College Savings - bond vs tips?
College Savings - bond vs tips?
Greetings Bogleheads! My kids are going to be college-age in 6 years. I have a small lumpsum that I'd like to set aside for their college education that I'd like to invest outside of tax deferred/sheltered retirement accounts. Given the terrible CD and savings rates, I'd like to invest them somewhere else, but am concerned about the general stock market, given the firm dates these funds are needed and I need to, at a minimum preserve this lumpsum amount. Does anyone have recommendations where I can invest these for 6ish years? Intermediate-term Bonds? TIPS?
Thanks in advance!
Thanks in advance!
- Mel Lindauer
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Re: College Savings - bond vs tips?
A couple can invest up to $25k per year in I Bonds which can be used, tax-free, for qualifying educational expenses. They're currently yielding 3.54% which is the current inflation adjustment. The current base rate is 0% and the composite rate is the base rate plus the current inflation adjustment to arrive at that 3.54%. The inflation rate is adjusted every six months.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
Best Regards - Mel |
|
Semper Fi
Re: College Savings - bond vs tips?
zonester wrote: ↑Thu Jul 22, 2021 2:22 pm Greetings Bogleheads! My kids are going to be college-age in 6 years. I have a small lumpsum that I'd like to set aside for their college education that I'd like to invest outside of tax deferred/sheltered retirement accounts. Given the terrible CD and savings rates, I'd like to invest them somewhere else, but am concerned about the general stock market, given the firm dates these funds are needed and I need to, at a minimum preserve this lumpsum amount. Does anyone have recommendations where I can invest these for 6ish years? Intermediate-term Bonds? TIPS?
Thanks in advance!
If it is something less than $10k then by all means stick it into ibonds and be done with it. If it is significantly more, then 6 years is a long time for cash or bond like investments. Plus, I doubt you will be pulling all 4 years of expenses on day 1 of college which means you need that cash to last for 4 years split up into 8 semesters worth of education. That means you won't be touching some of that cash for ~10 years. That means I would like to take on some equity risk with that money. May 529 type plans offer target date type funds which you may want to consider or create your own glide path of increasing bond holdings over the years if you so desire.
A time to EVALUATE your jitters: |
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Re: College Savings - bond vs tips?
Thanks. I am currently matching the 529 limit that provides a state tax deduction and dont want to tie any further amount into a 529. The sum I am looking to protect is ~100K (~50k/child). Given that our MAGI is higher than the qualifying limit, is i-bonds still the best option? Looks like it may be, but I'll be taxed federally?Mel Lindauer wrote: ↑Thu Jul 22, 2021 2:26 pm A couple can invest up to $25k per year in I Bonds which can be used, tax-free, for qualifying educational expenses. They're currently yielding 3.54% which is the current inflation adjustment. The current base rate is 0% and the composite rate is the base rate plus the current inflation adjustment to arrive at that 3.54%. The inflation rate is adjusted every six months.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
Re: College Savings - bond vs tips?
Thanks! Yes, it is significantly more than 10K, but my #1 priority is to not lose my base investment. #2 is the highest rate of return. Non taxable or tax efficient is an added perk. Dont want to park these in a 529 since I'm not 100% sure it will go towards college. Besides, the 529 already has funds.. Any other investment ideas?EnjoyIt wrote: ↑Thu Jul 22, 2021 2:36 pm
If it is something less than $10k then by all means stick it into ibonds and be done with it. If it is significantly more, then 6 years is a long time for cash or bond like investments. Plus, I doubt you will be pulling all 4 years of expenses on day 1 of college which means you need that cash to last for 4 years split up into 8 semesters worth of education. That means you won't be touching some of that cash for ~10 years. That means I would like to take on some equity risk with that money. May 529 type plans offer target date type funds which you may want to consider or create your own glide path of increasing bond holdings over the years if you so desire.
Re: College Savings - bond vs tips?
You might consider a fixed annuity (MYGA). Even after paying the 10% penalty on earnings for withdrawing before age 59.5, you'll do a lot better than Treasuries or CD's. You can get a 5-year MYGA from an A-rated company that yields 2.8% (2.52% after penalty). If you want to be ultra-safe, you can go with an A++ company that pays 2.25% (2.025%). (Rates quoted from https://www.blueprintincome.com/fixed-annuities.)
The main drawback of a MYGA is the steep surrender charge if you take the money out early. But if you don't need liquidity, they're a pretty good deal. Not as iron-clad of a guarantee as FDIC insurance, but still extremely safe if you go with a highly-rated company.
The main drawback of a MYGA is the steep surrender charge if you take the money out early. But if you don't need liquidity, they're a pretty good deal. Not as iron-clad of a guarantee as FDIC insurance, but still extremely safe if you go with a highly-rated company.
Re: College Savings - bond vs tips?
How about doing something like 40% total stock index fund and 60% total bond. Then every year decrease the stock portion by 2.5%.zonester wrote: ↑Thu Jul 22, 2021 10:01 pmThanks! Yes, it is significantly more than 10K, but my #1 priority is to not lose my base investment. #2 is the highest rate of return. Non taxable or tax efficient is an added perk. Dont want to park these in a 529 since I'm not 100% sure it will go towards college. Besides, the 529 already has funds.. Any other investment ideas?EnjoyIt wrote: ↑Thu Jul 22, 2021 2:36 pm
If it is something less than $10k then by all means stick it into ibonds and be done with it. If it is significantly more, then 6 years is a long time for cash or bond like investments. Plus, I doubt you will be pulling all 4 years of expenses on day 1 of college which means you need that cash to last for 4 years split up into 8 semesters worth of education. That means you won't be touching some of that cash for ~10 years. That means I would like to take on some equity risk with that money. May 529 type plans offer target date type funds which you may want to consider or create your own glide path of increasing bond holdings over the years if you so desire.
Another option that may be easier is to get a target Date index fund that such as the 2025 or 2020 plan. Those will automatically decrease equity holds over time.
A time to EVALUATE your jitters: |
viewtopic.php?p=1139732#p1139732
Re: College Savings - bond vs tips?
Decrease how? By selling the stock portions? I've considered target funds but heard that those arent tax efficient since they will be taxable funds..EnjoyIt wrote: ↑Fri Jul 23, 2021 7:18 am
How about doing something like 40% total stock index fund and 60% total bond. Then every year decrease the stock portion by 2.5%.
Another option that may be easier is to get a target Date index fund that such as the 2025 or 2020 plan. Those will automatically decrease equity holds over time.
Re: College Savings - bond vs tips?
Yes, sell a small portion every year. You’re going to sell eventually to pay for school and then pay taxes on the gains. Does it really matter if you do it in little chunks? Don’t forget that gains are good. Don’t let the tax tail wag the investing dog.zonester wrote: ↑Sat Jul 24, 2021 2:27 pmDecrease how? By selling the stock portions? I've considered target funds but heard that those arent tax efficient since they will be taxable funds..EnjoyIt wrote: ↑Fri Jul 23, 2021 7:18 am
How about doing something like 40% total stock index fund and 60% total bond. Then every year decrease the stock portion by 2.5%.
Another option that may be easier is to get a target Date index fund that such as the 2025 or 2020 plan. Those will automatically decrease equity holds over time.
A time to EVALUATE your jitters: |
viewtopic.php?p=1139732#p1139732
Re: College Savings - bond vs tips?
I would just invest it in a tax efficient mutual fund, such as S&P 500. Make a corresponding adjustment to bonds in a tax deferred account. If the S&P 500 drops you can still sell if needed for tuition and then readjust your tax deferred account towards S&P 500.
Re: College Savings - bond vs tips?
There is a income limit (MFJ 150k) to qualify for deducing the interest income on I-bonds.Mel Lindauer wrote: ↑Thu Jul 22, 2021 2:26 pm A couple can invest up to $25k per year in I Bonds which can be used, tax-free, for qualifying educational expenses. They're currently yielding 3.54% which is the current inflation adjustment. The current base rate is 0% and the composite rate is the base rate plus the current inflation adjustment to arrive at that 3.54%. The inflation rate is adjusted every six months.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
- Mel Lindauer
- Moderator
- Posts: 35757
- Joined: Mon Feb 19, 2007 7:49 pm
- Location: Daytona Beach Shores, Florida
- Contact:
Re: College Savings - bond vs tips?
Yes, and I advise folks who are approaching that income limit to redeem their I Bonds and put the entire proceeds into their 529 Plan before reaching the income limit. Contributions of I Bond proceeds to a 529 Plan are considered to be a qualifying educational expense, so that would be tax-free.babystep wrote: ↑Sat Jul 24, 2021 10:40 pmThere is a income limit (MFJ 150k) to qualify for deducing the interest income on I-bonds.Mel Lindauer wrote: ↑Thu Jul 22, 2021 2:26 pm A couple can invest up to $25k per year in I Bonds which can be used, tax-free, for qualifying educational expenses. They're currently yielding 3.54% which is the current inflation adjustment. The current base rate is 0% and the composite rate is the base rate plus the current inflation adjustment to arrive at that 3.54%. The inflation rate is adjusted every six months.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
Best Regards - Mel |
|
Semper Fi
Re: College Savings - bond vs tips?
Mel Lindauer wrote: ↑Sun Jul 25, 2021 3:55 pmYes, and I advise folks who are approaching that income limit to redeem their I Bonds and put the entire proceeds into their 529 Plan before reaching the income limit. Contributions of I Bond proceeds to a 529 Plan are considered to be a qualifying educational expense, so that would be tax-free.babystep wrote: ↑Sat Jul 24, 2021 10:40 pmThere is a income limit (MFJ 150k) to qualify for deducing the interest income on I-bonds.Mel Lindauer wrote: ↑Thu Jul 22, 2021 2:26 pm A couple can invest up to $25k per year in I Bonds which can be used, tax-free, for qualifying educational expenses. They're currently yielding 3.54% which is the current inflation adjustment. The current base rate is 0% and the composite rate is the base rate plus the current inflation adjustment to arrive at that 3.54%. The inflation rate is adjusted every six months.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
Would this be true in the case of grandparent-owned 529s and grandparent-owned Ibonds?
I thought the student needed to be a dependent.
- Mel Lindauer
- Moderator
- Posts: 35757
- Joined: Mon Feb 19, 2007 7:49 pm
- Location: Daytona Beach Shores, Florida
- Contact:
Re: College Savings - bond vs tips?
Yes, it's true that the student needs to be a dependent. So, if the child is a dependent of the grandparent, then it would qualify. Otherwise, not.Swimmer wrote: ↑Mon Jul 26, 2021 6:27 amMel Lindauer wrote: ↑Sun Jul 25, 2021 3:55 pmYes, and I advise folks who are approaching that income limit to redeem their I Bonds and put the entire proceeds into their 529 Plan before reaching the income limit. Contributions of I Bond proceeds to a 529 Plan are considered to be a qualifying educational expense, so that would be tax-free.babystep wrote: ↑Sat Jul 24, 2021 10:40 pmThere is a income limit (MFJ 150k) to qualify for deducing the interest income on I-bonds.Mel Lindauer wrote: ↑Thu Jul 22, 2021 2:26 pm A couple can invest up to $25k per year in I Bonds which can be used, tax-free, for qualifying educational expenses. They're currently yielding 3.54% which is the current inflation adjustment. The current base rate is 0% and the composite rate is the base rate plus the current inflation adjustment to arrive at that 3.54%. The inflation rate is adjusted every six months.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
Would this be true in the case of grandparent-owned 529s and grandparent-owned Ibonds?
I thought the student needed to be a dependent.
Also, on the old paper I Bonds, if a child is listed as a co-owner, the bonds don't qualify. To qualify for the tax-free benefit, the child can be listed as a beneficiary, but not as an owner or co-owner.
Best Regards - Mel |
|
Semper Fi
Re: College Savings - bond vs tips?
Thanks, Mel.Mel Lindauer wrote: ↑Mon Jul 26, 2021 3:57 pmYes, it's true that the student needs to be a dependent. So, if the child is a dependent of the grandparent, then it would qualify. Otherwise, not.Swimmer wrote: ↑Mon Jul 26, 2021 6:27 amMel Lindauer wrote: ↑Sun Jul 25, 2021 3:55 pmYes, and I advise folks who are approaching that income limit to redeem their I Bonds and put the entire proceeds into their 529 Plan before reaching the income limit. Contributions of I Bond proceeds to a 529 Plan are considered to be a qualifying educational expense, so that would be tax-free.babystep wrote: ↑Sat Jul 24, 2021 10:40 pmThere is a income limit (MFJ 150k) to qualify for deducing the interest income on I-bonds.Mel Lindauer wrote: ↑Thu Jul 22, 2021 2:26 pm A couple can invest up to $25k per year in I Bonds which can be used, tax-free, for qualifying educational expenses. They're currently yielding 3.54% which is the current inflation adjustment. The current base rate is 0% and the composite rate is the base rate plus the current inflation adjustment to arrive at that 3.54%. The inflation rate is adjusted every six months.
So, you'll at least keep up with inflation and be able to use them tax-free for your child's educational expenses.
You mentioned TIPS, but I wouldn't recommend them since they're currently providing a negative real return and they don't qualify for the tax-free educational benefit.
Would this be true in the case of grandparent-owned 529s and grandparent-owned Ibonds?
I thought the student needed to be a dependent.
Also, on the old paper I Bonds, if a child is listed as a co-owner, the bonds don't qualify. To qualify for the tax-free benefit, the child can be listed as a beneficiary, but not as an owner or co-owner.