feel we get the tax free growth and if one or 2 of the 3 kids choose a different path, there is plenty of money not locked into the 529.

Also, and this is just my opinion, I feel like by the time my oldest goes to college in 10 years something in the system will break. Costs are becoming some prohibitive some solution will manifest. What I dont know -  but things that cant go on forever dont...

NonprofitER

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Re: How much to save in 529?
« Reply #5 on: March 31, 2021, 07:34:53 AM »
We only have one child, but our goal was to get to ~$100k in the 529 by age 10/11, and then let the growth take over (stop additional contributions) til age 18, knowing that our plan is also to have our primary paid off when our child graduates high school so we could add some cashflow to the equation if needed. She's now age 11 and has just over $110k and growing.

This was our balance between over-saving in the 529 vs not feeling prepared.

Sugaree

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Re: How much to save in 529?
« Reply #6 on: March 31, 2021, 08:40:55 AM »
Now that I can max out all my tax-advantaged space and have a little left over to concentrate on the 529, I'm planning on having enough in the 529 to pay for community college or the first two years of a four-year degree.  The rest will either come out of my Roth IRA or brokerage account (I should also have a pension, so I feel comfortable doing this).  We'll also probably buy a condo in whatever city he ends up going to school in and sell it after graduation in order to recoup some of the room and board costs. 

If he goes another route, then I'll take a bunch of fun classes for myself or I'll put it aside for a grandchild.  But I won't have four years worth of tuition locked in. 

secondcor521

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Re: How much to save in 529?
« Reply #7 on: March 31, 2021, 09:31:01 AM »
Money in 529 plans count against the student in FAFSA calculations
IRA's are better
401(k)'s are better

FAFSA generally counts all assets (unless you meet the simplified needs test or auto zero EFC - which are separate loopholes in themselves).  529 assets count as parental assets if they are in the name of the parent or the child, and generally speaking parental assets are FAFSA taxed much less than student assets.  In other words, a 529 asset is among the best kinds of assets to have if you're filling out a FAFSA.  (This is, of course, excepting the kinds of assets that FAFSA doesn't count at all, which used to include home equity and retirement accounts.  I think that's still true under the new FAFSA rules but haven't checked for sure.)

I'm not sure why IRAs or 401(k)s would be better *for education purposes*, *especially* if there's a state tax deduction for the 529.  If there is, then a 529 and traditional IRA or 401(k) are taxed the same on the front end (to the extent of the state tax deduction) and during, but on the withdrawal end, 529's are tax free but traditional IRAs are taxed.  Also, contribution limits to 529s are generally higher ($15K vs $6K/$7K), which can be useful in certain circumstances.

In the case of a Roth IRA or 401(k), it might depend on the relative marginal tax rates involved at the time of the contribution(s) and distributions.

It's also worthwhile to look at 529 fees.  My state has both investment fees and account fees, which aren't great but can be around 1/2% annually.

yachi

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Re: How much to save in 529?
« Reply #8 on: March 31, 2021, 01:35:26 PM »
Money in 529 plans count against the student in FAFSA calculations
IRA's are better
401(k)'s are better

FAFSA generally counts all assets (unless you meet the simplified needs test or auto zero EFC - which are separate loopholes in themselves).  529 assets count as parental assets if they are in the name of the parent or the child, and generally speaking parental assets are FAFSA taxed much less than student assets.  In other words, a 529 asset is among the best kinds of assets to have if you're filling out a FAFSA.  (This is, of course, excepting the kinds of assets that FAFSA doesn't count at all, which used to include home equity and retirement accounts.  I think that's still true under the new FAFSA rules but haven't checked for sure.)

I'm not sure why IRAs or 401(k)s would be better *for education purposes*, *especially* if there's a state tax deduction for the 529.  If there is, then a 529 and traditional IRA or 401(k) are taxed the same on the front end (to the extent of the state tax deduction) and during, but on the withdrawal end, 529's are tax free but traditional IRAs are taxed.  Also, contribution limits to 529s are generally higher ($15K vs $6K/$7K), which can be useful in certain circumstances.

In the case of a Roth IRA or 401(k), it might depend on the relative marginal tax rates involved at the time of the contribution(s) and distributions.

It's also worthwhile to look at 529 fees.  My state has both investment fees and account fees, which aren't great but can be around 1/2% annually.

Right, 529 money is counted as an asset, but a parent's IRA isn't counted at all.  Both options are better than leaving the money in cash or buying a second home, but money in the IRA is superior for qualifying to FAFSA aid.

My thinking is not to give up the retirement account contribution space to a 529 plan because it's locked into being used for education, and the federal tax benefits are not much different from funding an IRA and using it for education.  Also, if you are used to maxing out a 401(K) plan and an IRA plan, you can cashflow up to $25,500 in education expenses per year just by stopping those contributions.  So they may not be the best plans for education exclusively, but may be the better plan overall.

I need to start running my actual numbers with state taxes and see if I'm doing what's best.  I recently realized Pennsylvania doesn't allow deductions for traditional IRA or 401(k) contributions, but does allow deductions for 529 plans.  I'm not sure if it'll make a difference with the 3.07% state income tax included.

Chrissy

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Re: How much to save in 529?
« Reply #9 on: March 31, 2021, 03:00:59 PM »
We front-loaded.  We were/are maxing our tax-advantaged space, and we had a taxable account. 

In-state tuition at our 2 big universities is ~$15k/yr, and room/board/fees is another $15k/yr... right now.  $30k/yr!  It'll probably double to $60k/yr by the time my kids could attend.  We plan to be retired well before, but who knows?  And, who knows what aid will look like then?

We liquidated taxable to fund $20k at age 0-1 and another $20k at age 1-2 for $40k total per kid, and received the max state tax deduction for our contributions.  My children are 3 & 5 years old right now, and the accounts stand at $59k and $74k, projected to be ~$170k by age 18.  Will $42k/yr for 4 years be enough?  I have no idea.  Originally, my plan was to have $240k/kid for college ($60k/yr x 4 years), with half in 529 and half in taxable, but it ended up more than we could do (at least for now).

Meanwhile, to keep myself from despair, I've decided my backup plan for the kids is dual enrollment/AP credits to shorten the time needed at uni or, after reading through BeyondtheStates.com, GOING ABROAD: 

Anglo-American University in Prague, where an entire bachelor's taught in English takes 3 years, costs $25k in tuition for the entire degree (!!!) and the cost of living is less than Memphis.  Not 529 eligible, but, if you withdrew the tuition & COL anyway, you'd pay income tax on the earnings portion of the withdrawal at the student's rate, and only incur the 10% penalty on the earnings;

Bocconi Unversity in Milan, which is 529 eligible, a bachelor's taught in English takes 3 years, ~$14k/yr tuition, and COL is like Tampa;

University College Utrecht in the Netherlands, which is 529 eligible, a bachelor's taught in English takes 3-4 years depending on the major, ~$14k/yr tuition, and COL is the same as the college towns in my state;

and honorable mention to Bangor University in Wales, which is also 529 eligible, a bachelor's takes 3 years and a master's takes 1 year!!!  They're ~$23k/yr in tuition, and COL is the same as our college towns.

There are some very interesting ways to skin the cat, and if you can't make the budget fit the options, you can make the options fit the budget.

SimpleCycle

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Re: How much to save in 529?
« Reply #10 on: April 01, 2021, 12:34:41 PM »
We plan to pay for college in full.  We are going to put four years of cost of attendance at our state flagship university into each account and go from there.  That's $150k per kid in today's dollars.  It's daunting, but we feel strongly about paying for our children's educations.

YttriumNitrate

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Re: How much to save in 529?
« Reply #11 on: April 01, 2021, 01:00:23 PM »
I save $5k a year for two kids (ages 2 and 5) because that's the amount needed to maximize my state's tax deduction. I started a few years before the oldest was born, and if I keep adding $5k a year I should be at about $130k per kid when they go of to college. While probably enough to pay for state schools, I'm guessing that would be a drop in the bucket relative to an expensive private school without significant financial aid.

NorCal

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Re: How much to save in 529?
« Reply #12 on: April 01, 2021, 01:07:07 PM »
Our target is $60K/kid in 529's, but we also expect some financial help from grandparents for college (it's set aside in the will).

Part of the challenge is the highly variable cost of college.  An exclusive private school is different than community college, which is different than a military academy. 

I STRONGLY recommend doing the math on how much the 10% penalty would cost if your child chooses not to go to college.  I did the math a few years back and the penalty was surprisingly small.  I counted my tax savings on the dividend income and on my state income taxes in one scenario and my capital gains taxes and the 10% penalty in the other scenario.  The net cost of the penalty was negligible. 

Snowman99

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Re: How much to save in 529?
« Reply #13 on: April 05, 2021, 12:37:45 AM »
Problem with 529 is that you must use it for education. College may be on YouTube in 18 years, might be free, kids may not want to go, etc.,  and we are concerned with locking in the funds to an inflexible account. We primed the pump with about $10k each and link our credit card (Fidelity gives 2% back automatically invested). Invest about $1k each a year thereafter.  Probably will use the taxable if 529s run short.

secondcor521

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Re: How much to save in 529?
« Reply #14 on: April 05, 2021, 06:44:14 AM »
Problem with 529 is that you must use it for education.

Or roll it over to another family member, including siblings, parents, and cousins.  Or withdraw penalty free based on several exceptions (including scholarships).  Or pay a small penalty on part of the account.

Practically speaking, a 529 is not much more restrictive than a taxable account, and comes with more tax benefits.

NorCal

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Re: How much to save in 529?
« Reply #15 on: April 05, 2021, 06:49:22 AM »
Problem with 529 is that you must use it for education.

Or roll it over to another family member, including siblings, parents, and cousins.  Or withdraw penalty free based on several exceptions (including scholarships).  Or pay a small penalty on part of the account.

Practically speaking, a 529 is not much more restrictive than a taxable account, and comes with more tax benefits.

Agreed.  When you do the math on the penalty, it's actually not that bad when you factor in the tax deferral on dividends (assuming you'd be putting the balance in a taxable account) and the present-value of deferred state income taxes (assuming you're in a state that allows the deduction).

When I did the math, the difference between paying a penalty vs. putting those funds in a taxable account amounted to a couple hundred dollars after 18 years.

Paper Chaser

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Re: How much to save in 529?
« Reply #16 on: April 06, 2021, 10:20:47 AM »
Rules for 529's owned by grandparents may be relaxing a lot soon? Moving forward they could avoid showing up on FAFSA assets and avoid being shown as taxable income if I'm reading it correctly?

https://www.savingforcollege.com/article/new-fafsa-removes-roadblocks-for-grandparent-529-plans

secondcor521

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Re: How much to save in 529?
« Reply #17 on: April 06, 2021, 11:50:34 AM »
Rules for 529's owned by grandparents may be relaxing a lot soon? Moving forward they could avoid showing up on FAFSA assets and avoid being shown as taxable income if I'm reading it correctly?

https://www.savingforcollege.com/article/new-fafsa-removes-roadblocks-for-grandparent-529-plans

Grandparent 529's never showed up as assets.  Grandparent 529 distributions used to be included as untaxed income to the student which was FAFSA taxed at a 50% rate but under the new rules will not be.

Grandparent 529 distributions to the student were never taxable income to anyone as long as they were used for qualified higher education expenses.

lutorm

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Re: How much to save in 529?
« Reply #18 on: April 06, 2021, 05:14:55 PM »
I'm hoping by the time he goes to college we'll live in Sweden and it'll be free....

We funded a 529 with 30k when he was born, if that's not enough we haven't decided how much we would give vs lend vs let him figure it out.

Morning Glory

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Re: How much to save in 529?
« Reply #19 on: April 06, 2021, 08:59:03 PM »
Wait a minute.

Nobody mentioned state taxes and incentives. You have to look at those before you decide where 529 falls on the investment order. My state, for example, has a $500 credit on the first $1000  contribution per year. I would be stupid not to take that. Even if I didn't have kids, I would still take it. There's an AGI cutoff for that one but I always come in under it. They also have a deduction for people who don't qualify for the credit because their income is higher.

529s come after tax deferred accounts if you live in a state with no income tax, or if there is no incentive. They function like a Roth that can only be used for education, but you can transfer the beneficiary if your kid doesn't use it. That's why it's usually better to fund IRAs and 401ks first.

Previous posters are correct that they count as a parental asset on the fafsa.

charis

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Re: How much to save in 529?
« Reply #20 on: April 06, 2021, 10:39:55 PM »
Wait a minute.

Nobody mentioned state taxes and incentives. You have to look at those before you decide where 529 falls on the investment order. My state, for example, has a $500 credit on the first $1000  contribution per year. I would be stupid not to take that. Even if I didn't have kids, I would still take it. There's an AGI cutoff for that one but I always come in under it. They also have a deduction for people who don't qualify for the credit because their income is higher.

529s come after tax deferred accounts if you live in a state with no income tax, or if there is no incentive. They function like a Roth that can only be used for education, but you can transfer the beneficiary if your kid doesn't use it. That's why it's usually better to fund IRAs and 401ks first.

Previous posters are correct that they count as a parental asset on the fafsa.

Several people have mentioned state tax incentives.

yachi

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Re: How much to save in 529?
« Reply #21 on: April 07, 2021, 03:40:41 PM »
Wait a minute.

Nobody mentioned state taxes and incentives. You have to look at those before you decide where 529 falls on the investment order. My state, for example, has a $500 credit on the first $1000  contribution per year. I would be stupid not to take that. Even if I didn't have kids, I would still take it. There's an AGI cutoff for that one but I always come in under it. They also have a deduction for people who don't qualify for the credit because their income is higher.

529s come after tax deferred accounts if you live in a state with no income tax, or if there is no incentive. They function like a Roth that can only be used for education, but you can transfer the beneficiary if your kid doesn't use it. That's why it's usually better to fund IRAs and 401ks first.

Previous posters are correct that they count as a parental asset on the fafsa.

Several people have mentioned state tax incentives.

For completeness, here is a list of state tax deductions for 529 plans: https://www.savingforcollege.com/compare_529_plans/state-tax-deductions/

This thread inspired me restart funding a 529 plan for our DD and start plans for her siblings.  My own state allows me to deduct $15k per beneficiary from my state taxable income.  Oddly, our state doesn't allow deductions for 401(k) or IRA contributions.

I'll take it for the tax deductions, and I like that low cost Vanguard funds are available.  In IRAs and taxable accounts you can buy options and invest in individual stocks, but you cannot in 529 plans.

kpd905

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Re: How much to save in 529?
« Reply #22 on: April 07, 2021, 05:04:29 PM »
Does anyone have a good resource for learning about the various 529 strategies like child vs. parent vs. grandparent as beneficiary, using grandparent 529 for final 2 years of college so it never gets factored into FAFSA calculations, stuff like that?  I have 15-17 years before kids head to college, but figure some of this stuff could be started now.

secondcor521

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Re: How much to save in 529?
« Reply #23 on: April 07, 2021, 05:44:19 PM »
Does anyone have a good resource for learning about the various 529 strategies like child vs. parent vs. grandparent as beneficiary, using grandparent 529 for final 2 years of college so it never gets factored into FAFSA calculations, stuff like that?  I have 15-17 years before kids head to college, but figure some of this stuff could be started now.

savingforcollege.com
google.com

The kid is almost always the beneficiary - the one the money is used for.  The kid or parent or grandparent can be the custodian - the one who has a fiduciary duty to care for the money.

The final 2 years thing doesn't apply starting this year.

Who knows what it will look like in 15-17 years; change seems to be the one constant.  But if you start learning now you'll be better prepared to understand the changes as they happen.

kpd905

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Re: How much to save in 529?
« Reply #24 on: April 07, 2021, 06:44:17 PM »
savingforcollege.com

Thanks, I'll poke around here a bit.

google.com

Extremely helpful, thanks.

The final 2 years thing doesn't apply starting this year.

It looks like this would favor saving all money in a 529 owned by a grandparent, correct?  That way it would never be seen by FAFSA?  Maybe I should stop contributing to our accounts now and just let them grow.  We could then empty them the first year and try for zero EFC the other years.

secondcor521

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Re: How much to save in 529?
« Reply #25 on: April 07, 2021, 06:57:54 PM »
The final 2 years thing doesn't apply starting this year.

It looks like this would favor saving all money in a 529 owned by a grandparent, correct?  That way it would never be seen by FAFSA?  Maybe I should stop contributing to our accounts now and just let them grow.  We could then empty them the first year and try for zero EFC the other years.

Yes, if:

1.  I and others are understanding the recent law changes correctly.  The law was passed in December but there isn't any guidance from the Department of Education yet really.

2.  The laws don't change again.

3.  Your kid(s) go to a FAFSA school.  Many are, but the most competitive schools are CSS, which is a whole different ball of financial aid wax.