How do you know when enough is in a 529 Plan?

[Grt2bOutdoors]

This is an offshoot from the previous thread about "how much you will pay for college"?
My question revolves around How do you know when you have enough in a college savings plan that you can stop? I find this is not an easy question to answer due to the unknown variables - what school will your child get accepted to, will the child want to attend graduate school, what will school cost in 10 or 15 years? Is there an amount you aim for and then let it ride? The equation seems more difficult than saving for retirement. Advice? Comments?

[livesoft]

I found that when we started investment in equities in 529 plans that we were making a 10% return per year, but then 2008-2009 happened. In the end, the gains were under 3% a year, so that the tax savings were miniscule. To be blunt: It just didn't matter how much one had in a 529 plan. One could do almost as well just investing in a taxable account.

So my advice would be to shoot for only half of a what you think you will need. Put the rest in a taxable account.

[JamesSFO]

I think a lot depends on your current/expected salary and how the 529 helps you save behaviorally.

[ks289]

Agree with livesoft.
Good thread on similar topic here recently.
viewtopic.php?f=1&t=107774

Because of the potential penalties on gains from overfunding the 529, my personal bias is to aim for an amount which covers 4 years in-state public university (projecting 5+% annual increases) and invest any other funds in a taxable account.
I am curious to hear other people's thoughts.

[livesoft]

There are many ubersavers on the forum and I have to count myself as one of them. Here is an anecdote:

As our oldest got closer to becoming a college freshman, we started to use only fixed income assets in the 529 plans. That reduced their annual returns. OTOH, our other assets were invested in 31% fixed income, 69% equities for the most part. Those other assets have increased in value by the cost of a full 4-year college education at a private elite college for each and every year my kid has been in college. That is, their gains have dwarfed anything the 529 plans ever did.

So my problem with 529 plan assets is that the value is low when one can use equities to perhaps goose their returns, but when the value is higher, one has to invest conservatively and the gains are inconsequential.

I'd like to read a success story about 529 plans that showed significant tax savings ... especially through the Great Recession.

[Dadarkar]

We have been saving in NY's 529 plan for last ten years in age based conservative option. This plan has given returns of 4.7% fpr last 3 years and 3.53% for last 5 years. In addition we have saved NY state income tax for 10k. Our aim is fund this account for four years undergraduate education in a private college. For graduate college we will see what happens!

[Sammy_M]

We're saving the equivalent of 4 years of public school tuition as well. We are investing it exclusively in fixed income because it is our nearest term investment goal, it's after-tax money, and because there have been some great fixed income deals like the Ohio 5% 10YR CD that Tramper Al brought to the forum's attention a couple of years ago.

[RadAudit]

You know you have enough when the last one graduates from the last grad school.

I saved for 18 years (pre-529) and put two through their masters but all the savings were long gone before we got to the end of that road.

Best of luck.

[jdilla1107]

Remember that states with tax breaks for 529s can generate significant tax savings. In IL, where I live, I get $1,000 back per year when I put in 20k each year. This will equal at least 10k in tax savings by the time I am done.

[Clark & Addison]

In Indiana, we get $1,000 back on our state taxes if we put $5,000 in, so that's how much we put in ($2,500 per year for each of our two). If this continues, we should save over $18,000 in taxes by time our second child reaches college. I doubt that this will be enough to fund their college in 14 and 17 years, but we'll just cash flow the remainder.

[momar]

There are many ubersavers on the forum and I have to count myself as one of them. Here is an anecdote:

As our oldest got closer to becoming a college freshman, we started to use only fixed income assets in the 529 plans. That reduced their annual returns. OTOH, our other assets were invested in 31% fixed income, 69% equities for the most part. Those other assets have increased in value by the cost of a full 4-year college education at a private elite college for each and every year my kid has been in college. That is, their gains have dwarfed anything the 529 plans ever did.

So my problem with 529 plan assets is that the value is low when one can use equities to perhaps goose their returns, but when the value is higher, one has to invest conservatively and the gains are inconsequential.

I'd like to read a success story about 529 plans that showed significant tax savings ... especially through the Great Recession.

Why get conservative in a situation like yours? It's not like you needed the 529 plans. Go for the gusto.

[jon-nyc]

I'm probably on one extreme here. I'll have 250k in my son's 529 by the time he turns 4 this year. That is approximately 4 years of a tier 1 private at today's cost, or more for a top-teir state school.

My thought is with that I can most likely consider his schooling fully funded at that point, using the (I believe, reasonable) assumption that the market will keep up with university inflation. If that assumption proves incorrect I will course correct.

I should add I have no problem accepting the risk of overfunding.

[Grt2bOutdoors]

I'm probably on one extreme here. I'll have 250k in my son's 529 by the time he turns 4 this year. That is approximately 4 years of a tier 1 private at today's cost, or more for a top-teir state school.

My thought is with that I can most likely consider his schooling fully funded at that point, using the (I believe, reasonable) assumption that the market will keep up with university inflation. If that assumption proves incorrect I will course correct.

I should add I have no problem accepting the risk of overfunding.

When did you start the 529 plan that you could accumulate so much? I thought 5 years advance funding per couple was $130K last year and $140K if you start this year? BTW, I thought I was extreme, but what you wrote above is way out there.

[jon-nyc]

I started it in 2009. Remember you could give up to 26k per couple within the gift tax exclusion. Also remember 1k put in equities in 2009 is ~2k today.

2013 will be the first (and only) year I 'borrow' from future years gifting capacity.

[jon-nyc]

I'll add I was in a hurry to get him an SSN after he was born, knowing it a great time to buy. In hind sight, I wish I had done the 5 year deposit then. (the reason I didn't was I had intended to use my ibonds for his education at the time, so I thought it was already fully funded except R&B. I changed my plan only later)

[reggiesimpson]

I went into max funding mode when the 529 plans first came out. My parents made contributions also. What i didnt expect was both my children getting scholarships. There is now $300,000 in their 529s and it will be transferred to their children in the future. As one cannot tell what will happen if you can afford to max the plans out then i suggest you should. The sooner the better. IMHO

[Bacchus01]

Even if you don't need the money, deferring taxes (if your state allows) is "almost" always a good thing.

[RenoJay]

I took the projected "worst-case" scenario for college and am aiming to cover 50% of it with 529's, and the rest is going into UTMA accounts for the kids which I will let them know is expected to go toward college costs. Anything left in the UTMA's at graduation is theirs to enjoy.

[PoeticalDeportment]

"Enough" is impossible to guess. We contribute the minimum amount required to get the full state tax credit. In my state that is currently $1840/year per beneficiary for a tax credit of $92. Married filing jointly = $184/year. This obviously won't leave these accounts with astronomical balances, but that isn't really the goal.

The previous comment about using UTMA's could adversely impact any financial aid for which your child may qualify (not to mention the depressing possibility that if junior turns out to be an irresponsible adult he could have a lot of your money to ruin his life with).

[letsgobobby]

Our kids are 3 and almost 6 and they have about $250k between them in 529s. Their XIRRs since 2009 and 2007 respectively are 11.x% and 9.x% so I think the tax savings have been worth the risks, etc. They are still 100% stocks in their traditional 529s, with another half in prepaid tuition plans whose gains have contributed mightily to their overall returns.

This year we will eschew essentially all taxable investing in favor of 529 contributions. That decision is a combination of higher tax rates on taxable investing and our desire to fully fund four years of college wherever they might go, plus the possibility that we will have enough to afford to leave any extra in the 529s for future grandkids. Actually this is more than an unintended outcome, we actually hope the 529s will start a multigenerational educational trust, albeit not a giant one.

Above a certain income limit you won't qualify for any educational tax credits or deductions and I bonds won't be tax free for education, either. All of these make the relative risks of 529s somewhat less compared to the alternatives, especially if you can load them up when the kids are young and have many years of hopefully solid equity based growth.

You would also want to max out all retirement accounts such as 401k, IRA, and HSA before overloading or even funding a 529, at least beyond any state tax benefit.

[livesoft]

^So with your 529 plans used as a pseudo-multi-generational education trust, there would be no need to have an asset allocation of less than 60% equities in it, right? That is, even when the offspring are in college.

[l2ridehd]

Just setting this up for our grandson. New born, 8 weeks old. Obviously we do not know which state they will be living in 18 years from now and if the child will even go to a state school. So I decided to go with the Vanguard 529 plan. I went and looked at 3 states to see what a pre paid tuition plan would cost. Example. They currently live in VA and the VA state university system will sell you a 4 year guaranteed tuition to any state university including UVA, VA tech, William and Mary and about 20 other 4 year colleges for $56,700 and this allows you to attend any of those (if accepted). They also allow you to buy by semester for $7325 for one today. 8 needed for 4 years. A couple other states were close to this. So I took that amount and did the math using a 6% average rate of return and came up with about $160,000 needed for 4 years of in state tuition in 18 years. Then I took a 529 plan from Vanguard and looked at the investment options and built a plan that starts with 100% equities and moves by 5% a year through the first 12 years to get to a 40/60 stock bond split. Doing this with historical (leap of faith) returns shows I need to add $4000 a year for 18 years to provide the $160,000 in 18 years. Lots of if's and assumptions in this planning but it is as close as I can get with today's information. I may need to adjust things as it moves along. My goal is to provide the required amount for any in state tuition. He will need to work for room, board, fun, books, etc. Each year if I check what a pre-paid will cost I should be able to adjust my plan to meet my final objective.

[sscritic]

When did you start the 529 plan that you could accumulate so much? I thought 5 years advance funding per couple was $130K last year and $140K if you start this year?

It is legal to give people gifts of more than $14k. You just have to file Form 709. If you give $140k under the five year plan, you still have to file Form 709. What's the difference?

Utah would accept $387,000 in 2011:

For 2011, UESP will accept contributions until all UESP account balances for the same beneficiary reach $387,000.

[Some of you may be using up all of your $10+ million in your lifetime, but I am not worried about it in my situation]

[letsgobobby]

And that increases every year, UESP accepts up to $397,000 in 2013.

[letsgobobby]

^So with your 529 plans used as a pseudo-multi-generational education trust, there would be no need to have an asset allocation of less than 60% equities in it, right? That is, even when the offspring are in college.

Never less than that, I suppose. As you know I'm converting from the viewpoint of seeing 529s as a separate pool with their own AA, to part of my total portfolio.

[Sammy_M]

Just setting this up for our grandson. New born, 8 weeks old. Obviously we do not know which state they will be living in 18 years from now and if the child will even go to a state school. So I decided to go with the Vanguard 529 plan. I went and looked at 3 states to see what a pre paid tuition plan would cost. Example. They currently live in VA and the VA state university system will sell you a 4 year guaranteed tuition to any state university including UVA, VA tech, William and Mary and about 20 other 4 year colleges for $56,700 and this allows you to attend any of those (if accepted). They also allow you to buy by semester for $7325 for one today. 8 needed for 4 years. A couple other states were close to this. So I took that amount and did the math using a 6% average rate of return and came up with about $160,000 needed for 4 years of in state tuition in 18 years. Then I took a 529 plan from Vanguard and looked at the investment options and built a plan that starts with 100% equities and moves by 5% a year through the first 12 years to get to a 40/60 stock bond split. Doing this with historical (leap of faith) returns shows I need to add $4000 a year for 18 years to provide the $160,000 in 18 years. Lots of if's and assumptions in this planning but it is as close as I can get with today's information. I may need to adjust things as it moves along. My goal is to provide the required amount for any in state tuition. He will need to work for room, board, fun, books, etc. Each year if I check what a pre-paid will cost I should be able to adjust my plan to meet my final objective.

I think this is a sound approach, but I believe the red portion above is your assumption for tuition inflation, which [I hope] is a high number. I take a similar, but more simplified approach. In-state public tuition is around $25K today for us, or $100K for 4 years in today's dollars. We invest this money conservatively, so my goal for our 529 investment returns is simply to keep pace with college tuition. I'll monitor the going rate for in-state tuition and adjust contributions accordingly.

[letsgobobby]

In state tuition has not averaged an inflation rate as low as 6% over any number of years for several decades, if I recall correctly.

[Rodc]

Our original plan was to aim for 50% of total cost at the state flagship U. We can, presuming we are still employed full time just cover the rest from cash flow. This would start 5 years from now. That way if they get scholarships we would not be over funded. Plan was we pay for undergrad, they pay for anything after that.

Turns out we are well ahead of schedule (right about 50% now if returns match collage cost inflation going forward) and I see no reason to stop here as the savings are not a burden. If costs spike, wife or I decide to retire early or reduce hours, they don't get scholarships, have a good case for out of state or private, we'll just be in that much better shape. Or if in the end we have extra maybe we'll relax the stance that we only pay undergrad, designate for grandkids, pay the penalty and go on a nice vacation.

Moving to increasing investments in a taxable account is another possibility which has its good points which we need to talk through before too long.

[irwinmfletcher]

Is at what point is spending money for college a waste. If my parents had $250,000 saved when I was 18 I would beg them to just let me invest it (and not touch it) and go be an entrepreneur.

Should be a millionaire by 38, at the latest, under that scenario. As opposed to spending $250,000, starting your work career at $0, and having to bust ass to be a millionaire by 40 or 45.

[reggiesimpson]

Is at what point is spending money for college a waste. If my parents had $250,000 saved when I was 18 I would beg them to just let me invest it (and not touch it) and go be an entrepreneur.

Should be a millionaire by 38, at the latest, under that scenario. As opposed to spending $250,000, starting your work career at $0, and having to bust ass to be a millionaire by 40 or 45.

Agreed and many an article has written on this wisdom. I seriously thought about this for my own children. BUT...... The problem is that if you dont end up a millionaire at 38 are you then going to go out and get the sheepskin?

[bdpb]

Is at what point is spending money for college a waste. If my parents had $250,000 saved when I was 18 I would beg them to just let me invest it (and not touch it) and go be an entrepreneur.

Should be a millionaire by 38, at the latest, under that scenario. As opposed to spending $250,000, starting your work career at $0, and having to bust ass to be a millionaire by 40 or 45.

You can't do both. You can't leave the money alone and be an entrepreneur. Where are you going to get the capital? Where are you going to get the money to live on?

Or, you could still have only 250k at 38 and a minimum wage job. Compare that to having 500k and a career earning 150k a year at 40.

A college education doesn't have to be a waste. It creates human capital.

[Rodc]

Is at what point is spending money for college a waste. If my parents had $250,000 saved when I was 18 I would beg them to just let me invest it (and not touch it) and go be an entrepreneur.

Should be a millionaire by 38, at the latest, under that scenario. As opposed to spending $250,000, starting your work career at $0, and having to bust ass to be a millionaire by 40 or 45.

Depending on the person it might make sense to fund an 18 year old in business. Probably makes more sense for them to get some experience in the real world for a while first. Maybe hold the money until they get a real clue about how to run a business (I suspect most 18 year olds are not in a position to be successful).

But many people of any age are not cut out for this path, so need to be careful.

Also have to factor in the fact that most new business fail. Probably more likely that this path leads to a failed business, child has no job and no degree, than to lead to being a millionaire.

This also misses the point that a collage education is not simply vocational training.

Of course there are middle paths as well. Spend $100k on an education, keep the remaining $150K to help the child later (grad school, business start up, a house, whatever).

[TNG]

Not sure this point has been made on this or the prior-referenced thread(s): if beneficiary gets a scholarship, the 529 owner is entitled to withdraw the amount of the scholarship award penalty free (but still subject to fed/state income tax on the gains). I think this is one fewer reason to worry about having too much saved in 529s. Pat yourself on the back for raising an exceptional scholar/athlete and consider starting a downpayment fund instead.

https://www.fidelity.com/529-plans/what-is-a-529-plan