How to know you have enough in a 529 plan?

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dred pirate
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How to know you have enough in a 529 plan?

Post by dred pirate »

So I know there is not a set black or white answer to this, and everybody has their own opinion on how much of your kids college to fund.
And of course - we never know if our children will go to school, qualify for scholarships, etc

A little background info.

We are 44/40 and have a 3 year old. FIL is very generous and gives about $10-12k a year to "college fund" through birthday and christmas gifts. Our income is ~250k- so do not plan on getting any financial aid.
Daughter will be an only child, and we would like to provide for her as much as possible in college (obviously our retimreent comes first, etc). At a bare minnimum we would like to have enough for total cost of attendance at our flagship state university. ($26k at UNC per their website).

Assuming the gifts from FIL continue- in principle alone = $216k before growth. That is a big if as FIL is 83 - so would be 97 or 98 when she goes to school- albiet he is the healthiest 83 year old I know - although I am sure when he passes away there will be an inheritance as my wife is his only child and he is very solid upper middle class and money wise.

My thoughts are when we meet the total cost of attendance at the state school (currently 26k x 4 = $104k) - to quit putting the money into a 529 and instead into a UTMA account investing in index funds. Since the checks are ear marked "college fund" the money will still be used for her college expenses first (if she needs more than the 529) - that way if she gets any financial aid (academic scholarships, etc) - we minimize our risk of having to use non-qualified (if that is the correct term) withdrawals and pay a 10% penalty on the gain.

If she goes the private school route - we would use the UTMA account.

Having too much money set aside is a good problem to have, so that 10% penalty isn't the end of the world, but figure my plan balances risk vs reward?

thoughts?
mary1492
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Re: How to know you have enough in a 529 plan?

Post by mary1492 »

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Last edited by mary1492 on Thu Sep 29, 2022 11:35 am, edited 1 time in total.
ZMonet
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Re: How to know you have enough in a 529 plan?

Post by ZMonet »

I'll let others weigh in on how much is "enough" for college. A couple of things to consider though: (1) Is it the worst thing in the world, as a worst-case scenario, if the 529 becomes multi-generational such that it funds any children your daughter eventually has?; (2) Do you know for sure that your daughter won't go to private elementary/middle/high school? Current law allows for $10k/year to be withdrawn for such schooling.
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dred pirate
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Re: How to know you have enough in a 529 plan?

Post by dred pirate »

mary1492 wrote: Mon Aug 08, 2022 6:06 pm Budget for higher.

That $26k is today. College costs have traditionally increased annually in excess of inflation. I would budget for annual 5% increases.

So, with 15 years before you daughter will need the funds for first year, figure it will cost between $50k and $55k for freshman year. Following 3 years will be higher. I'd figure you'll need $225k to $250k for the 4 years.
agree completely, what I was thinking (although it isn't what I actually typed) was that take into account the rising cost of tuition and once I hit 4 years in that particular year, I would stop (hoping my investment income then keeps up with the rising cost of tuition).
Example: so in 2022 = 106K, 2023 110k, 2024 115k, etc (assuming those are the actual numbers).

Each year I put more into the fund than what the cost goes up. So once I hit whatever the 4 x annual cost is in a year, then shift the funds (if that makes sense)
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dred pirate
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Re: How to know you have enough in a 529 plan?

Post by dred pirate »

ZMonet wrote: Mon Aug 08, 2022 6:08 pm I'll let others weigh in on how much is "enough" for college. A couple of things to consider though: (1) Is it the worst thing in the world, as a worst-case scenario, if the 529 becomes multi-generational such that it funds any children your daughter eventually has?; (2) Do you know for sure that your daughter won't go to private elementary/middle/high school? Current law allows for $10k/year to be withdrawn for such schooling.
1. agree- that is a good problem to have - what does happen if my daughter doesn't use all the money, and I want to shift it to her child (if and when she has one) - what if I die with money in the account? How is it inherited? can you keep it in a 529 and change owners and beneficiaries?

2. not sure about private elementary/HS- always a possibility where i live - I think I am in good schools, but not against private if it makes sense.
RetiredCSProf
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Re: How to know you have enough in a 529 plan?

Post by RetiredCSProf »

A Stanford CS college professor once told me that the cost of college tuition grows at the same pace as the cost of a new car, which typically grows at a faster rate than overall inflation.

I invested $55K in my only child's 529 plan (aggressive age-based). He graduated a year ago and currently has $57K remaining in his 529 plan. The remaining balance is designated for grad school, professional school, apprenticeship, or education of future grandchildren.

I had a co-worker who sighed with relief when his two sons both pursued their education through CA community college and completed their bachelor's degrees at UCLA. Then one son went to medical school :moneybag and the other went to law school :moneybag
secondcor521
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Re: How to know you have enough in a 529 plan?

Post by secondcor521 »

A few comments:

1. There is a scholarship exception to the 10% penalty, so you can withdraw to that extent and only pay income tax on only the portion of the distribution which represent gains.

2. Your child can also use 529 money for her graduate school if she wants to. Qualified grad school expenses paid by 529s are tax and penalty free. In other words, 529s are not limited to undergrad.

3. You may want to see if you can arrange it so your daughter qualifies for the AOTC. Your income is too high to qualify, but if your daughter can it's a nice tax break.

3. 529 owners and beneficiaries can both change. So you could use the 529 until she graduates from college, then change the owner to her. She could then use it for her own grad school (see #2 above), or change the beneficiary to her child if she has one later. You could even change the beneficiary to yourself or your spouse if either of you want to go back to school.

4. If you die while you're the 529 account owner, the 529 assets are not part of your estate, and the 529 program probably has a method for a successor owner, which could be your spouse or your daughter. I've told my 529 plan that my sister is the successor owner for now (I have two of college age). When you die the successor owner takes over; the beneficiary remains the same.

5. Generally changing the beneficiary to a family member is a non-taxable event. I think some BHers think that this could create a gift tax situation depending on the value of the 529; I'm not sure on that point.
Pdxnative
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Re: How to know you have enough in a 529 plan?

Post by Pdxnative »

Your plan of accumulating four years of in-state tuition and letting returns take it from there seems good to me. You can always check every few years to see if it’s keeping up with costs. College tuition inflation is generally way overstated. There was a significant pullback in state funding for higher Ed in many states during and after the GFC. That caused tuition to go up significantly to fill the gap. To extrapolate based on that one-time funding shift is common but is a mistake imo. In many states tuition has been flat for the last several years.

You’re fortunate to live in a state with good public universities as options.
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Re: How to know you have enough in a 529 plan?

Post by dak »

Pdxnative wrote: Mon Aug 08, 2022 9:08 pm College tuition inflation is generally way overstated. There was a significant pullback in state funding for higher Ed in many states during and after the GFC.
'
This really rings true to me. I am in the process of funding my 2nd child through UCLA. Her sister went there exactly 4 years earlier, so I have seven good years of data.

Tuition and fees have hardly budged in that timeframe - from $13152 per year in 2015 to $13531 per year for the last academic year. (This is comparing apples to apples and assumes no University provided health care.)

Housing ( either dorm or apartment) has bounced around a bit, with yearly costs ranging from $12K - $15K per year. The lowest year was my eldest daughter living off campus - she has naturally frugal tendencies. The highest cost was one of the dorm years. It looks to me like at this institution, dorm room and board have the greatest inflationary pressure.

I was all prepped for massive price inflation, and we just have not seen it. Color me pleased as there is not some money to give them a little cushion as they enter grad school!
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Re: How to know you have enough in a 529 plan?

Post by KlangFool »

OP,

I think you are asking the wrong question.

The correct question is how you can use the gift in the best possible way to help your daughter. Spending most or all of it in a college education may not be the best way to do it.

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HereToLearn
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Re: How to know you have enough in a 529 plan?

Post by HereToLearn »

dak wrote: Mon Aug 08, 2022 9:24 pm
Pdxnative wrote: Mon Aug 08, 2022 9:08 pm College tuition inflation is generally way overstated. There was a significant pullback in state funding for higher Ed in many states during and after the GFC.
'
This really rings true to me. I am in the process of funding my 2nd child through UCLA. Her sister went there exactly 4 years earlier, so I have seven good years of data.

Tuition and fees have hardly budged in that timeframe - from $13152 per year in 2015 to $13531 per year for the last academic year. (This is comparing apples to apples and assumes no University provided health care.)

Housing ( either dorm or apartment) has bounced around a bit, with yearly costs ranging from $12K - $15K per year. The lowest year was my eldest daughter living off campus - she has naturally frugal tendencies. The highest cost was one of the dorm years. It looks to me like at this institution, dorm room and board have the greatest inflationary pressure.

I was all prepped for massive price inflation, and we just have not seen it. Color me pleased as there is not some money to give them a little cushion as they enter grad school!

To provide a data point from the private university side.

Fall 2014, tuition, room & board -- $60,300

Fall 2021, tuition, room & board -- $77,500.

Two different schools, but their costs are usually within $500 of each other. The only charge not included here is a student activity fee (social fee of $100-$200 per year). Food costs can be reduced when living off campus but housing costs came in very close to university housing price.
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Re: How to know you have enough in a 529 plan?

Post by the_wiki »

I honestly don’t like 529 very much. They only save 15% capital gains tax and then your money is so locked down. If you don’t use it for education you pay 10% plus regular income tax on the withdrawals, which could be >30% total

With an only child, I would be pretty conservative with the 529 contributions and then put the rest in a regular account. Maybe your kid gets a scholarship or decides to be a plumber or entrepreneur. Too many variables for too little tax savings.

I may be in the minority with that opinion though.
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Re: How to know you have enough in a 529 plan?

Post by secondcor521 »

the_wiki wrote: Mon Aug 08, 2022 10:58 pm I honestly don’t like 529 very much. They only save 15% capital gains tax and then your money is so locked down. If you don’t use it for education you pay 10% plus regular income tax on the withdrawals, which could be >30% total

With an only child, I would be pretty conservative with the 529 contributions and then put the rest in a regular account. Maybe your kid gets a scholarship or decides to be a plumber or entrepreneur. Too many variables for too little tax savings.

I may be in the minority with that opinion though.
The 10% penalty and the income tax is only on the gains portion of the withdrawals, not the entire withdrawal. (Admittedly, the gains portion might be high if a 529 has been invested in since birth, but since it's a blended average over all contributions it still would arguably likely be less than 50%.)

The 10% penalty is waived for amounts withdrawn due to scholarships.

The income tax can be at the student's rate; if withdrawn their senior year could be very little to no taxes due.

There can be state tax benefits at contribution time which can sway the analysis quite a bit.
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Re: How to know you have enough in a 529 plan?

Post by squirrel1963 »

So my wife and I did this unintentionally, we funded our daughters 529 for what we though would be really good out of state colleges, think Stanford CA, Berkeley CA and so on..... Not enough actually, but we would have paid the rest out of pocket. Daughter #1 got a scholarship at business school in Italy near my relatives, so expenses were very low, Daughter #2 is doing in-state college at UW Washington.

We put about 300K and by the times they were college ready it was 600K. Overall expenses I think will be 100K, which is darn cheap I think, unless of course they change their mind. We plan to give some to BIL children college so perhaps we'll have 300K left.

The plan is to change asset allocation to Vanguard TSM equivalent (it's NY 529), let it grow and spend it last. Of course the funds will go our grandchildren college if we have any, but otherwise we plan to spend it ourselves, otherwise it will be a bequest. One way of another it will benefits our children (it already has).

Another possibility is for our daughters' further education, or a second master for me. Now that I am retired I'd have the time for it.

I'll be honest, we've always ran out of tax deferred space for tax inefficient investments, so in retrospect we should have contributed more to it, I think.
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Re: How to know you have enough in a 529 plan?

Post by SnowBog »

dred pirate wrote: Mon Aug 08, 2022 5:57 pm My thoughts are when we meet the total cost of attendance at the state school (currently 26k x 4 = $104k) - to quit putting the money into a 529 and instead into a UTMA account investing in index funds.
...
If she goes the private school route - we would use the UTMA account.

Having too much money set aside is a good problem to have,...
Be cautious in how much goes into a UTMA. Arguably the "worst" thing you could do is give a child who has drug and/or mental health issues money that found be used to do themselves harm.

We all hope that won't be our child. But it's always someone"s child.

As such, we won't put more into a UTMA than we could comfortably spend (on behalf of child) before they reach age of majority and gain control of funds (which differs by state).

The rest will end up either overfunding a 529 or being in a taxable account in our names. Given the funds are coming from FIL, I'd probably create a separate account for the funds.
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Re: How to know you have enough in a 529 plan?

Post by RetiredCSProf »

the_wiki wrote: Mon Aug 08, 2022 10:58 pm ...

With an only child, I would be pretty conservative with the 529 contributions and then put the rest in a regular account. Maybe your kid gets a scholarship or decides to be a plumber or entrepreneur. Too many variables for too little tax savings.

...
Since passage of the SECURE Act, apprenticeships are considered a qualified higher education expense if the apprenticeship is registered and certified with the U.S. Secretary of Labor under Section 1 of the National Apprenticeship Act. Qualified costs for apprenticeships -- required fees, books, supplies and equipment for participation -- can also be paid with 529 distributions.
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Re: How to know you have enough in a 529 plan?

Post by SchruteB&B »

the_wiki wrote: Mon Aug 08, 2022 10:58 pm I honestly don’t like 529 very much. They only save 15% capital gains tax and then your money is so locked down. If you don’t use it for education you pay 10% plus regular income tax on the withdrawals, which could be >30% total
The capital gains tax rate can be even high than 15%. We are at 20%. We live in a state with a 5% income tax. We are also subject to the 3.8% NIIT. That’s 28.8%. If instead of saving in a 529 we had saved in a taxable brokerage account, that money would be coming out to pay tuition right now subject to almost a 30% tax; so almost double the 15% you cite. 529s certainly have drawbacks that should be weighed but you are selling them short by saying you can only save 15%.

Eta: I just paid my youngest Fall semester bill. $14,000 of the payment was gain in a 529. That’s all coming out tax free vs. paying a little over $4000 in tax. We save $8,000 in tax per year by having saved in a 529 PLUS the state tax deductions we took when we saved for many years in the 529.
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Re: How to know you have enough in a 529 plan?

Post by vineviz »

dred pirate wrote: Mon Aug 08, 2022 5:57 pm
Having too much money set aside is a good problem to have, so that 10% penalty isn't the end of the world, but figure my plan balances risk vs reward?

thoughts?
One approach to deal with potentially overfunding a 529 plan is actually to open TWO 529 plans for the child.

Call the two plans 529 #1 and 529 #2.

You will invest 529 plan #1 solely in stocks. Contribute to this plan ONLY while the balance in the plan is less than the current net price for one year of school. In other words, using the numbers above, you’d CONTRIBUTE to this plan when the balance is less than $26,000. You will adjust this to match the net price of your benchmark in the year you are making the decision.

If the balance in 529 plan #1 is MORE than a single year’s cost, contribute to 529 plan #2 instead. Invest this plan, unlike plan #1, entirely or almost entirely in bonds.

And if the TOTAL of plan # 1 and plan #2 has grown to more than 4x the current net price, you can take a year off to avoid overfunding the plan.

You can withdraw excess contributions from a college savings plan. If you do then you might owe taxes on capital gains plus a 10% penalty. That’s not catastrophic, but the “two plan strategy” helps manage this.

You’ll first take qualified education expenses from plan #1. You funded plan #1 earlier and invested in stocks (which historically have appreciated more than bonds). As a result, it probably has the most growth. Plan #2 was invested entirely in bonds so it likely have less growth.

Any surplus funds you withdraw will be from Plan #2 and therefore will likely have a smaller exposure the taxes and penalties.
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Re: How to know you have enough in a 529 plan?

Post by the_wiki »

As I said, my opinion may be the minority. :sharebeer

I still don’t think adding hundreds of thousands to a 529 is a great choice. I’d cover what the local state school is likely to cost in the 529 and put the extra in a more flexible account.
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Re: How to know you have enough in a 529 plan?

Post by dred pirate »

KlangFool wrote: Mon Aug 08, 2022 9:29 pm OP,

I think you are asking the wrong question.

The correct question is how you can use the gift in the best possible way to help your daughter. Spending most or all of it in a college education may not be the best way to do it.

KlangFool
Ok. I will go down this road. The gift is specified to go to “college fund”. He is very specific about that. I can see an argument is to be made that their could be better uses. But thst is not his wish.
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Re: How to know you have enough in a 529 plan?

Post by bampf »

vineviz wrote: Tue Aug 09, 2022 10:38 am
dred pirate wrote: Mon Aug 08, 2022 5:57 pm
Having too much money set aside is a good problem to have, so that 10% penalty isn't the end of the world, but figure my plan balances risk vs reward?

thoughts?
One approach to deal with potentially overfunding a 529 plan is actually to open TWO 529 plans for the child.

Call the two plans 529 #1 and 529 #2.

You will invest 529 plan #1 solely in stocks. Contribute to this plan ONLY while the balance in the plan is less than the current net price for one year of school. In other words, using the numbers above, you’d CONTRIBUTE to this plan when the balance is less than $26,000. You will adjust this to match the net price of your benchmark in the year you are making the decision.

If the balance in 529 plan #1 is MORE than a single year’s cost, contribute to 529 plan #2 instead. Invest this plan, unlike plan #1, entirely or almost entirely in bonds.

And if the TOTAL of plan # 1 and plan #2 has grown to more than 4x the current net price, you can take a year off to avoid overfunding the plan.

You can withdraw excess contributions from a college savings plan. If you do then you might owe taxes on capital gains plus a 10% penalty. That’s not catastrophic, but the “two plan strategy” helps manage this.

You’ll first take qualified education expenses from plan #1. You funded plan #1 earlier and invested in stocks (which historically have appreciated more than bonds). As a result, it probably has the most growth. Plan #2 was invested entirely in bonds so it likely have less growth.

Any surplus funds you withdraw will be from Plan #2 and therefore will likely have a smaller exposure the taxes and penalties.
This makes no sense to me, but, maybe it is because I don't understand. I don't get what having two plans does for you except it is an artificial bucket for asset allocation. Next, why would you purposely invest in something to get lower returns? Wouldn't you want to invest in higher returns? If it is for risk mitigation, what does having the second account do for you that simply investing in bonds in plan one wouldn't do?
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Re: How to know you have enough in a 529 plan?

Post by dred pirate »

bampf wrote: Tue Aug 09, 2022 11:08 am
vineviz wrote: Tue Aug 09, 2022 10:38 am
dred pirate wrote: Mon Aug 08, 2022 5:57 pm
Having too much money set aside is a good problem to have, so that 10% penalty isn't the end of the world, but figure my plan balances risk vs reward?

thoughts?
One approach to deal with potentially overfunding a 529 plan is actually to open TWO 529 plans for the child.

Call the two plans 529 #1 and 529 #2.

You will invest 529 plan #1 solely in stocks. Contribute to this plan ONLY while the balance in the plan is less than the current net price for one year of school. In other words, using the numbers above, you’d CONTRIBUTE to this plan when the balance is less than $26,000. You will adjust this to match the net price of your benchmark in the year you are making the decision.

If the balance in 529 plan #1 is MORE than a single year’s cost, contribute to 529 plan #2 instead. Invest this plan, unlike plan #1, entirely or almost entirely in bonds.

And if the TOTAL of plan # 1 and plan #2 has grown to more than 4x the current net price, you can take a year off to avoid overfunding the plan.

You can withdraw excess contributions from a college savings plan. If you do then you might owe taxes on capital gains plus a 10% penalty. That’s not catastrophic, but the “two plan strategy” helps manage this.

You’ll first take qualified education expenses from plan #1. You funded plan #1 earlier and invested in stocks (which historically have appreciated more than bonds). As a result, it probably has the most growth. Plan #2 was invested entirely in bonds so it likely have less growth.

Any surplus funds you withdraw will be from Plan #2 and therefore will likely have a smaller exposure the taxes and penalties.
This makes no sense to me, but, maybe it is because I don't understand. I don't get what having two plans does for you except it is an artificial bucket for asset allocation. Next, why would you purposely invest in something to get lower returns? Wouldn't you want to invest in higher returns? If it is for risk mitigation, what does having the second account do for you that simply investing in bonds in plan one wouldn't do?
I was just thinking this. One thought - are the withdrawals pro rata? If so it would make sense that if their is a penalty, that it or comes from the lower performing bonds. But that me a stretch
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Re: How to know you have enough in a 529 plan?

Post by Broken Man 1999 »

secondcor521 wrote: Tue Aug 09, 2022 12:13 am
the_wiki wrote: Mon Aug 08, 2022 10:58 pm I honestly don’t like 529 very much. They only save 15% capital gains tax and then your money is so locked down. If you don’t use it for education you pay 10% plus regular income tax on the withdrawals, which could be >30% total

With an only child, I would be pretty conservative with the 529 contributions and then put the rest in a regular account. Maybe your kid gets a scholarship or decides to be a plumber or entrepreneur. Too many variables for too little tax savings.

I may be in the minority with that opinion though.
The 10% penalty and the income tax is only on the gains portion of the withdrawals, not the entire withdrawal. (Admittedly, the gains portion might be high if a 529 has been invested in since birth, but since it's a blended average over all contributions it still would arguably likely be less than 50%.)

The 10% penalty is waived for amounts withdrawn due to scholarships.

The income tax can be at the student's rate; if withdrawn their senior year could be very little to no taxes due.

There can be state tax benefits at contribution time which can sway the analysis quite a bit.
I've never fully understood the angst some have about the possibility of paying the 10% penalty tax!

Future conversation with one of my grandchildren:

Grandchild: Papa, I am finished with grad school, and I have money left in the 529 plan you funded!
Answer 1 Papa: You fool! Now I have to pay a penalty to get the remaining dollars out!

OR

Answer 2 Papa: Well, our goal was always to get you out of undergraduate and graduate school with no debt. We accomplished that goal and have money left over! Your sibling and cousins are in the same boat. Same goal, same result. I bet we can find something that will soak up that extra money even if we have to pay extra taxes!


I'm sure my answer would be the latter.

Would those who are worried about the possibility of paying a tax penaltly be happier if every cent went to the university(ies)?

Me, I would rather end up with money left over than to have one of them saddled with student debt.

My goal is to get them out of college with zero student debt. If we have some $$$ left over, we can deal with it.

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Re: How to know you have enough in a 529 plan?

Post by vineviz »

RetiredCSProf wrote: Mon Aug 08, 2022 7:37 pm A Stanford CS college professor once told me that the cost of college tuition grows at the same pace as the cost of a new car, which typically grows at a faster rate than overall inflation.
Projecting college costs is always a challenge.

Historically, by which I mean over the past 60 years, it's been pretty safe to plan on total costs (tuition, fees, room, board) increasing an average of about 2% more than the general rate of inflation.

There is an observable smoothing effect in the data, which means it can take several years of above-average increases for costs to "catch up" after sharp transitory spikes, but inflation + 2% is the best planning assumption I've come up with.
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Re: How to know you have enough in a 529 plan?

Post by vineviz »

dred pirate wrote: Tue Aug 09, 2022 11:10 am
bampf wrote: Tue Aug 09, 2022 11:08 am This makes no sense to me, but, maybe it is because I don't understand. I don't get what having two plans does for you except it is an artificial bucket for asset allocation. Next, why would you purposely invest in something to get lower returns? Wouldn't you want to invest in higher returns? If it is for risk mitigation, what does having the second account do for you that simply investing in bonds in plan one wouldn't do?
I was just thinking this. One thought - are the withdrawals pro rata? If so it would make sense that if their is a penalty, that it or comes from the lower performing bonds. But that me a stretch
Right. What I outlined above is essentially a tax (and penalty) management strategy.

529 withdrawals (i.e. withdrawals of excess funds) are treated as pro-rata withdrawals. And this is calculated on a per account basis.

The reason you might use two accounts as described above is that you can use the one with lots of gains (#1) to pay the tuition (maximizing the tax deferral benefit) and make any unqualified withdrawals will only be made from the second account (minimizing the tax and penalty).
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Re: How to know you have enough in a 529 plan?

Post by bampf »

vineviz wrote: Tue Aug 09, 2022 11:21 am
dred pirate wrote: Tue Aug 09, 2022 11:10 am
bampf wrote: Tue Aug 09, 2022 11:08 am This makes no sense to me, but, maybe it is because I don't understand. I don't get what having two plans does for you except it is an artificial bucket for asset allocation. Next, why would you purposely invest in something to get lower returns? Wouldn't you want to invest in higher returns? If it is for risk mitigation, what does having the second account do for you that simply investing in bonds in plan one wouldn't do?
I was just thinking this. One thought - are the withdrawals pro rata? If so it would make sense that if their is a penalty, that it or comes from the lower performing bonds. But that me a stretch
Right. What I outlined above is essentially a tax (and penalty) management strategy.

529 withdrawals (i.e. withdrawals of excess funds) are treated as pro-rata withdrawals. And this is calculated on a per account basis.

The reason you might use two accounts as described above is that you can use the one with lots of gains (#1) to pay the tuition (maximizing the tax deferral benefit) and make any unqualified withdrawals will only be made from the second account (minimizing the tax and penalty).
OK, I get it now, sort of. So if you are going to invest in a 529 and you have an asset allocation in mind, you can separate the two accounts to angle penalty withdrawals from the bond fund. That being said, it would need to be a lot of money for it to matter I suppose.

I have three kids. We funded their 529s to cover about 50% of 4 years instate tuition and room/board at a good university. We cash flowed about 50% of one kid and used the 529 for the rest. The other kid is entering into her second year and tuition /room and board is easily covered with the 529. Since many schools get scholarships as a way to incentivize a kid to come, we have actually taken money out of the 529 under that rule, tax and penalty free. The third kid is four years away and we have plenty in the 529s today even setting aside growth. So, I am no longer funding a 529 and wont until grandkids come along.
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Re: How to know you have enough in a 529 plan?

Post by secondcor521 »

bampf wrote: Tue Aug 09, 2022 11:30 am Since many schools get scholarships as a way to incentivize a kid to come, we have actually taken money out of the 529 under that rule, tax and penalty free.
Scholarship related withdrawals from 529s escape the 10% penalty, but you still owed income tax on the earnings portion of those withdrawals.
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Re: How to know you have enough in a 529 plan?

Post by bampf »

secondcor521 wrote: Tue Aug 09, 2022 1:31 pm
bampf wrote: Tue Aug 09, 2022 11:30 am Since many schools get scholarships as a way to incentivize a kid to come, we have actually taken money out of the 529 under that rule, tax and penalty free.
Scholarship related withdrawals from 529s escape the 10% penalty, but you still owed income tax on the earnings portion of those withdrawals.
I didn't know that... I am glad you told me that since I have the opportunity to fix it before the end of the year. Thanks!
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Re: How to know you have enough in a 529 plan?

Post by squirrel1963 »

vineviz wrote: Tue Aug 09, 2022 10:38 am
dred pirate wrote: Mon Aug 08, 2022 5:57 pm
Having too much money set aside is a good problem to have, so that 10% penalty isn't the end of the world, but figure my plan balances risk vs reward?

thoughts?
One approach to deal with potentially overfunding a 529 plan is actually to open TWO 529 plans for the child.

Call the two plans 529 #1 and 529 #2.

You will invest 529 plan #1 solely in stocks. Contribute to this plan ONLY while the balance in the plan is less than the current net price for one year of school. In other words, using the numbers above, you’d CONTRIBUTE to this plan when the balance is less than $26,000. You will adjust this to match the net price of your benchmark in the year you are making the decision.

If the balance in 529 plan #1 is MORE than a single year’s cost, contribute to 529 plan #2 instead. Invest this plan, unlike plan #1, entirely or almost entirely in bonds.

And if the TOTAL of plan # 1 and plan #2 has grown to more than 4x the current net price, you can take a year off to avoid overfunding the plan.

You can withdraw excess contributions from a college savings plan. If you do then you might owe taxes on capital gains plus a 10% penalty. That’s not catastrophic, but the “two plan strategy” helps manage this.

You’ll first take qualified education expenses from plan #1. You funded plan #1 earlier and invested in stocks (which historically have appreciated more than bonds). As a result, it probably has the most growth. Plan #2 was invested entirely in bonds so it likely have less growth.

Any surplus funds you withdraw will be from Plan #2 and therefore will likely have a smaller exposure the taxes and penalties.
I guess it depends on which specific 529 you have. New York 529 plan (the one we picked) is administered by Vanguard and lets you pick any combo of the available funds, so you can do the equivalent by putting X% in Vang stock index fund and the rest in Vang total bond fund.
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Re: How to know you have enough in a 529 plan?

Post by vineviz »

squirrel1963 wrote: Tue Aug 09, 2022 4:44 pm I guess it depends on which specific 529 you have. New York 529 plan (the one we picked) is administered by Vanguard and lets you pick any combo of the available funds, so you can do the equivalent by putting X% in Vang stock index fund and the rest in Vang total bond fund.
This doesn’t accomplish the same tax advantage, since the withdrawals are treated as coming proportionately from contributions and growth.
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Re: How to know you have enough in a 529 plan?

Post by squirrel1963 »

vineviz wrote: Tue Aug 09, 2022 6:12 pm
squirrel1963 wrote: Tue Aug 09, 2022 4:44 pm I guess it depends on which specific 529 you have. New York 529 plan (the one we picked) is administered by Vanguard and lets you pick any combo of the available funds, so you can do the equivalent by putting X% in Vang stock index fund and the rest in Vang total bond fund.
This doesn’t accomplish the same tax advantage, since the withdrawals are treated as coming proportionately from contributions and growth.
All right I see what you mean now, thanks. If you set it up like this at the start it'd be a really cool idea.
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Re: How to know you have enough in a 529 plan?

Post by liynus »

I think this website is such a good tool by Vanguard. It will look up your target schools. I chose a local state university, and also a private school.
It gave me the estimated amounts I needed to save yearly. I have one baseline target that aim to definitely fund, local state, and then a higher target for private. It also gave me a good idea about how expensive a college education is now a days if a family doesn't receive financial aid. The numbers are shocking! After health care costs, I'd imagine student loans are the most likely to sink a younger persons future financial goals. I'm just waiting for the government to pull the rug from schools that really should not be charging tuition for their program. Unlimited loans has been such a bad idea for higher education, despite it's best intentions.

https://vanguard.wealthmsi.com/csp.php
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Re: How to know you have enough in a 529 plan?

Post by dboeger1 »

Broken Man 1999 wrote: Tue Aug 09, 2022 11:11 am
secondcor521 wrote: Tue Aug 09, 2022 12:13 am
the_wiki wrote: Mon Aug 08, 2022 10:58 pm I honestly don’t like 529 very much. They only save 15% capital gains tax and then your money is so locked down. If you don’t use it for education you pay 10% plus regular income tax on the withdrawals, which could be >30% total

With an only child, I would be pretty conservative with the 529 contributions and then put the rest in a regular account. Maybe your kid gets a scholarship or decides to be a plumber or entrepreneur. Too many variables for too little tax savings.

I may be in the minority with that opinion though.
The 10% penalty and the income tax is only on the gains portion of the withdrawals, not the entire withdrawal. (Admittedly, the gains portion might be high if a 529 has been invested in since birth, but since it's a blended average over all contributions it still would arguably likely be less than 50%.)

The 10% penalty is waived for amounts withdrawn due to scholarships.

The income tax can be at the student's rate; if withdrawn their senior year could be very little to no taxes due.

There can be state tax benefits at contribution time which can sway the analysis quite a bit.
I've never fully understood the angst some have about the possibility of paying the 10% penalty tax!

Future conversation with one of my grandchildren:

Grandchild: Papa, I am finished with grad school, and I have money left in the 529 plan you funded!
Answer 1 Papa: You fool! Now I have to pay a penalty to get the remaining dollars out!

OR

Answer 2 Papa: Well, our goal was always to get you out of undergraduate and graduate school with no debt. We accomplished that goal and have money left over! Your sibling and cousins are in the same boat. Same goal, same result. I bet we can find something that will soak up that extra money even if we have to pay extra taxes!


I'm sure my answer would be the latter.

Would those who are worried about the possibility of paying a tax penaltly be happier if every cent went to the university(ies)?

Me, I would rather end up with money left over than to have one of them saddled with student debt.

My goal is to get them out of college with zero student debt. If we have some $$$ left over, we can deal with it.

Broken Man 1999
I'm confused by your wording, but it seems like a perfectly reasonable concern to me. I actually like the sound of #2 very much. Maybe it's because I'm one of those FIRE people and the more money we keep for ourselves, the earlier/better we can retire. We don't plan to have a huge excess, so 10% penalties for poorly estimating future costs can have a potentially significant impact. Your last sentence in hypothetical #2 seems like a bit of a stretch. Extra taxes? I can't imagine anybody going through the trouble of minimizing or avoiding the 10% 529 penalty would be looking at tax-inefficient withdrawal strategies as a fall-back, unless market growth left them with way more than they need in the long run, in which case we're back to the same problem as with the 529, having to withdraw an excess in a higher income tax bracket later in life. That being said, I don't think having an excess in 529 avoids that problem; if anything, it compounds it, because you pay 10% penalty on the excess, then potentially add it back into one's general asset allocation, then it builds up to a higher tax bracket later in life, so now you've been penalized twice.
dred pirate wrote: Tue Aug 09, 2022 11:03 am
KlangFool wrote: Mon Aug 08, 2022 9:29 pm OP,

I think you are asking the wrong question.

The correct question is how you can use the gift in the best possible way to help your daughter. Spending most or all of it in a college education may not be the best way to do it.

KlangFool
Ok. I will go down this road. The gift is specified to go to “college fund”. He is very specific about that. I can see an argument is to be made that their could be better uses. But thst is not his wish.
OP, I understand your point about FIL's wishes, but I still think your FIL may be doing some mental accounting, and that KlangFool's point is at least worth considering. From your post, it sounds like FIL is designating the money for education but otherwise letting you decide where and how to invest it, given that it's you who's deciding between a 529 and UTMA. An UTMA is not a dedicated education account, and it eventually transfers the assets (including full control) to the minor at 18, which seems to suggest you have some flexibility when it comes to using the money. There's a decent chance the money your FIL asks to be designated for education ends up being more than is needed, even without growth. So as noble as your FIL's wishes are for the money, I honestly think he's making a naive mistake insisting that this all goes to education. Education first, I can totally understand, but education only seems a bit unrealistic. Imagine if Elon Musk gave each of his kids $1 billion, with the caveat that it could only be spent on education. They could buy a lot of those stock-picking get-rich-quick programs from YouTube ads, I guess. I would consider talking to your FIL about sensible alternatives, such as funding the kid's Roth IRA if they get a job. It seems a bit silly to dump all this money on your kid and then send you on a guilt trip for deciding how to use it. Stipulations like that are for low amounts when compromises need to be made and the benefactor wants to make sure their priorities are taken care of. They don't really make sense when the amounts are more than needed and the beneficiaries are sensible people who can be trusted to manage the money efficiently and appropriately. The money has to go somewhere eventually, and if FIL truly insists on it going to education, he may be better off donating projected excesses to a scholarship fund for other students rather than your kid's UTMA, which may or may not be spent according to his wishes.

OP, you also left out a lot of potentially relevant details. Granted, many of these considerations are subject to change by the time your child attends university, but my understanding is that primary residence and retirement accounts are often excluded for the purposes of determining financial aid eligibility, so high income today isn't really enough to say for certain whether you might be eligible later on. If you aren't maxing out retirement accounts, intend to buy a bigger house, and/or one or both of you decided to retire or become stay-at-home parents before your child attends university, you may find yourselves eligible, and FIL's money may have been better off sitting sheltered in his retirement accounts or in a trust designated for your child after his passing. There are lots of variables to consider, and I don't think anybody can really predict all of them with much certainty this far in advance.

Personally, I'm not in love with the 529 unless you have absolutely no other tax-advantaged space left. If your FIL really intends for all of this money to go to this particular child, then an UTMA is an okay way to accomplish that with any potential excess. Personally, I'd still prefer to over-fund the 529 and change the beneficiaries later if that's an option, but if there are no other potential beneficiaries, either because they don't exist or because this particular child is FIL's favorite, then sure, UTMA is not unreasonable. Funding the child's Roth IRA would likely still be better, but that depends on them earning income.
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Re: How to know you have enough in a 529 plan?

Post by smectym »

mary1492 wrote: Mon Aug 08, 2022 6:06 pm Budget for higher.

That $26k is today. College costs have traditionally increased annually in excess of inflation. I would budget for annual 5% increases.

So, with 15 years before you daughter will need the funds for first year, figure it will cost between $50k and $55k for freshman year. Following 3 years will be higher. I'd figure you'll need $225k to $250k for the 4 years.
“Budget for higher” is right. We are still going through the cycle. But the way college admissions generally still works these days is that talented candidates are typically offered a “scholarship” (i.e., a tuition discount) as an incentive to attend; but the higher-ranked the school, the lower the scholarship (discount). The top tier may offer no discount: the applicant is thrilled just to get an offer of admission. So when your kid is sorting through the acceptances and this or that mid-tier school is offering a generous discount, but the elite top-tier school that also offered admission included no discount…which school do you think applicant, and most likely applicant’s parents, think is the right choice?

So be prepared to pay up.
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Re: How to know you have enough in a 529 plan?

Post by EFF_fan81 »

In the unlikely event we overfund, I am OK keeping the money in there and using it for grandkids or relatives, etc. Keeps things simple.

Not trying to overdo it, but not losing sleep over the risk of doing so either.
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Re: How to know you have enough in a 529 plan?

Post by YeahBuddy »

I personally think if you're able to cover cost of attendance 100% then that's the cut off point.

Couple questions if it's not too much trouble, you said you don't expect financial aid with a $250k income, what's the cut off for financial aid? Just wondering.

Also, does the amount or existence of a 529 reduce financial aid? We are in our 40s with 2 kids 12 and 10 without a 529 and just trying to decide if it's time to put my foot on the gas with it vs continuing with our plan of focusing on our retirement contributions, EF, etc. Thanks
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Re: How to know you have enough in a 529 plan?

Post by marti038 »

secondcor521 wrote: Tue Aug 09, 2022 1:31 pm
bampf wrote: Tue Aug 09, 2022 11:30 am Since many schools get scholarships as a way to incentivize a kid to come, we have actually taken money out of the 529 under that rule, tax and penalty free.
Scholarship related withdrawals from 529s escape the 10% penalty, but you still owed income tax on the earnings portion of those withdrawals.
Wonder why it's income tax instead of a capital gains tax?
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Re: How to know you have enough in a 529 plan?

Post by A440 »

Over-funding the 529 may seem like a good problem to have. Here is an article I found today on the matter: https://www.morningstar.com/articles/11 ... r-529-plan
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Re: How to know you have enough in a 529 plan?

Post by secondcor521 »

marti038 wrote: Wed Aug 10, 2022 8:17 am
secondcor521 wrote: Tue Aug 09, 2022 1:31 pm
bampf wrote: Tue Aug 09, 2022 11:30 am Since many schools get scholarships as a way to incentivize a kid to come, we have actually taken money out of the 529 under that rule, tax and penalty free.
Scholarship related withdrawals from 529s escape the 10% penalty, but you still owed income tax on the earnings portion of those withdrawals.
Wonder why it's income tax instead of a capital gains tax?
You'd have to ask Congress, but one plausible theory is that it matches the way most tax-deferred accounts work - traditional IRAs, 401(k)s etc, and HSAs (when used for non-qualified expenses) are all taxed as ordinary income when funds are removed.
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Re: How to know you have enough in a 529 plan?

Post by HereToLearn »

RobLyons wrote: Wed Aug 10, 2022 7:35 am I personally think if you're able to cover cost of attendance 100% then that's the cut off point.

Couple questions if it's not too much trouble, you said you don't expect financial aid with a $250k income, what's the cut off for financial aid? Just wondering.

Also, does the amount or existence of a 529 reduce financial aid? We are in our 40s with 2 kids 12 and 10 without a 529 and just trying to decide if it's time to put my foot on the gas with it vs continuing with our plan of focusing on our retirement contributions, EF, etc. Thanks
While I realize that it is impossible to predict where your ten and twelve year olds will attend college, if you want to see the interplay of assets vs earnings, you can run the Net Price Calculator for a few colleges to see the varying approaches used by colleges. The Net Price Calculator will be more accurate than anything else you look at. Just enter 'College Name Net Price Calculator'

The cutoff for FA will vary across schools and the NPC will also ask for home equity and balances in retirement and non-retirement accounts, including 529. You can enter different amounts to see the impact. Retirement account balances are not considered but 529 accounts are. Most of the schools with the most generous FA policies consider home equity but cap it at a multiplier of income.

HYPSM would offer FA to someone earning $250K but with zero home equity and zero savings, however, it is unlikely that the $250K earner has no savings.
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Re: How to know you have enough in a 529 plan?

Post by MDivision »

We have been using the vanguard tool cited earlier to project undergraduate college cost. We are considering the ‘worst’ case cost to be an average private 4 year school and saving in a 529 towards that number. If an amount is unused we will keep it handy for graduate school or grandkids. I suspect we will find ways to use up this money.

We are separately funding a UTMA to hand over to the child at 25 years of age to use towards a house down payment or wedding or business venture or whatever the child chooses.
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Re: How to know you have enough in a 529 plan?

Post by Scotttheking »

I have a goal of what to pay for. I track the balance towards that goal. As it gets closer, I’ll adjust.
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Re: How to know you have enough in a 529 plan?

Post by Lee_WSP »

the_wiki wrote: Mon Aug 08, 2022 10:58 pm I honestly don’t like 529 very much. They only save 15% capital gains tax and then your money is so locked down. If you don’t use it for education you pay 10% plus regular income tax on the withdrawals, which could be >30% total

With an only child, I would be pretty conservative with the 529 contributions and then put the rest in a regular account. Maybe your kid gets a scholarship or decides to be a plumber or entrepreneur. Too many variables for too little tax savings.

I may be in the minority with that opinion though.
You are in the minority, but you aren’t alone, even if your numbers aren’t 100% correct.

Even if the cap gains tax rate is 28% as posited, the regular income rate is going to be close to 35% for that individual and there’s still the 10% penalty.

That said, there’s clearly a scale of “risk of having too much in the 529”. I think funding them past age 10 doesn’t make much sense (given the conservative AA the money will be in) and on the low end you could just lump sum the first five and be done with it once the child is born.
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Re: How to know you have enough in a 529 plan?

Post by 2mwasmytarget »

Our experience:
We contributed $55,000 in a 529 plan. Plan value was $95,000 when our daughter went off to college. Our agreement was that we would pay for a state school but if our daughter could arrange an out of state school at the same cost we'd be fine with that. She ultimately got a $35,000 per year scholarship for academics renewable for 4 years which covered all but $1500 of tuition per semester. In the end $95,000 should cover all of her college costs and leave some funds in the account.

Things we've encountered:
Living off campus is more expensive than living on campus (based on the "cost of attendance" figures the college posts)
You can withdraw up to the amount of the scholarship each year without a penalty but you do pay taxes on the gains
We decided to withdraw a smaller number than the scholarship value that will cover the increased cost of living off campus for the next two years and will pay taxes on the gains. We are looking in to having the distribution go to our daughter since she is in the lowest tax bracket (she makes less than $5K per year)
We are withdrawing the cost of attendance amount each year for room and board with no penalties or taxes
Having the funds in a taxable account would have been easier but we are getting a tax advantage on most of the $40K in gains
All of the travel costs for getting her there and back are not covered by the 529 plan

All that being said, I don't think we would have done anything different. It was nice knowing the majority of our daughter's college was covered and enabled us to not have it be a major factor on when we retire.
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