529 options for late high school/college students

[MaybeBabyMustache]

We have two teens (18 & 19), both of whom will be in college this fall. We've saved enough in their 529s to cover about 1/2-2/3 of the college costs, and were planning to cash flow the rest with our income. (This is feasible based on our income & expenses.)

I'm reviewing benefits at a company & plan to accept a job offer next week. One of the surprise benefits is a 529 match, at 3%.

Questions:
1) Does it makes sense to consider investing in some short of very conservative 529 (we're with Utah 529) fund in order to secure the match? The 3% is great, but we don't want to risk much/any of the principal for that amount.
2) Does anyone have investment allocation recommendations for the Utah 529 while your kids are actually in college? We're comfortable with a very low ROI, and would prefer something more like a CD or fixed return, given we will be withdrawing quarterly from this point forward. Regardless of what we do with #1, we'd like to move to a more conservative mix, given the current stock market volatility. This isn't our retirement account. We know we are withdrawing immediately, and often, as planned.

Thanks for helping me think this through!

[roomtempmayo]

That's a great benefit!  First I've heard of it, but I'm glad it exists.

Contributing whatever it takes to get the match seems like a no-brainer.  It's free money.

At this point, with the kids already in school, the need for cash imminent, and markets pretty frothy, I'd hold it in cash or ultra short bonds like UTFIX, which is in your my529 options.  At this point, there's little upside to risk and lots of downside.

[secondcor521]

The 3% sounds nice, but if you're putting it into something conservative and leaving it there for three years, then it's just a 1% bump.  Six years, it's only a 0.5% bump.  Meh.  I'd probably think of something else to do with that money, like maybe put it towards my mortgage if I still had one.

On the second question, I just made sure I put the next X years of expenses for my kids into conservative investments, then left the rest in long term investments.  I think for me I chose X of 4, but it's really a personal risk / reward decision.  And if you just make a decision and stick with it over the next four or five years, you'll probably end up just fine both practically in terms of getting their college paid for, and mentally in terms of having a plan in place and feeling comfortable with it.

I would encourage you to learn about the relatively new 529->Roth rollover option which generally allows you to roll unused 529 money into the kids' Roth IRAs tax free and penalty free.  There are some rules and restrictions to know about, but they're not particularly hard to meet.  If it works for you, it's likely better than distributing the leftovers and paying taxes and a 10% penalty on the growth.

[Turtle]

As far as I know, there’s no holding requirement for 529 money.  (Unless there’s some sort of vesting schedule with the new company.). So I don’t see the harm in putting money in for the match and I agree that you’re making the right choice by selecting only conservative allocations for it.

[MaybeBabyMustache]

@roomtempmayo - thanks for the suggestion. I'll look into the bond you recommend.

@secondcor521 - house is paid off. We're thinking of just doing the amount to get the 3%, and that money (assuming no hold/vest) could then just be immediately removed the following quarter, which makes the 3% a little more appealing.

We currently have the remaining money for college in CDs.

I'm very interested in the new 529->Roth rollover, and will do more research on that, because we would be very comfortable gifting it in that way to our kids, with whatever is leftover. They both work, which I assume is a requirement for the Roth itself. But, will look into it!

Thanks for the suggestions everyone! @Turtle - good call on the vesting schedule. If it was a year for example, I could always pull out money that's already there, and just work my way through the 529 that already exists until the "vested" batch is ready to go.

[secondcor521]

@secondcor521 - house is paid off. We're thinking of just doing the amount to get the 3%, and that money (assuming no hold/vest) could then just be immediately removed the following quarter, which makes the 3% a little more appealing.

Maybe.

You *can* remove the money the following quarter.  I don't know Utah state tax law on 529s, but from a federal level that withdrawal would be a distribution, and unless you had qualifying expenses, you'd owe income tax plus 10% penalty on the earnings portion.  Mentally you can think of it as withdrawing those extra matching dollars, but from a federal 529 law point of view, it's all one big pile of money and all distributions come pro rata from contributions and earnings.

If you want to segregate withdrawals, the only way I know of to do that would be to open a separate 529, which is OK from a federal level but I don't know if the Utah 529 program will allow you to have two 529s for the same beneficiary.  You might have to open a 529 in a different state, which may or may not be worth the admin hassle to segregate funds.  And even then, your matching funds sound like they would be in the Utah 529 which you already have established and contributed to for years, so it seems problematic as a general idea to do this in your situation.

I'm very interested in the new 529->Roth rollover, and will do more research on that, because we would be very comfortable gifting it in that way to our kids, with whatever is leftover. They both work, which I assume is a requirement for the Roth itself. But, will look into it!

Yep, they have to earn enough.  Also, the 529->Roth rollover displaces any Roth conversions they might make, so you can only contribute/rollover up to whatever the limit is these days ($7K?  I forget).  There are other rules, too.  I'm doing them with my kids 529 leftovers and it's working very well.

[MaybeBabyMustache]

@secondcor521 - we can withdraw, because we will have eligible expenses (both kids will be in college in the fall). Sorry if I was unclear. Rather than cash flowing the remaining 1/3 or whatever of college expenses, we'd funnel the money into the 529, get the 3% match, and then withdraw as per the rules for eligible expenses. I can't decide if this is a giant PITA for 3%, but also, college is expensive. I'll see how much they allow for contributions. If it's a nominal amount, we are unlikely to pursue this.

Interesting on the Roth option. DS19 will make around that this year, and DS18 has earned less, but will likely work again while at college.

[secondcor521]

@secondcor521 - we can withdraw, because we will have eligible expenses (both kids will be in college in the fall). Sorry if I was unclear. Rather than cash flowing the remaining 1/3 or whatever of college expenses, we'd funnel the money into the 529, get the 3% match, and then withdraw as per the rules for eligible expenses. I can't decide if this is a giant PITA for 3%, but also, college is expensive. I'll see how much they allow for contributions. If it's a nominal amount, we are unlikely to pursue this.

Interesting on the Roth option. DS19 will make around that this year, and DS18 has earned less, but will likely work again while at college.

Ah, okay.  On your first paragraph, I was probably unclear too.  I was just trying to point out that the additional money you add for the matching will displace something, but in your case it would be displacing some of what you were going to cash flow, so that makes total sense now.

You're not required to 529->Roth rollover (or contribute) the full annual amount.  So if DS18 earned $1000, and met the rules, you could just 529->Roth rollover $1000.  It's limited to $35K lifetime per person, but there is no time limit, so you could take 10 or 15 years to do the 529->Roth rollovers if necessary.  Most college-bound kids are going to use it up in maybe 5 to 7 years though.

Another quirky rule is that you can do 529->Roth rollovers even if the person would normally be excluded from Roth contributions due to making too much.  So if your kid becomes a doctor or lawyer or whatever, you can still use the provision.

[MaybeBabyMustache]

@secondcor521 - super interesting on the Roth side, both timing & the ability to qualify even if you normally wouldn't based on income. I'm basically thinking that over funding shouldn't really be a concern, then, as we have options for getting the funds out without penalty.

[secondcor521]

Two of the big rules I haven't mentioned are the seasoning rules.  Essentially, you have to have had the 529 for that person for 15 years, and any money you rollover has to have been in there for 5 years.

The rules work pretty well to alleviate the "what if we overfund the 529?" concern that parents sometimes have while not allowing for much abuse.  I think it is a reasonably well crafted law.