529 accounts and asset allocation

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DoctorPhysics
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529 accounts and asset allocation

Post by DoctorPhysics »

I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
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windaar
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Re: 529 accounts and asset allocation

Post by windaar »

Depends on your age and your kid's age, but the accumulation phases, horizons, and durations will be different. If you're 30 you will be accumulating your retirement for 40+ years and then living off of it for 20+ years... If you have a kid you will be accumulating for 18 years and then spending it in 4 years. So yes, the risk tolerance and AA will probably be very different.
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sycamore
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Re: 529 accounts and asset allocation

Post by sycamore »

DoctorPhysics wrote: Tue Oct 19, 2021 6:03 pm I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
I have kept my 529 portfolio separate from retirement portfolio. Different spending horizon, different tax rules (mostly), different asset allocation. Maybe I'm a bucketer at heart.

But I do think it's possible to build a good enough plan doing it either way.
bhough
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Re: 529 accounts and asset allocation

Post by bhough »

Check this out:

viewtopic.php?t=346351

Long live vineviz!
b
inbox788
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Re: 529 accounts and asset allocation

Post by inbox788 »

bhough wrote: Tue Oct 19, 2021 9:50 pm Check this out:

viewtopic.php?t=346351

Long live vineviz!
b
Interesting strategy, and I've considered it, but having a portion in bonds isn't going to return much, so I'm not sure what's the point, especially with bond rates these days.
https://www.whitecoatinvestor.com/asset ... n-taxable/
I wound up being aggressive and investing in 100% equities, and it's paid off. I'm considering the consequences of keeping it 100% equities even as it's being spent down during the college years. Any shortfalls will be made up from taxable account invested more conservatively. I figure cashing in on tax-free earnings is a win, but you give up TLH in a taxable account if there's downturn (when there's a downturn).

An offshoot of the emergency fund location placement strategy. Still working through the tradeoffs. On a shorter timeframe.
https://www.bogleheads.org/wiki/Placing ... ed_account
https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
https://www.bogleheads.org/wiki/Tax-eff ... _placement
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Spinola
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Re: 529 accounts and asset allocation

Post by Spinola »

I was at 90% stock (VTSAX), 10% bonds. (VBTLX) during accumulation, when kid started college last year I switched to 20% bonds. This strategy has paid off in the last few years. Now that we are withdrawing, I am taking money out of the stock portion mostly, so it is probably slightly higher in bonds than 20% right now. The stock portion just keeps growing back :mrgreen:
"If more of us valued food and cheer and song above hoarded gold, it would be a merrier world." | Thorin Oakenshield
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TierArtz
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Re: 529 accounts and asset allocation

Post by TierArtz »

There is no right answer to this one. As for the TierArtz household:

1. The 529s are not counted as part of the end-stage accumulators' portfolio. For simplification, I let VG choose the AA for each child using the "Aggressive" college start date option. The AAs for all kids happen to be more conservative than what I'm using across retirement and taxable investment accounts (70:30; stocks:FI).

2. If one is "well-off" on saving for their retirement, how they arrange the 529s likely does not matter much - they can afford to take on risk or be conservative as they choose. For example, right now, our retirement assets are 15X the sum of the 529 accounts, so the AA of the 529s would not push the needle much anyway.
cfa-ish
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Re: 529 accounts and asset allocation

Post by cfa-ish »

DoctorPhysics wrote: Tue Oct 19, 2021 6:03 pm I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
Separate. The 529 money cannot be used for my expenses. I can spend out of my IRA for kids' college expenses but would really rather not, given the IRA money is invested for much longer term.

I am confused why you think the timeline for 529 is the same as your overall portfolio.
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markjk
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Re: 529 accounts and asset allocation

Post by markjk »

windaar wrote: Tue Oct 19, 2021 6:15 pm Depends on your age and your kid's age, but the accumulation phases, horizons, and durations will be different. If you're 30 you will be accumulating your retirement for 40+ years and then living off of it for 20+ years... If you have a kid you will be accumulating for 18 years and then spending it in 4 years. So yes, the risk tolerance and AA will probably be very different.
+1

That condensed four year withdrawal is the biggest difference in my mind. Your 529 could be dramatically impacted by a bad year or two when you are withdrawing ~25% of the portfolio value each year with a target of using all the money by the time school is done. So, I do treat the 529 differently.

I can see reasoning for a lot of different approaches with this but overall, I am more conservative with this money because if we take a huge hit as we get closer to college (or are in college), then it was a pointless savings mechanism. I'll give up the chance for bigger gains to protect the downside on this one.
loukycpa
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Re: 529 accounts and asset allocation

Post by loukycpa »

I don't consider it a part of my retirement portfolio. While I control it, I consider it money I have already gifted and won't see again.

As far as asset allocation, I use the recommended target date fund based on graduation year. Set it and forget it.
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
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StevieG72
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Re: 529 accounts and asset allocation

Post by StevieG72 »

I have a 529 for DD and do not consider it as part of my portfolio. The money is for the kids education, if some of it is not used I will save for grandkids if any, however I am fairly confident it will be used up entirely.
Fools think their own way is right, but the wise listen to others.
fourwheelcycle
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Re: 529 accounts and asset allocation

Post by fourwheelcycle »

I do not include our 529 accounts in the "total" of our personal savings. They are in my name, but I consider them dedicated to our grandchildren. Since our grandchildren are still very young, I have all of their 529s in Vanguard's TSM Index. When our grandchildren become older, I will move their funds for each semester of college into Vanguard's intermediate-term bond index five years before the money is needed. I use the same approach for our retirement funds. I keep five years of RMDs in VBILX, and the rest in VTSAX.
shess
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Re: 529 accounts and asset allocation

Post by shess »

We treated it as part of our portfolio, under the theory that if 529 plans did not exist, we'd be covering it out of our portfolio.

Within that, I feel like I made a mistake in how I invested it. I treated it like a tIRA, and used it to cover some of our fixed-income portfolio. But once we got closer to college, I realized that it would have made more sense to treat it as a Roth IRA, because all of the gains would escape taxes entirely when used for educational expenses. But by then it was really too late, because college expenses were inbound, so it made more sense to allocate those funds conservatively to lock things in. As opposed to risking a loss in the 529 plan which would need to be made up for by selling taxable assets (whereas right now I can let those taxable assets run for a few more decades). To be fair to myself, if we had invested in a broad-market equities fund, we'd have probably ended up with way too much 529 plan for our needs (terrible problem to have, I admit).

Hopefully that all made sense.
runner540
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Re: 529 accounts and asset allocation

Post by runner540 »

sycamore wrote: Tue Oct 19, 2021 7:22 pm
DoctorPhysics wrote: Tue Oct 19, 2021 6:03 pm I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
I have kept my 529 portfolio separate from retirement portfolio. Different spending horizon, different tax rules (mostly), different asset allocation. Maybe I'm a bucketer at heart.

But I do think it's possible to build a good enough plan doing it either way.
Same. I don’t include 529 for net worth or asset allocation. Love buckets.
Topic Author
DoctorPhysics
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Re: 529 accounts and asset allocation

Post by DoctorPhysics »

bhough wrote: Tue Oct 19, 2021 9:50 pm Check this out:

viewtopic.php?t=346351

Long live vineviz!
b
Thanks for that link.

My first thought about that a two account approach sounds way to complex.

I'm also not sure why overfunding is such a big concern - 1) college costs are rising fast ~5-8%/year, very close to historical SP500 average returns, 2) you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings, 3) if any taxes paid, are they not taxed at the beneficiary tax rate? If not, you could try to manage the tax bite with a tax sensitive withdraw strategy? 4) Why not just run 1 account. And if one is truly worried about overfunding it, its easy to monitor it on a year by year basis and adjust asset allocations with 2 funds.
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DoctorPhysics
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Re: 529 accounts and asset allocation

Post by DoctorPhysics »

runner540 wrote: Wed Oct 20, 2021 9:14 pm
sycamore wrote: Tue Oct 19, 2021 7:22 pm
DoctorPhysics wrote: Tue Oct 19, 2021 6:03 pm I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
I have kept my 529 portfolio separate from retirement portfolio. Different spending horizon, different tax rules (mostly), different asset allocation. Maybe I'm a bucketer at heart.

But I do think it's possible to build a good enough plan doing it either way.
Same. I don’t include 529 for net worth or asset allocation. Love buckets.
See here on buckets - lots of thought on if it is optimal.

viewtopic.php?t=286370
Topic Author
DoctorPhysics
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Re: 529 accounts and asset allocation

Post by DoctorPhysics »

markjk wrote: Wed Oct 20, 2021 7:11 pm
windaar wrote: Tue Oct 19, 2021 6:15 pm Depends on your age and your kid's age, but the accumulation phases, horizons, and durations will be different. If you're 30 you will be accumulating your retirement for 40+ years and then living off of it for 20+ years... If you have a kid you will be accumulating for 18 years and then spending it in 4 years. So yes, the risk tolerance and AA will probably be very different.
+1

That condensed four year withdrawal is the biggest difference in my mind. Your 529 could be dramatically impacted by a bad year or two when you are withdrawing ~25% of the portfolio value each year with a target of using all the money by the time school is done. So, I do treat the 529 differently.

I can see reasoning for a lot of different approaches with this but overall, I am more conservative with this money because if we take a huge hit as we get closer to college (or are in college), then it was a pointless savings mechanism. I'll give up the chance for bigger gains to protect the downside on this one.
I think there is a point to be made here on why these plans often have target date funds with a steep glide path. I'll take that into consideration as I get closer to the actual college date.
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DoctorPhysics
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Re: 529 accounts and asset allocation

Post by DoctorPhysics »

cfa-ish wrote: Wed Oct 20, 2021 6:16 pm
DoctorPhysics wrote: Tue Oct 19, 2021 6:03 pm I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
Separate. The 529 money cannot be used for my expenses. I can spend out of my IRA for kids' college expenses but would really rather not, given the IRA money is invested for much longer term.

I am confused why you think the timeline for 529 is the same as your overall portfolio.
Ahh yes, my sub-conscious is actually thinking I will get on the retirement train roughly when 1st child starts or leaves college.
Scotttheking
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Re: 529 accounts and asset allocation

Post by Scotttheking »

Either it is part of overall portfolio and managed with assets types routed to the optimal account or it is managed as a separate, shorter time frame portfolio with a more conservative allocation.

I do the former since I’m going to pay for college regardless.
Ed 2
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Re: 529 accounts and asset allocation

Post by Ed 2 »

DoctorPhysics wrote: Tue Oct 19, 2021 6:03 pm I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
Our AA on 529’s and ESA’s are different . For both of my kids in Coverdale accounts we keep purely at Wellington funds but 529’s are different. My oldest child is more organized and good student. She study good and fast , she is graduating university ahead of time , so her 529 we use for immediate use in money market and to pay off her partial loan. But our younger child went to community college and first two years are free , so we invest in her 529 most aggressive way in 100% equity.
Hope it helped.
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Nate7out
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Re: 529 accounts and asset allocation

Post by Nate7out »

DoctorPhysics wrote: Thu Oct 21, 2021 12:55 pm
bhough wrote: Tue Oct 19, 2021 9:50 pm Check this out:

viewtopic.php?t=346351

Long live vineviz!
b
Thanks for that link.

My first thought about that a two account approach sounds way to complex.

I'm also not sure why overfunding is such a big concern - 1) college costs are rising fast ~5-8%/year, very close to historical SP500 average returns, 2) you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings, 3) if any taxes paid, are they not taxed at the beneficiary tax rate? If not, you could try to manage the tax bite with a tax sensitive withdraw strategy? 4) Why not just run 1 account. And if one is truly worried about overfunding it, its easy to monitor it on a year by year basis and adjust asset allocations with 2 funds.
I use the age based aggressive all in one funds in my 529. I'm not in danger of over-funding yet.

I think the key reason for the two accounts is that your withdrawals are a pro-rated mix of earnings and growth. The second, low growth account gives you much better control over your tax situation.
SocalLiving
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Re: 529 accounts and asset allocation

Post by SocalLiving »

We have two 529 accounts at my529 (Utah) for our 15 and 13 year old kids.
We use the aggressive domestic AA recommended by the plan.
https://advisor.my529.org/age-based-agg ... -domestic/
We do have to set the AA manually once a year now because my529 switched to a default plan that now includes international and does not offer the aggressive domestic AA as an automatic option anymore.

For our 15 year old we are currently 50/50 and for our 13 year old we are 60/40.
This is more conservative than our retirement AA of 70/30.

We expect to use the 529 accounts to fully pay for 4 years college for both kids - either private or state.
Addy
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Re: 529 accounts and asset allocation

Post by Addy »

bhough wrote: Tue Oct 19, 2021 9:50 pm Check this out:

viewtopic.php?t=346351

Long live vineviz!
b
Hmm, if you follow/understand vineviz’s strategy, do you want to comment on viewtopic.php?p=6290354#p6290354 ?
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camillus
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Re: 529 accounts and asset allocation

Post by camillus »

My opinion is that the 529 should be treated as part of one's overall portfolio (and hold stocks only!), provided a few things:
1) The 529 is underfunded relative to the cost of college, and
2) the parent has made a commitment to pay for some meaningful part of college, regardless of market performance, and
3) you can consistently maintain a single AA and glide path across all your accounts (in the end, this is all about behavior).

Most people would count an HSA balance as part of their portfolio, even though it is designated towards a certain future stream of expenses related to health. A Donor Advised Fund can be thought of the same way, designated towards a future stream of charitable expenses.

The function of the 529 is to keep gains on investments from being taxed if used for qualified educational expenses. Money goes in post-tax, and comes out without being taxed, much like a Roth IRA. Holding bonds in such a vehicle, especially over a short time horizon, makes little sense (unless you are contributing for a state tax deduction).

You will put your stocks somewhere in your portfolio, you will also put bonds somewhere in your portfolio. It makes the most sense for an underfunded 529 to hold mostly if not 100% stocks along with your Roth IRA and HSA. Your 401k should hold all of your bonds.

This is easy for me to say, as my oldest is 7. Perhaps in 8-10 years I'll change my tune. But it seems that 529s should be very aggressive and any glidepath should be short and sweet.

edited to add: i-bonds are getting very popular. They appear to be completely tax-free if used for educational expenses. So, they are far superior to bonds in a 529 since I-bonds are much more liquid and can be withdrawn without penalty besides tax.
51% US / 34% ex-US / 15% “bond”
NiceUnparticularMan
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Re: 529 accounts and asset allocation

Post by NiceUnparticularMan »

We have a sophomore in HS and a 4th-grader with 529s. We live in PA and get a state tax deduction. We're not really too worried about overfunding.

We keep them separate, and the only conceptual connection is we "know" we wouldn't need to try to figure out how to finance helping with higher education expenses for our kids out of income (work or eventually retirement), and in fact that we will get a reduction in expenses when we are no longer paying out of income for private K-12. I don't think it is "wrong" to do a unified approach, and it may well be "optimal" from some perspectives (as long as you really execute it correctly). But to me it was more trouble than it was worth trying to plan around such large, but temporary, but not necessarily on a perfectly known schedule, expenses with a unified approach.

We are using a custom glidepath approach which is somewhat backloaded, and in fact ends with everything going into PA's 529 Guaranteed Savings Plan, which we have already executed for our sophomore (originally those funds were at Utah--the other child's funds are at WV). I personally think the GSP is a nice alternative to something like a bond/cash-heavy terminal allocation, particularly given current interest rates.
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anon_investor
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Re: 529 accounts and asset allocation

Post by anon_investor »

We have 3 kids and multiple 529 plans. The investment time horizon for each is significantly different from my spouse and mine, so our 529 plans are viewed separately from the rest of our portfolio and AA.
inbox788
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Re: 529 accounts and asset allocation

Post by inbox788 »

camillus wrote: Sun Oct 24, 2021 3:54 amThe function of the 529 is to keep gains on investments from being taxed if used for qualified educational expenses. Money goes in post-tax, and comes out without being taxed, much like a Roth IRA. Holding bonds in such a vehicle, especially over a short time horizon, makes little sense (unless you are contributing for a state tax deduction).

You will put your stocks somewhere in your portfolio, you will also put bonds somewhere in your portfolio. It makes the most sense for an underfunded 529 to hold mostly if not 100% stocks along with your Roth IRA and HSA. Your 401k should hold all of your bonds.

This is easy for me to say, as my oldest is 7. Perhaps in 8-10 years I'll change my tune. But it seems that 529s should be very aggressive and any glidepath should be short and sweet.
IMO, 5 years between high school junior and college senior isn't that short a time horizon. I currently have 100% stocks in 529 and bonds in 401k as well as municipal bonds in taxable. Let's say there's 100k in 529 and $200k in 401k (50/50) and $200k in taxable (50/50), so overall AA is 60/40. Student spends $25k+/year. One could sell $100k stocks in 529 and go to bonds/cash and buy $100k in one of the other accounts (which one?) An aggressive strategy might be around 50/50 in the 529. A conservative strategy would have you mostly in cash/bonds by the junior or senior HS year. All the age based glidepaths I've seen are pretty much cash at enrollment. I'm contemplating keeping nearly 100% stocks in 529 thru most of the college years. The way I see it is if the market keeps going up (or doesn't go down), you maximize tax-free earnings now. The downside is you give up TLH if the market goes down. [You'd also have to sell extra stocks in 529 and trade some bonds for stock to rebalance] Am I missing something else big?
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ram
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Re: 529 accounts and asset allocation

Post by ram »

The bulk of the balance in the 529 that I have will be used by as yet not born grandkid(s). So a >18 yr time horizon. I will be investing it aggressively. The kids got substantial scholarships and so I ended up with more money in 529 than was needed. I do not consider it as part of "my money". My attitude to it is the same as I have toward my donor advised fund. High risk and hopefully high returns.
Ram
inbox788
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Re: 529 accounts and asset allocation

Post by inbox788 »

ram wrote: Sun Oct 24, 2021 2:18 pm The bulk of the balance in the 529 that I have will be used by as yet not born grandkid(s). So a >18 yr time horizon. I will be investing it aggressively. The kids got substantial scholarships and so I ended up with more money in 529 than was needed. I do not consider it as part of "my money". My attitude to it is the same as I have toward my donor advised fund. High risk and hopefully high returns.
Have you figured out or found a resource on how to maximize the eligible future participants? There seem to be some odd quirks regarding ownership and beneficiary, gift tax, generation skipping, relationship of eligible relative, etc. I'm hoping to spend it all so I don't have to worry about it, or simply pass it on to the next generation if we're fortunate to have some left over funds. The option to donate to charity would be welcome, but currently unavailable.

https://www.edmit.me/blog/to-whom-can-i ... a-529-plan

Can You Donate Your 529 Plan to Charity?
https://www.savingforcollege.com/articl ... to-charity

Aggressive investing if successful leads to the "problem" of over-contributing, which I was ok with, but now I think it's simpler to undercontribute (and still invest aggressively) and make it up in taxable (or other account) for the future flexibility.
Broken Man 1999
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Re: 529 accounts and asset allocation

Post by Broken Man 1999 »

We have four grandchildren, and 529 plans for each. The four also have Florida Prepaid College Plans. As well, they are beneficiaries of my Roth IRA, along with my daughters. This year I started buying I-bonds with grandchildren as POD beneficiaries.

With all the different funding sources, I believe they will have many universities to chose from when it is time.

Nice thing is they are all excellent students, unlike their Papa. I put in enough effort to earn a B, never cared about earning an A. My grades were so much better than my brother's grades, my parents were happy one son wasn't in danger of flunking HS.

My current AA for the 529 plans is 100% Total Stock Market Index.

While I am the owner for the four plans, I do not include it in our portfolio.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
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camillus
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Re: 529 accounts and asset allocation

Post by camillus »

inbox788 wrote: Sun Oct 24, 2021 2:03 pm
camillus wrote: Sun Oct 24, 2021 3:54 am <snip> But it seems that 529s should be very aggressive and any glidepath should be short and sweet.
<snip> Am I missing something else big?
I don’t think so. Our thoughts seem to be pretty 1:1. I added my glide path comment just as a concession to people who might get the jitters. I’m currently 100% VTSAX in 529, only personally really contributing to capture the state tax deduction, and have no plans for bonds. I’m going to try to maintain one overall AA. I’m probably going to cash-flow a fair amount of college and hope to get some tax credits for that.

I’m currently now also accumulating ibonds as part of my AA. I might cash them out come college time and move that bond position into the 403b.

As you mention in a following post, under-contributing to the 529 and going 100% equitie (but maintaining an overall AA) seems like the best strategy.
51% US / 34% ex-US / 15% “bond”
Lou354
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Re: 529 accounts and asset allocation

Post by Lou354 »

At first spouse and I included the 529s in our asset allocation, until a few years before our oldest started college, at which time we stopped including them in our AA.
SnowBog
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Re: 529 accounts and asset allocation

Post by SnowBog »

I think it depends on how you model out expenses (assuming you do so, such as in a cash flow analysis).

At first, we included college expenses as part of our cash flow model, and thus included 529 & UTMA accounts in our portfolio.

We're now well over 50% funded (with time left to save/grow the rest), and have decided to remove college expenses from our model, and thus now exclude them from our portfolio. Primarily, this was to reduce what appeared to be excessive spending from these years (some of which coincidentally align with the beginning of our planned retirement). Since we expect these costs to be covered by dedicated accounts, it simplified things to remove the expenses and accounts from our model/portfolio.

Our AA for these accounts is independent. Currently we are 100/0 in these accounts, but plan to start lowering AA as we get closer.
bhough
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Re: 529 accounts and asset allocation

Post by bhough »

Addy wrote: Sat Oct 23, 2021 2:43 pm
bhough wrote: Tue Oct 19, 2021 9:50 pm Check this out:

viewtopic.php?t=346351

Long live vineviz!
b
Hmm, if you follow/understand vineviz’s strategy, do you want to comment on viewtopic.php?p=6290354#p6290354 ?
I commented on his a year ago. I can't tell if you are asking me to keep my comments on the correct post, or if you actually want me to expound on why it is the correct strategy. If the latter, here is my humble understanding of his point:

It is impossible to fund your kids' college expenses with 100% precision. If you overfund and then you personally need that money, you will be hit with a 10% fine on the plan's earnings. If you underfund, you won't get all the sweet tax benefits of deferred tax-free growth. When you withdraw money from an account that has both stock and bond funds, you can't pick and chose which gains/losses you want (that is my understanding, I've never done it).

What vineviz proposed is that you have two accounts for each child. One has stock funds with expected appreciation. The other has your fixed income/TIPS funds. The 2nd is not expected to appreciate much and you could take out from that if you overfund. You must use all of the money in the 1st fund initially given it will likely have more appreciation (which again, you would be fined at 10% for losing).

It is in my opinion a genius move which I have implemented.
b
shess
Posts: 2164
Joined: Wed May 17, 2017 12:02 am

Re: 529 accounts and asset allocation

Post by shess »

bhough wrote: Wed Oct 27, 2021 11:11 am
Addy wrote: Sat Oct 23, 2021 2:43 pm
bhough wrote: Tue Oct 19, 2021 9:50 pm Check this out:

viewtopic.php?t=346351

Long live vineviz!
b
Hmm, if you follow/understand vineviz’s strategy, do you want to comment on viewtopic.php?p=6290354#p6290354 ?
I commented on his a year ago. I can't tell if you are asking me to keep my comments on the correct post, or if you actually want me to expound on why it is the correct strategy. If the latter, here is my humble understanding of his point:

It is impossible to fund your kids' college expenses with 100% precision. If you overfund and then you personally need that money, you will be hit with a 10% fine on the plan's earnings. If you underfund, you won't get all the sweet tax benefits of deferred tax-free growth. When you withdraw money from an account that has both stock and bond funds, you can't pick and chose which gains/losses you want (that is my understanding, I've never done it).

What vineviz proposed is that you have two accounts for each child. One has stock funds with expected appreciation. The other has your fixed income/TIPS funds. The 2nd is not expected to appreciate much and you could take out from that if you overfund. You must use all of the money in the 1st fund initially given it will likely have more appreciation (which again, you would be fined at 10% for losing).

It is in my opinion a genius move which I have implemented.
b
Comment from the peanut gallery: Once we got to the point where we started looking at the actual withdrawal mechanics, this basic approach occured to me. Any time you take money from a 529 plan, it is allocated pro-rata between basis and earnings, so within a given account you cannot really attempt to preferentially allocate earnings.

Unfortunately, providers like Vanguard don't allow you to have more than one account for a given beneficiary/owner pair. I haven't checked if a given beneficiary could have two accounts differing on owner (say, one for each parent).

That said ... I think this is probably a bit of over-optimization unless you enjoy that kind of thing.
Hoosier CPA
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Re: 529 accounts and asset allocation

Post by Hoosier CPA »

I think of it as a separate bucket of money. We aren't in danger of overfunding it by a long shot, and there's some money in there from grandparents, so I'm more risk adverse with those funds than our other money. I think we're at 70/30 right now (13, 10 and 10 year kids) but have retirement somewhere near 90/10.
Addy
Posts: 88
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Location: USA

Re: 529 accounts and asset allocation

Post by Addy »

bhough wrote: Wed Oct 27, 2021 11:11 am
I commented on his a year ago. I can't tell if you are asking me to keep my comments on the correct post, or if you actually want me to expound on why it is the correct strategy.
b
Thanks for your response! I wanted your take on the following points:
Addy wrote: Sat Oct 23, 2021 2:04 pm

Hi @vineviz (or anyone else who understands this strategy),

I hope it is OK to revive this thread, if it is, I have the following questions about this strategy:
  1. When you run this for less than 18 years, how does the amount that you contribute to Account #1 change? If I assume that the 1/5th in the suggested amount comes from 4 years of college / 20 (18 years + 2 years for college mid point) = 1/5, so for a 10 year old this would give 4/10 (8 + 2) = 2/5th of 1 year of current college expenses. Is my understanding correct?
  2. For a 10 year old, if I assume that the cost of college for 1 year right now is $30,000, in about 2.5 years, with the above formula Account #1 would probably have hit the Account #1 limit and all future contributions would go to bonds. Does this not mean that the strategy takes more risk in the initial 3-5 years than a typical target date fund (e.g. https://my529.org/enrollment-date-options/) for the same enrollment year?
  3. For a 10 year old, let's assume that that returns will be similar to https://www.blackrock.com/institutions/ ... ssumptions, for a 70/30 US/ex-US equities mix and rest US aggregate bonds portfolio and $15,000 contributions (max gift tax limit). The chance of overfunding the 529 account seems low. Hence perhaps the strategy probably is not worth the extra complexity. Is my thinking reasonable?
Thanks for your contributions to the forum!
inbox788
Posts: 8372
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Re: 529 accounts and asset allocation

Post by inbox788 »

bhough wrote: Wed Oct 27, 2021 11:11 amWhat vineviz proposed is that you have two accounts for each child. One has stock funds with expected appreciation. The other has your fixed income/TIPS funds. The 2nd is not expected to appreciate much and you could take out from that if you overfund. You must use all of the money in the 1st fund initially given it will likely have more appreciation (which again, you would be fined at 10% for losing).

It is in my opinion a genius move which I have implemented.
b
It's a great strategy in general, but given today's environment, bonds aren't returning anything, potentially negative, so the 2nd account could just as well be taxable or better yet, i-bonds for the short term. For the long term, you should be mostly in equities, so the 2nd account isn't necessary either yet.

viewtopic.php?t=345997
viewtopic.php?f=10&t=346091&start=750
LateStarter1975
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Joined: Tue Jul 02, 2013 4:50 pm

Re: 529 accounts and asset allocation

Post by LateStarter1975 »

Our kids' 529 plans are kept separate from our retirement portfolio. The 529 plans are 100% stock allocation (all Index funds). Probably about 2-3 years before college, I will transition into some bonds. I like WCI's view of being very aggressive in the 529 plan. Worst case scenario: if stocks plummet before college, I can cash flow the balance.
Debt is dangerous...simple is beautiful
inbox788
Posts: 8372
Joined: Thu Mar 15, 2012 5:24 pm

Re: 529 accounts and asset allocation

Post by inbox788 »

LateStarter1975 wrote: Wed Oct 27, 2021 12:38 pm Our kids' 529 plans are kept separate from our retirement portfolio. The 529 plans are 100% stock allocation (all Index funds). Probably about 2-3 years before college, I will transition into some bonds. I like WCI's view of being very aggressive in the 529 plan. Worst case scenario: if stocks plummet before college, I can cash flow the balance.
I'm considering going even more aggressive. Don't transition into bonds at all. Maybe sell 2-3 months before a tuition bill is due and the timing of the market is good or wait till 2-3 days before the bill is to be paid. That's 2-3 more years time in market. Where is the cash flow going now? Transitioning the cash flow into bonds keeps it out of the 529 and achieves similar effect, or you can go even more aggressive.

Thanks to the stupendous 16% returns these last few years, I may have overfunded the 529, especially if kiddo goes to state school, which is looking more likely. If stocks plummet, it helps "solve" my "problem".
SnowBog
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Re: 529 accounts and asset allocation

Post by SnowBog »

inbox788 wrote: Wed Oct 27, 2021 1:47 pm
LateStarter1975 wrote: Wed Oct 27, 2021 12:38 pm Our kids' 529 plans are kept separate from our retirement portfolio. The 529 plans are 100% stock allocation (all Index funds). Probably about 2-3 years before college, I will transition into some bonds. I like WCI's view of being very aggressive in the 529 plan. Worst case scenario: if stocks plummet before college, I can cash flow the balance.
I'm considering going even more aggressive. Don't transition into bonds at all. Maybe sell 2-3 months before a tuition bill is due and the timing of the market is good or wait till 2-3 days before the bill is to be paid. That's 2-3 more years time in market. Where is the cash flow going now? Transitioning the cash flow into bonds keeps it out of the 529 and achieves similar effect, or you can go even more aggressive.

Thanks to the stupendous 16% returns these last few years, I may have overfunded the 529, especially if kiddo goes to state school, which is looking more likely. If stocks plummet, it helps "solve" my "problem".
+1 to you both. Although I don't think I'm over funded yet...

But I'm of the same opinion of staying aggressive. My current income is enough that I could cash flow state college if needed. So I figure let the 529/UTMA grow as much as possible.

If stocks are down in a given year, I can decide if I want to cash flow for the year and then use the 529/UTMA when things recover.

Now, if I retire "extra" early - or my income changes where I couldn't cash flow things, I might reconsider... That might mean using a loan for college, and then using the 529 when things recover to pay off the loan (which I assume would still be tax free). Or it might mean a more conservative AA, like having 1-2 years in bonds.
shess
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Re: 529 accounts and asset allocation

Post by shess »

SnowBog wrote: Wed Oct 27, 2021 1:54 pm Now, if I retire "extra" early - or my income changes where I couldn't cash flow things, I might reconsider... That might mean using a loan for college, and then using the 529 when things recover to pay off the loan (which I assume would still be tax free). Or it might mean a more conservative AA, like having 1-2 years in bonds.
Don't get too committed on the loan. You are limited to $10k/student.
SnowBog
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Re: 529 accounts and asset allocation

Post by SnowBog »

shess wrote: Wed Oct 27, 2021 2:14 pm
SnowBog wrote: Wed Oct 27, 2021 1:54 pm Now, if I retire "extra" early - or my income changes where I couldn't cash flow things, I might reconsider... That might mean using a loan for college, and then using the 529 when things recover to pay off the loan (which I assume would still be tax free). Or it might mean a more conservative AA, like having 1-2 years in bonds.
Don't get too committed on the loan. You are limited to $10k/student.
Excellent - thanks for that!! :beer

I'm still 4+ years away, so hadn't looked into the details yet!
dukeblue219
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Re: 529 accounts and asset allocation

Post by dukeblue219 »

inbox788 wrote: Wed Oct 27, 2021 12:17 pm It's a great strategy in general, but given today's environment, bonds aren't returning anything, potentially negative, so the 2nd account could just as well be taxable or better yet, i-bonds for the short term. For the long term, you should be mostly in equities, so the 2nd account isn't necessary either yet.

viewtopic.php?t=345997
viewtopic.php?f=10&t=346091&start=750
For states that offer significant or unlimited tax deductions for 529 contributions that second account for low return investments is still potentially applicable
inbox788
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Re: 529 accounts and asset allocation

Post by inbox788 »

SnowBog wrote: Wed Oct 27, 2021 1:54 pmIf stocks are down in a given year, I can decide if I want to cash flow for the year and then use the 529/UTMA when things recover.

Now, if I retire "extra" early - or my income changes where I couldn't cash flow things, I might reconsider... That might mean using a loan for college, and then using the 529 when things recover to pay off the loan (which I assume would still be tax free). Or it might mean a more conservative AA, like having 1-2 years in bonds.
I don't know if this is how it works, but if you skip a use year, you might pull out QHEE (tax-free earnings portion) and open a new account with new funds (all contribution) [following the 2 account strategy].

Loan payback has limits and state quirks. I think only 10k/beneficiary and CA taxable are limits for me. And how you withdraw may impact taxes -- 1099q going to owner vs beneficiary.
dukeblue219 wrote: Wed Oct 27, 2021 2:17 pmFor states that offer significant or unlimited tax deductions for 529 contributions that second account for low return investments is still potentially applicable
Yes, if you have the open space left.
shess
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Re: 529 accounts and asset allocation

Post by shess »

inbox788 wrote: Wed Oct 27, 2021 2:36 pm
SnowBog wrote: Wed Oct 27, 2021 1:54 pmIf stocks are down in a given year, I can decide if I want to cash flow for the year and then use the 529/UTMA when things recover.

Now, if I retire "extra" early - or my income changes where I couldn't cash flow things, I might reconsider... That might mean using a loan for college, and then using the 529 when things recover to pay off the loan (which I assume would still be tax free). Or it might mean a more conservative AA, like having 1-2 years in bonds.
I don't know if this is how it works, but if you skip a use year, you might pull out QHEE (tax-free earnings portion) and open a new account with new funds (all contribution) [following the 2 account strategy].
To the best of my knowledge, there is no way to pull earnings only out of a 529. QHEE is "qualified education expenses", which comes out pro-rata between earnings and basis. Rollovers happen pro-rata. Non-qualified distributions are also pro-rata. In all cases, the funds which are removed from the account have the same ratio of earnings to basis as the funds left in the account. AFAICT, once you have those earnings, you can't split apart the earnings from the basis.

The gist of that is that if you want to do something like this, your best outcome is to set it up BEFORE the earnings happen.

If you think that bonds are pointless to hold (which is a point I think has some validity), then you could go with equities and periodically siphon some off to a bond-holding account as you get closer. The earnings at the point of transfer will come along, but your final earnings amount will probably be lower in the bond-holding account than the stock-holding account.

The big problem in all of this is that educational expenses are on an exponential curve with the starting point varying across different institutions, and equity returns are also on an exponential curve with a lot of variance. So for a kid matriculating in 18 years, your 50% confidence point isn't in 9 years (half the time) it's probably somewhere closer to 15 or 16 years. By which point you've either got "too much" and now you're pretty much stuck with the excess so splitting the account won't help a lot, or you don't have enough so splitting the account is just extra work for no benefit.
inbox788
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Re: 529 accounts and asset allocation

Post by inbox788 »

shess wrote: Wed Oct 27, 2021 3:53 pm
inbox788 wrote: Wed Oct 27, 2021 2:36 pm
SnowBog wrote: Wed Oct 27, 2021 1:54 pmIf stocks are down in a given year, I can decide if I want to cash flow for the year and then use the 529/UTMA when things recover.

Now, if I retire "extra" early - or my income changes where I couldn't cash flow things, I might reconsider... That might mean using a loan for college, and then using the 529 when things recover to pay off the loan (which I assume would still be tax free). Or it might mean a more conservative AA, like having 1-2 years in bonds.
I don't know if this is how it works, but if you skip a use year, you might pull out QHEE (tax-free earnings portion) and open a new account with new funds (all contribution) [following the 2 account strategy].
To the best of my knowledge, there is no way to pull earnings only out of a 529. QHEE is "qualified education expenses", which comes out pro-rata between earnings and basis. Rollovers happen pro-rata. Non-qualified distributions are also pro-rata. In all cases, the funds which are removed from the account have the same ratio of earnings to basis as the funds left in the account. AFAICT, once you have those earnings, you can't split apart the earnings from the basis.

The gist of that is that if you want to do something like this, your best outcome is to set it up BEFORE the earnings happen.

If you think that bonds are pointless to hold (which is a point I think has some validity), then you could go with equities and periodically siphon some off to a bond-holding account as you get closer. The earnings at the point of transfer will come along, but your final earnings amount will probably be lower in the bond-holding account than the stock-holding account.

The big problem in all of this is that educational expenses are on an exponential curve with the starting point varying across different institutions, and equity returns are also on an exponential curve with a lot of variance. So for a kid matriculating in 18 years, your 50% confidence point isn't in 9 years (half the time) it's probably somewhere closer to 15 or 16 years. By which point you've either got "too much" and now you're pretty much stuck with the excess so splitting the account won't help a lot, or you don't have enough so splitting the account is just extra work for no benefit.
Well put. Estimating 15 or 16 years returns performance is quite challenging, not to mention cost of education. Which is why it's a challenge no matter what strategy you take. For better or worse, many parents can make adjustments 9 years out or at other times as cash to contribute and situation (market and educational costs and expectations change). "Trying to hit a moving target on the run".

The discussion about QHEE was only in regards to a skip year during college if the market is significantly down and you don't want to withdraw funds from the 529. Presumably a large fraction of the fund is earnings by then, say during the sophomore year, the market is down 30%. Rather than do nothing waiting for a recovery, and keeping the large fraction of earnings, you take out $10k to pay for tuition using some contribution and hopefully more earnings. You take 10k out of your other pocket and open a new 529 for the senior year with 100% contribution. If for whatever reason you have to make a non-qualified withdraw, spinning these extra wheels reduces penalties, no?
shess
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Re: 529 accounts and asset allocation

Post by shess »

inbox788 wrote: Wed Oct 27, 2021 4:03 pm The discussion about QHEE was only in regards to a skip year during college if the market is significantly down and you don't want to withdraw funds from the 529. Presumably a large fraction of the fund is earnings by then, say during the sophomore year, the market is down 30%. Rather than do nothing waiting for a recovery, and keeping the large fraction of earnings, you take out $10k to pay for tuition using some contribution and hopefully more earnings. You take 10k out of your other pocket and open a new 529 for the senior year with 100% contribution. If for whatever reason you have to make a non-qualified withdraw, spinning these extra wheels reduces penalties, no?
Maybe I don't understand your point. If the student skips a year of college, they probably don't have QHEE for that year, so any distributions for that year will be unqualified and subject to tax-and-penalty on earnings. If the market is down, I suppose you could take that opportunity to withdraw funds and pay a lower tax-and-penalty on the reduced earnings, then fund another account to lock in a new basis. But I'm not sure that that helps anything versus just leaving it in place. I don't think there's really a case like "tax loss harvesting" where taking an early distribution and making an offsetting contribution actually helps anything.

Note that "earnings" does not mean that they track dividends and stuff inside the account. "Earnings" is literally "Account value minus original contributions". At least for Vanguard's 529, they don't track capital gains and dividends separately, it's all just in the portfolio share value. So if you contribute $10k, and the account goes to $15k, and then the account falls to $9k, you will pay no penalties-and-taxes on any gains on non-qualified distributions until it gets back above $10k. If you took a non-qualified distribution of that $9k and contributed $9k to a different fund, that would be WORSE than leaving it alone, because you can never reclaim that $1k loss.

Don't get me wrong, if you are certain you are over-contributed and intend to withdraw using non-qualified distributions, it certainly makes more sense to do it in a down year than in an up year, all else being equal. I'm not entirely convinced it ever makes sense to wait for a down year before doing it, though. But if you're having a down year anyhow, it might make sense to take a look at the issue just in case. Similar to how in March 2020 I evaluated our accounts to see if any additional Roth conversions might make sense.
esteen
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Re: 529 accounts and asset allocation

Post by esteen »

DoctorPhysics wrote: Tue Oct 19, 2021 6:03 pm I am curious how folks think of 529 accounts and asset allocations:

1. Do you treat it as part of your overall portfolio? Separate?

2. Does that view point change if you are "well-off" on your way to retirement? Even then, knowing that you don't pay taxes or penalty for the portion of a distribution that represents your original contribution and that you can withdraw the same amount recieved as scholarship, but with taxes on the earnings.

My thoughts ... I should treat a 529 as part of my portfolio, and treat it with similar timeline, thus it should have a similar asset allocation as my overall portfolio and financial goals.
1. I treat it separately, as earmarked for our children. I have our retirement investment portfolio, which has its own asset allocation, time horizon, risk tolerances etc. Then I have an emergency fund which has its own time horizon, AA, etc. and lastly I have 529s with their own time horizon, AA, etc. During the times in our life where we've had another long term financial (non-retirement) goal, that pot of $ has also had a separate time horizon, AA, etc. Other than creating a NW number for my own personal fun, there is no reason to combine these portfolios that have different purposes and different time horizons.

2. Not for me. Yes I know it's technically my $ but I consider it not my $, because I've earmarked it for my kids. Plus, as a bucket it has a very different timeline from my entire retirement nest egg (my retirement $ has to last me 40+ years in retirement... 529s are most often drained in a few years of undergraduate college).
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
LateStarter1975
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Re: 529 accounts and asset allocation

Post by LateStarter1975 »

inbox788 wrote: Wed Oct 27, 2021 1:47 pm
LateStarter1975 wrote: Wed Oct 27, 2021 12:38 pm Our kids' 529 plans are kept separate from our retirement portfolio. The 529 plans are 100% stock allocation (all Index funds). Probably about 2-3 years before college, I will transition into some bonds. I like WCI's view of being very aggressive in the 529 plan. Worst case scenario: if stocks plummet before college, I can cash flow the balance.
I'm considering going even more aggressive. Don't transition into bonds at all. Maybe sell 2-3 months before a tuition bill is due and the timing of the market is good or wait till 2-3 days before the bill is to be paid. That's 2-3 more years time in market. Where is the cash flow going now? Transitioning the cash flow into bonds keeps it out of the 529 and achieves similar effect, or you can go even more aggressive.

Thanks to the stupendous 16% returns these last few years, I may have overfunded the 529, especially if kiddo goes to state school, which is looking more likely. If stocks plummet, it helps "solve" my "problem".
This is even better!
Debt is dangerous...simple is beautiful
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