Best way to pay for college
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Best way to pay for college
Hi all,
Our daughter sent in her deposit for college last night and we're trying to figure out the mechanics of paying. All in, including room, board, and books, it will be around 40K a year, which is well within our budget for her.
She has 80K in a 529 and we have plenty in a money market to cover the rest. Is there any best way to pay? I know we have to withdraw from the 529 in the year that the tuition is due, but other than that?
Her brother will graduate in 2025 and also has about 80K in his 529, and a budget of 55K a year for his college search. They will overlap 2025-2027. Is it best to empty her 529 first, then move to our money market funds, or does it matter at all? Her 529 has lost approximately 8% in the last 18mths. We live in Washington if it matters and she will attend college in Texas.
Thanks as always!
Our daughter sent in her deposit for college last night and we're trying to figure out the mechanics of paying. All in, including room, board, and books, it will be around 40K a year, which is well within our budget for her.
She has 80K in a 529 and we have plenty in a money market to cover the rest. Is there any best way to pay? I know we have to withdraw from the 529 in the year that the tuition is due, but other than that?
Her brother will graduate in 2025 and also has about 80K in his 529, and a budget of 55K a year for his college search. They will overlap 2025-2027. Is it best to empty her 529 first, then move to our money market funds, or does it matter at all? Her 529 has lost approximately 8% in the last 18mths. We live in Washington if it matters and she will attend college in Texas.
Thanks as always!
Re: Best way to pay for college
Note enough info. Is your family eligible for the American Opportunity Tax Credit? The Lifetime Learning Credit? Other education tax credits?
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Re: Best way to pay for college
If they plan to attend 4 years, then divide the 529 by 8 semesters. Withdraw that amount from the 529.
Pay the balance from the money market. If grad school is in the picture, then you could add 4 semesters.
Also factor in living on campus vs living off campus. I put money in each kids checking account from time to time as living is just plain expensive everywhere these days.
Once they move off campus, I put the rent and other monies in their savings account for the semester and have the kid pay those bills directly.
Lots of moving parts. Adjust as you go.
Pay the balance from the money market. If grad school is in the picture, then you could add 4 semesters.
Also factor in living on campus vs living off campus. I put money in each kids checking account from time to time as living is just plain expensive everywhere these days.
Once they move off campus, I put the rent and other monies in their savings account for the semester and have the kid pay those bills directly.
Lots of moving parts. Adjust as you go.
Re: Best way to pay for college
Could you elaborate on this a bit as this is the first time I have encountered a budget for college search.Isabelle77 wrote: ↑Wed Mar 22, 2023 4:38 pm ...
Her brother will graduate in 2025 ... and a budget of 55K a year for his college search.
...
You have allocated up to $55,000 for your son to evaluate colleges before deciding which one to attend?
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Re: Best way to pay for college
Could you elaborate on this a bit as this is the first time I have encountered a budget for college search.
You have allocated up to $55,000 for your son to evaluate colleges before deciding which one to attend?
[/quote]
Sorry if I’m not clear. We have given him a limit of 55k a year for his college costs. He’s welcome to go above that (he’s our high stats kid so he might be able to get into an Ivy or other top school) but we only will pay 55k a year. Make sense?
Re: Best way to pay for college
Yes! Thank youIsabelle77 wrote: ↑Wed Mar 22, 2023 5:09 pmSorry if I’m not clear. We have given him a limit of 55k a year for his college costs. He’s welcome to go above that (he’s our high stats kid so he might be able to get into an Ivy or other top school) but we only will pay 55k a year. Make sense?MarkRoulo wrote: ↑Wed Mar 22, 2023 5:01 pmCould you elaborate on this a bit as this is the first time I have encountered a budget for college search.Isabelle77 wrote: ↑Wed Mar 22, 2023 4:38 pm ...
Her brother will graduate in 2025 ... and a budget of 55K a year for his college search.
...
You have allocated up to $55,000 for your son to evaluate colleges before deciding which one to attend?
Re: Best way to pay for college
I can offer one piece of advice, on the first one, I made a mistake of paying the entire tuition bill from a 529 account for the freshman fall semester. When I received the 1098-T box 1 (qualified education expenses), it was less than the tuition bill, 10-15% less (I think it was in this range, other fees, parking..etc). That difference ended up being taxable plus a 10% penalty. So now I spread the 529 out over the full course of schooling.
Alternatively, you can try to contact the school to get the qualified portion that will be reported on the 1098-T of the tuition bill.
Alternatively, you can try to contact the school to get the qualified portion that will be reported on the 1098-T of the tuition bill.
Re: Best way to pay for college
I'll spread 529 to 4 years in equal parts. I'll pay the university directly, anything that needs to be paid to the university. I'll deposit the rest to the kid's bank account and let the kid handle these.Isabelle77 wrote: ↑Wed Mar 22, 2023 4:38 pm Hi all,
Our daughter sent in her deposit for college last night and we're trying to figure out the mechanics of paying. All in, including room, board, and books, it will be around 40K a year, which is well within our budget for her.
She has 80K in a 529 and we have plenty in a money market to cover the rest. Is there any best way to pay? I know we have to withdraw from the 529 in the year that the tuition is due, but other than that?
"Know what you own, and know why you own it." — Peter Lynch
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Re: Best way to pay for college
Thank you, thats very helpful!Kagord wrote: ↑Wed Mar 22, 2023 6:15 pm I can offer one piece of advice, on the first one, I made a mistake of paying the entire tuition bill from a 529 account for the freshman fall semester. When I received the 1098-T box 1 (qualified education expenses), it was less than the tuition bill, 10-15% less (I think it was in this range, other fees, parking..etc). That difference ended up being taxable plus a 10% penalty. So now I spread the 529 out over the full course of schooling.
Alternatively, you can try to contact the school to get the qualified portion that will be reported on the 1098-T of the tuition bill.
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Re: Best way to pay for college
This was what we were thinking as well. Thanks!Metsfan91 wrote: ↑Wed Mar 22, 2023 6:19 pmI'll spread 529 to 4 years in equal parts. I'll pay the university directly, anything that needs to be paid to the university. I'll deposit the rest to the kid's bank account and let the kid handle these.Isabelle77 wrote: ↑Wed Mar 22, 2023 4:38 pm Hi all,
Our daughter sent in her deposit for college last night and we're trying to figure out the mechanics of paying. All in, including room, board, and books, it will be around 40K a year, which is well within our budget for her.
She has 80K in a 529 and we have plenty in a money market to cover the rest. Is there any best way to pay? I know we have to withdraw from the 529 in the year that the tuition is due, but other than that?
Re: Best way to pay for college
Qualified expenses reported on the 1098t are for tax credits, not 529 distributions. More expenses qualify for 529s, including room and board.Kagord wrote: ↑Wed Mar 22, 2023 6:15 pm I can offer one piece of advice, on the first one, I made a mistake of paying the entire tuition bill from a 529 account for the freshman fall semester. When I received the 1098-T box 1 (qualified education expenses), it was less than the tuition bill, 10-15% less (I think it was in this range, other fees, parking..etc). That difference ended up being taxable plus a 10% penalty. So now I spread the 529 out over the full course of schooling.
Alternatively, you can try to contact the school to get the qualified portion that will be reported on the 1098-T of the tuition bill.
Re: Best way to pay for college
To clarify, to get favorable tax treatment, 529 distributions must be used for qualified education expenses. The 1098-T reports qualified education expenses, thus the 1098-T is not solely purposed just for tax credits. When you put the 1098-T in Turbo Tax, it uses that, along with other qualified expenses you put in, for the 529 distribution (1099-Q) tax treatment calculations.Pdxnative wrote: ↑Thu Mar 23, 2023 2:16 amQualified expenses reported on the 1098t are for tax credits, not 529 distributions. More expenses qualify for 529s, including room and board.Kagord wrote: ↑Wed Mar 22, 2023 6:15 pm I can offer one piece of advice, on the first one, I made a mistake of paying the entire tuition bill from a 529 account for the freshman fall semester. When I received the 1098-T box 1 (qualified education expenses), it was less than the tuition bill, 10-15% less (I think it was in this range, other fees, parking..etc). That difference ended up being taxable plus a 10% penalty. So now I spread the 529 out over the full course of schooling.
Alternatively, you can try to contact the school to get the qualified portion that will be reported on the 1098-T of the tuition bill.
I guess the point I'm making, is that it's highly unlikely, IMHO, that everything the school charges on a semester billing statement is a qualified expense for a 529. That was the bad assumption I made, paying the entire tuition bill from the 529. In my case, I didn't have other major expenses outside of the school bill, except for a few books, that could offset the non-qualified expenses in the school billing.
I'll mention a 2nd mistake, that first semester, which was not getting a waiver for the school provided health insurance, as I had my own insurance (my child did not send me the communication this could be done). So yeah, I paid for extra health unneeded insurance, and then adding salt on the wound, was taxed at my federal/state rate + 10% penalty on it because it was paid from a 529 distribution (it was on the tuition bill, but in the 1098-T supporting detail, was not listed as qualified, and appropriately not included in box 1).
TLDR, the OP queried if emptying the 529 first was something one should do, that is exactly what I did, paying everything first from the 529, without understanding qualified versus not qualified expenses. I was penalized. Hoping this will save someone else from making the same mistake.
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Re: Best way to pay for college
Thanks. Good info to know. I have researched 529s and I know what a qualified expense is, but I see it's important to understand the bills you get from the college may be lumped in a way that includes qualified and unqualified expenses.Kagord wrote: ↑Wed Mar 22, 2023 6:15 pm I can offer one piece of advice, on the first one, I made a mistake of paying the entire tuition bill from a 529 account for the freshman fall semester. When I received the 1098-T box 1 (qualified education expenses), it was less than the tuition bill, 10-15% less (I think it was in this range, other fees, parking..etc). That difference ended up being taxable plus a 10% penalty. So now I spread the 529 out over the full course of schooling.
Alternatively, you can try to contact the school to get the qualified portion that will be reported on the 1098-T of the tuition bill.
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Re: Best way to pay for college
I have never even looked at 1098-Ts. I have the invoices and receipts which I can use if ever audited. I don't understand why you would have paid taxes on qualified withdrawals due to an incorrect or incomplete 1098 amount. In addition to tuition I also bought laptops and books with 529 funds so not sure why you would stop at 1098 anyway - not to mention room and board already mentioned.Kagord wrote: ↑Wed Mar 22, 2023 6:15 pm I can offer one piece of advice, on the first one, I made a mistake of paying the entire tuition bill from a 529 account for the freshman fall semester. When I received the 1098-T box 1 (qualified education expenses), it was less than the tuition bill, 10-15% less (I think it was in this range, other fees, parking..etc). That difference ended up being taxable plus a 10% penalty. So now I spread the 529 out over the full course of schooling.
Alternatively, you can try to contact the school to get the qualified portion that will be reported on the 1098-T of the tuition bill.
EDIT ADD: it may not be to late for you to file ammended returns and get the taxes you overpaid back.
OP: there are a few choices:
1) do what one person said - use part 529 and part MM
2) use the 529 first - that way if an unfortunate situation happens (kid drops out or something) you will have spent the money in a qualified way
3) save the 529 for the later years so the money can grow tax free for a couple more years.
I don't think there is a single "best" way. Congratulations for using 529s and saving on taxes.
It's unfortunate you lost 8% - I shifted my 529 money mostly out of equities as my kids approached college.
Re: Best way to pay for college
$40k all-in sounds like a public school.Isabelle77 wrote: ↑Wed Mar 22, 2023 4:38 pm Hi all,
Our daughter sent in her deposit for college last night and we're trying to figure out the mechanics of paying. All in, including room, board, and books, it will be around 40K a year, which is well within our budget for her.
She has 80K in a 529 and we have plenty in a money market to cover the rest. Is there any best way to pay? I know we have to withdraw from the 529 in the year that the tuition is due, but other than that?
Her brother will graduate in 2025 and also has about 80K in his 529, and a budget of 55K a year for his college search. They will overlap 2025-2027. Is it best to empty her 529 first, then move to our money market funds, or does it matter at all? Her 529 has lost approximately 8% in the last 18mths. We live in Washington if it matters and she will attend college in Texas.
Thanks as always!
Is it in one of the states that covers tuition at in-state, public schools for its National Guard members?
https://www.nationalguard.com/education-programs
Re: Best way to pay for college
Yes, I agree one needs to look at the relevant section of pub 970 when deciding what is qualified for 529 vs tax credits.Kagord wrote: ↑Thu Mar 23, 2023 5:09 am
To clarify, to get favorable tax treatment, 529 distributions must be used for qualified education expenses. The 1098-T reports qualified education expenses, thus the 1098-T is not solely purposed just for tax credits. When you put the 1098-T in Turbo Tax, it uses that, along with other qualified expenses you put in, for the 529 distribution (1099-Q) tax treatment calculations.
I guess the point I'm making, is that it's highly unlikely, IMHO, that everything the school charges on a semester billing statement is a qualified expense for a 529.
My point is that the definition of “qualified expenses” for the purposes of tax credits is different than the definition of qualified higher education expenses for the purposes of 529 distributions. Student health fees, for example, are specifically excluded from qualified expenses for tax credits but not for 529s.
The colleges are required to report qualified expenses on the 1098t using the definition for tax credits, not for 529 distributions.
So, I would not rely on the 1098t at all when deciding which fees are considered qualified for 529 distributions. Some fees will be qualified for 529s but not for tax credits.
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Re: Best way to pay for college
I would maximize tax free growth and pay as long as possible out of MM fund. Once child #2 is fully funded, start paying out of 529. In my state, you can roll one child’s unused funds into another, so I would use child #1 529 to ensure #2 fully funded.
Re: Best way to pay for college
Personally, I'd try to use the two 529's to smooth out the payments between the two kids to have a level set of pain across all the semesters to come.
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Re: Best way to pay for college
Money market accounts and funds are paying ~4% right now, something we haven't seen in a while (still lagging inflation). If the Fed has its way, inflation and yields should settle back down in a couple of years. This would argue in favor of letting your cash sit in a money market for a bit longer and spend it for the 3rd and 4th years of college.
You could make a counterargument that giving your 529 plan a couple of years to recover on the equities side would be beneficial, but if your kid is about to enter college you likely don't have much in the way of equities at this point (our 529 plans are target date funds).
You could make a counterargument that giving your 529 plan a couple of years to recover on the equities side would be beneficial, but if your kid is about to enter college you likely don't have much in the way of equities at this point (our 529 plans are target date funds).
Re: Best way to pay for college
The 529 distribution should be done in the year that the associated expenses are paid, which isn't necessarily the year that the expenses are due.Isabelle77 wrote: ↑Wed Mar 22, 2023 4:38 pm Is there any best way to pay? I know we have to withdraw from the 529 in the year that the tuition is due, but other than that?
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Re: Best way to pay for college
In my case (as is the OPs) I know I am not getting any tax credits for college payments. So the easiest thing to do if you know all your 529 withdrawls were qualified (and you are over AGI for credits) is simply NOT put any of this into Turbotax. My rule is if something doesn't need to be reported - Turbotax doesn't need to know about it. (I ONLY pull from 529 to reimburse qualified expenses and pay directly to the college - save all the reciepts in case of audit - there is NO reason to waste time putting eveything in Turbotax since none of it needs to be reported). I no longer tell Turbotax about a number of deductions as well that I used to take because I know I will end up with the standard deduction anyway.