How many families use 529 plans?

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The529guy
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How many families use 529 plans?

Post by The529guy »

15% this year.

According to this MarketWatch article ("Parents, you're paying for college wrong") with its SallieMae source, 15% of families are paying for college with the help of 529 plans. In contrast, 7% are withdrawing from retirement savings to help pay for college.

Full report here: How America Pays for College.
TheEternalVortex
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Re: How many families use 529 plans?

Post by TheEternalVortex »

I'm not using a 529 plan for my kids. I realize it's theoretically better, but to me the hassle of trying to guess the exact amount to save and managing a separate account isn't worth it. If my state allowed me to deduct state income tax it would obviously be a much better idea though.
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LowER
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Re: How many families use 529 plans?

Post by LowER »

I do. My state allows for deduction and the tax-free growth will be nice upon withdrawal. Also, my plan is administered through Vanguard and has quite low fees.
Leesbro63
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Re: How many families use 529 plans?

Post by Leesbro63 »

The Pennsylvania Guaranteed Savings Plan has been the best investment I've ever made, as it's grown with the cost of college while stocks and bonds have zigged and zagged and lagged at different times. That being said, oddly it's not at all guaranteed by the Commonweatlh of PA, and in 2009 there was some fear it could become less than solvent, and beneficiaries would only have gotten a pro-rata portion. But at least for the moment happy days are here again and the plan is solvent, paying my son's college costs (he's a sophomore and my daughter may start grad school in a year or two, all funded by their 529 accounts). The tax-free withdrawal for college is one of the few areas of the tax code like that not limited to lower or middle income taxpayers. For many of us Boglehead types, this is one rare free lunch not to be missed if applicable.
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camper
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Re: How many families use 529 plans?

Post by camper »

We have a 529 set up for our only child. We also have set one up for each of our 5 nieces and nephews.
We make sure retirement contributions are made prior to 529 contributions. I know college needs can be borrowed and retirement needs cannot.
OatmealAddict
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Re: How many families use 529 plans?

Post by OatmealAddict »

We invest in Georgia's Path to College 529 plan (we get a state tax deduction), but admittedly just started a few months ago when our son was born and only currently contribute $100/month. We hope to begin tripling that in a year or so when we're in slightly better financial shape (just paid off a big chunk of mom's school loans) and plan to direct all cash gifts to it as well. Ultimately, we're hoping to pay for about half of his college expenses, should he decide to attend.
sunnyday
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Re: How many families use 529 plans?

Post by sunnyday »

I don't invest in a 529 and neither does Jack Bogle. I think the article could mislead a lot of parents to invest in a 529 before fully funding retirement
Andyrunner
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Re: How many families use 529 plans?

Post by Andyrunner »

We do. When my daughter (1yr old) gets birthday money I put it straight to the 529. I cant justify putting her money into my bank account or retirement account. I also put in 300 a month.

My goal is to replace my mortgage payment with her tuition bill when the time comes. 529 will just be a supplement. I also plan on her paying half of her tuition.
flyingbison
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Re: How many families use 529 plans?

Post by flyingbison »

I don't have a 529 for my kid. IF I have enough retirement savings by the time she starts college, I can draw from that to help out. Or, I could work longer. Or (most likely option at this point), she can pay for college herself.
swaption
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Re: How many families use 529 plans?

Post by swaption »

sunnyday wrote:I don't invest in a 529 and neither does Jack Bogle. I think the article could mislead a lot of parents to invest in a 529 before fully funding retirement
I'm confused here, what is the relevance of the reference to Jack Bogle? Hear what you say about investing in a 529 before fully funding retirement, but I could think of a lot worse places that money generally ends up going in lieu of retirement accounts. Not sure what you find misleading in the article.
NoVa Lurker
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Re: How many families use 529 plans?

Post by NoVa Lurker »

We have 529s for each of our kids, but they are our lowest priority of funds.

Since (1) we get a state tax break, (2) the money deposited can earn tax-free returns as long as it's eventually used for education purposes, and (3) we do plan to pay for four years of college for each of our kids (whether through savings, out of pocket, or loans), the 529s are a useful part of our overall savings plan. But the benefits are not so huge that we would forego other things to fund the 529s.
OatmealAddict
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Re: How many families use 529 plans?

Post by OatmealAddict »

Just out of curiosity, when you all are speaking about "fully funding retirement", are you talking about maxing out all available tax-advantaged accounts or just contributing enough to put you in a likely position to retire within your goal time frame? I ask because there's a wide disparity between the two for us.
NoVa Lurker
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Re: How many families use 529 plans?

Post by NoVa Lurker »

jimday1982 wrote:Just out of curiosity, when you all are speaking about "fully funding retirement", are you talking about maxing out all available tax-advantaged accounts or just contributing enough to put you in a likely position to retire within your goal time frame? I ask because there's a wide disparity between the two for us.
Only speaking as to my own view, but there is obviously no need to max out all available tax-advantaged accounts in every situation.

E.g., plenty of public school teachers have a pension, plus the ability to use both 457 and 403(b) plans. Fully funding everything would leave them with almost nothing to spend today.
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Re: How many families use 529 plans?

Post by sunnyday »

jimday1982 wrote:We hope to begin tripling that in a year or so when we're in slightly better financial shape (just paid off a big chunk of mom's school loans) and plan to direct all cash gifts to it as well.
When I first read that, I thought wow, his mother must have taken out loans to go back to college and he is paying off her loans. What a noble thing to do! Then I realized I think he's referring to "mom" as his wife :)

swaption wrote:
sunnyday wrote:I don't invest in a 529 and neither does Jack Bogle. I think the article could mislead a lot of parents to invest in a 529 before fully funding retirement
I'm confused here, what is the relevance of the reference to Jack Bogle? Hear what you say about investing in a 529 before fully funding retirement, but I could think of a lot worse places that money generally ends up going in lieu of retirement accounts. Not sure what you find misleading in the article.
Jack Bogle isn't against 529's, he just doesn't like having his money tied up them. I feel the same way. There are a lot of factors to consider when deciding to invest in a 529:

Are you fully funding retirement?
Do you get a state tax credit?
Do you want to retire early?
How much will you save with a 529 vs getting a tuition tax credit?
Are you ok tying up a lot of money in a 529?
Will a 529 affect financial aid?

So I think a broad statement "parents, you're paying for college wrong" is misleading because it's a decision that should be looked at on an individual basis.
jimday1982 wrote: Just out of curiosity, when you all are speaking about "fully funding retirement", are you talking about maxing out all available tax-advantaged accounts or just contributing enough to put you in a likely position to retire within your goal time frame? I ask because there's a wide disparity between the two for us.
I think it fully funding tax-advantage accounts before 529 is a safer option and a lot of people will probably come out ahead doing that.

For me personally, fully funding retirement means not only maxing out my tax-advantage accounts but also investing in taxable and paying off all debt before investing in a 529. However, I want to be financially independent before my children go off to college and I do not get a 529 state tax break.
OatmealAddict
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Re: How many families use 529 plans?

Post by OatmealAddict »

NoVa Lurker wrote: Only speaking as to my own view, but there is obviously no need to max out all available tax-advantaged accounts in every situation.

E.g., plenty of public school teachers have a pension, plus the ability to use both 457 and 403(b) plans. Fully funding everything would leave them with almost nothing to spend today.
Thanks for that clarification.
flyingbison
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Re: How many families use 529 plans?

Post by flyingbison »

jimday1982 wrote:Just out of curiosity, when you all are speaking about "fully funding retirement", are you talking about maxing out all available tax-advantaged accounts or just contributing enough to put you in a likely position to retire within your goal time frame? I ask because there's a wide disparity between the two for us.
Maxing out isn't an option for me.
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Re: How many families use 529 plans?

Post by OatmealAddict »

flyingbison wrote:
jimday1982 wrote:Just out of curiosity, when you all are speaking about "fully funding retirement", are you talking about maxing out all available tax-advantaged accounts or just contributing enough to put you in a likely position to retire within your goal time frame? I ask because there's a wide disparity between the two for us.
Maxing out isn't an option for me.
I'm right there with you. We could, but would be living hand to mouth if we did and THAT really isn't an option for us...as long as I want to stay married anyway.
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greg24
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Re: How many families use 529 plans?

Post by greg24 »

We have a small one, basically to satisfy my wife. We receive a 529 deduction on state taxes only, while our other option is to avoid state and federal taxes by contributing more to a 401k. Its an easy choice for me.
letsgobobby
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Re: How many families use 529 plans?

Post by letsgobobby »

For most Americans, 529s are an iffy proposition. The primary gains are:

1. state tax credit;
2. forced or at least siloed savings.

The disadvantages are:
1. the average American doesn't go to college;
2. the average American could pay 0% tax in long term capital gains even without a 529;
3. the average American's chances for financial aid could be hurt by a 529.

However, for high-earners 529s are outstanding options:

1. Their taxable tax rate is very high so the tax-deferred compounding in a 529 is attractive.
2. Their income precludes the use of educational tax credits.
3. Their income precludes the use of I bonds or EE bonds tax-free for college.
4. They will not be eligible for financial aid so using a 529 does not hurt them.
5. They will save at high rates, for a long time, using a 529's tax-deferred compounding over several decades to their advantage.
6. They relish the opportunity to move assets out of their estate for estate taxation purposes, while still retaining control over the money (including the ability to take back the gift at any time).
7. They can afford to take risk in a 529, and benefit from the tax-deferred compounding of a high expected return asset class.
8. They will happily pay for their grandkids, nieces, and nephews to go to college, or their kids to go to graduate school, if their children do not consume the 529s for their own undergraduate expenses.
9. They already max out all other tax-advantaged opportunities available to them.
ERISA Stone
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Re: How many families use 529 plans?

Post by ERISA Stone »

I opened an account for my 2 year old this week in GA. I haven't decided how I'm going to fund it beyond the tax deduction amount yet. Still working on the details. My wife and I will both max out our 401(k) before any additional funds will go in. I'm not sure if it will still be around by the time my son graduates but luckily in GA, if you maintain a certain GPA at a public university, most of tuition and books are paid for by the state, assuming you met certain criteria in high school.
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Re: How many families use 529 plans?

Post by OatmealAddict »

greg24 wrote:We have a small one, basically to satisfy my wife. We receive a 529 deduction on state taxes only, while our other option is to avoid state and federal taxes by contributing more to a 401k. Its an easy choice for me.
Honest questions - are you planning to withdraw from the 401k to cover college expenses? Wouldn't you be responsible for taxes at that point?
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Re: How many families use 529 plans?

Post by flyingbison »

jimday1982 wrote:
flyingbison wrote:
jimday1982 wrote:Just out of curiosity, when you all are speaking about "fully funding retirement", are you talking about maxing out all available tax-advantaged accounts or just contributing enough to put you in a likely position to retire within your goal time frame? I ask because there's a wide disparity between the two for us.
Maxing out isn't an option for me.
I'm right there with you. We could, but would be living hand to mouth if we did and THAT really isn't an option for us...as long as I want to stay married anyway.
Same here. I live a pretty modest lifestyle but I'm not willing to live at poverty level so that I can save more for a future retirement that I might never live to see. You only get one life, and it's happening right now.
swaption
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Re: How many families use 529 plans?

Post by swaption »

sunnyday wrote:Jack Bogle isn't against 529's, he just doesn't like having his money tied up them. I feel the same way. There are a lot of factors to consider when deciding to invest in a 529:

Are you fully funding retirement?
Do you get a state tax credit?
Do you want to retire early?
How much will you save with a 529 vs getting a tuition tax credit?
Are you ok tying up a lot of money in a 529?
Will a 529 affect financial aid?

So I think a broad statement "parents, you're paying for college wrong" is misleading because it's a decision that should be looked at on an individual basis.
jimday1982 wrote: Just out of curiosity, when you all are speaking about "fully funding retirement", are you talking about maxing out all available tax-advantaged accounts or just contributing enough to put you in a likely position to retire within your goal time frame? I ask because there's a wide disparity between the two for us.
I think it fully funding tax-advantage accounts before 529 is a safer option and a lot of people will probably come out ahead doing that.
Don't necessarily agree with your last comment, or rather I see no evidence to support that most people would come out ahead. Putting aside any state tax decustions up-front, this investment grows fully tax free. While I see your questions above, not sure there is much substance in them. For example, a decision to retire early is irrelevant, that's more of a choice between your consumption/work vs paying for the child's education, not a question of how best to save. The financial aid stuff is somewhat of a tail wagging dog thing to save less so as to increase financial aid. Hardly a prudent approach.

There are a number of people who (apparently ignorantly) fund for their retriement and also put aside savings in a 529 account. You clearly have taken an alternative approach, which is fine. But I think you are vastly overstating the complexity of the thought process that us ignorant folks should undertake.
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greg24
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Re: How many families use 529 plans?

Post by greg24 »

jimday1982 wrote:Honest questions - are you planning to withdraw from the 401k to cover college expenses? Wouldn't you be responsible for taxes at that point?
Not planning on using the 401k funds. The mortgage will be paid off as the first one graduates high school, so hopefully we'll just pay out of pocket. If that doesn't work out, we'll figure out Plan B.
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Re: How many families use 529 plans?

Post by Jack FFR1846 »

For many who do not first max retirement space, please understand a few things

You may be disqualifying yourself for any financial aid.

There are no retirement loans on the market but there are student loans

Even grandparent 529 plans can cause problems. When the student takes the 529 money to pay for school, that becomes the student's income on next year's fafsa (the absolute worst place for it to appear)

I will be starting a roth for my son who starts college in the fall up to the full amount he earn, on top of my 401k to the limit, my roth to the limit and my wife's ira to the limit (she isnt working). "Hiding" money from fafsa is not easy. A 529 can be a bad place for it to be.
Bogle: Smart Beta is stupid
sunnyday
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Re: How many families use 529 plans?

Post by sunnyday »

swaption wrote:
sunnyday wrote: I think it fully funding tax-advantage accounts before 529 is a safer option and a lot of people will probably come out ahead doing that.
Don't necessarily agree with your last comment, or rather I see no evidence to support that most people would come out ahead. Putting aside any state tax decustions up-front, this investment grows fully tax free.
I said "a lot of people" not "most people". It depends on a case by case basis. Take this for example:

If a person doesn't get a state tax deduction and is trying to decide whether to put $5k in a roth ira or 529 what do you think would be the better option?

Consider this: the roth will grow tax-free too . The roth is also safer because the contribution amount can be withdrawn tax free. Also, the Roth won't be penalized if one's child does not attend college. The roth will have lower expenses. The roth may save on the person on taxes (tuition tax credits). The roth may lower one's expected family contribution.

swaption wrote: While I see your questions above, not sure there is much substance in them. For example, a decision to retire early is irrelevant, that's more of a choice between your consumption/work vs paying for the child's education, not a question of how best to save.
Say my target retirement number is $1M. If I have $200k in a 529 and $800k in my portfolio, I will need to save an additional $200k to retire. Therefor I won't be able to retire as early.
swaption wrote:
The financial aid stuff is somewhat of a tail wagging dog thing to save less so as to increase financial aid. Hardly a prudent approach.

There are a number of people who (apparently ignorantly) fund for their retriement and also put aside savings in a 529 account. You clearly have taken an alternative approach, which is fine. But I think you are vastly overstating the complexity of the thought process that us ignorant folks should undertake.
I think you misinterpreted most of what I said. I'm not saying "save less" to increase financial aid. Saving differently may increase financial aid and have some other financial benefits. On a case by case basis, all the pros and cons should be considered and some numbers should be crunched to determine which comes out ahead.
Jozxyqk
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Re: How many families use 529 plans?

Post by Jozxyqk »

Several posters have argued that contributing to a 529 plan is a bad idea because it may hurt your child's chances for financial aid.

I assume that saving in a 529 plan has no worse impact on financial aid than saving in a taxable account (correct me if I'm wrong).

Is the suggestion then that parents should not save anything for college at all in the hope that their children get more financial aid?
letsgobobby
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Re: How many families use 529 plans?

Post by letsgobobby »

No, the point is that saving in a retirement plan does NOT hurt your child's chances for financial aid on the FAFSA.

529s and taxable accounts are viewed the same on a FAFSA.

Child-held accounts have their own rules have a 20% annual contribution expectation.
swaption wrote:Don't necessarily agree with your last comment, or rather I see no evidence to support that most people would come out ahead. Putting aside any state tax decustions up-front, this investment grows fully tax free. While I see your questions above, not sure there is much substance in them. For example, a decision to retire early is irrelevant, that's more of a choice between your consumption/work vs paying for the child's education, not a question of how best to save. The financial aid stuff is somewhat of a tail wagging dog thing to save less so as to increase financial aid. Hardly a prudent approach.

There are a number of people who (apparently ignorantly) fund for their retriement and also put aside savings in a 529 account. You clearly have taken an alternative approach, which is fine. But I think you are vastly overstating the complexity of the thought process that us ignorant folks should undertake.
The 529 investment only grows tax-free if used for QHEEs. Recall a majority of Americans do not go to college, so no QHEEs. Then 529 withdrawals are fully taxable at marginal rates, whereas a taxable investment would have LTCG taxation of 0% or 15% in the vast majority of cases.

regarding financial aid, no one is arguing "save less to qualify for financial aid." The argument is, "saving in a retirement account doesn't hurt financial aid prospects whereas saving in a 529 does." For parents on the cusp, why take the chance?

In particular one should nearly always fund a Roth IRA ahead of a 529, since contributions to the former can be withdrawn tax free any time, for any reason. The exception is a fulsome state tax benefit which makes the calculus more interesting, witness Indiana's 20% tax *credit* on 529 contributions.
bloom2708
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Re: How many families use 529 plans?

Post by bloom2708 »

If not having a 529 or taxable investments means more financial aid, does that simply mean "more student loans"? Or does the whole financial aid package include merit based/academic scholarships and grants?

I think it is getting less clear cut that a 4 year college education is necessary. That being said, I hope our 3 girls attend a reasonable state school. That may change over the next years.

We have a 529 for each kid. My goal is to have 2 years in a 529 for each. I also have a Vanguard taxable account for each. Conservatively invested. I hope to have another 2+ years here. Kind of a hedge against "what if a kid doesn't go to college for 4 years". Or what if one attends a 2 year school. Or no school?

Trying to find a middle ground. I don't want my kids coming out with $50k+ in student loan debt. It is hard enough without starting out with a pile of debt.
ERISA Stone
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Re: How many families use 529 plans?

Post by ERISA Stone »

letsgobobby wrote:No, the point is that saving in a retirement plan does NOT hurt your child's chances for financial aid on the FAFSA.

529s and taxable accounts are viewed the same on a FAFSA.

Child-held accounts have their own rules have a 20% annual contribution expectation.
swaption wrote:Don't necessarily agree with your last comment, or rather I see no evidence to support that most people would come out ahead. Putting aside any state tax decustions up-front, this investment grows fully tax free. While I see your questions above, not sure there is much substance in them. For example, a decision to retire early is irrelevant, that's more of a choice between your consumption/work vs paying for the child's education, not a question of how best to save. The financial aid stuff is somewhat of a tail wagging dog thing to save less so as to increase financial aid. Hardly a prudent approach.

There are a number of people who (apparently ignorantly) fund for their retriement and also put aside savings in a 529 account. You clearly have taken an alternative approach, which is fine. But I think you are vastly overstating the complexity of the thought process that us ignorant folks should undertake.
The 529 investment only grows tax-free if used for QHEEs. Recall a majority of Americans do not go to college, so no QHEEs. Then 529 withdrawals are fully taxable at marginal rates, whereas a taxable investment would have LTCG taxation of 0% or 15% in the vast majority of cases.

regarding financial aid, no one is arguing "save less to qualify for financial aid." The argument is, "saving in a retirement account doesn't hurt financial aid prospects whereas saving in a 529 does." For parents on the cusp, why take the chance?

In particular one should nearly always fund a Roth IRA ahead of a 529, since contributions to the former can be withdrawn tax free any time, for any reason. The exception is a fulsome state tax benefit which makes the calculus more interesting, witness Indiana's 20% tax *credit* on 529 contributions.
I'm not disagreeing with the statement "majority of Americans do not go to college" but that feels like a blanket statement without digging into details. Does the study that provides this outcome have any sort of break down of % that go vs. family income? I feel that a majority of people who have the $$ to fund a 529 plan probably have strong intentions of sending their children to school. However, for example, maybe a lot of families in rural areas do not send their children to school but they probably don't have the ability to stash $2k every year in hopes that they're children will go in the first place.
kaudrey
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Re: How many families use 529 plans?

Post by kaudrey »

I don't have kids, but my sister set them up for her kids...
flyingbison
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Re: How many families use 529 plans?

Post by flyingbison »

letsgobobby wrote: The 529 investment only grows tax-free if used for QHEEs. Recall a majority of Americans do not go to college, so no QHEEs.
I don't think that is correct.

"In October 2011, 68.3 percent of 2011 high school graduates were enrolled in colleges or universities, the U.S. Bureau of Labor Statistics reported ..."

http://www.bls.gov/news.release/archive ... 192012.htm
mayday23
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Re: How many families use 529 plans?

Post by mayday23 »

I think the “vast majority of Americans don’t go to college” needs to be taken into context. I would guess that 75% of the kids whose parents read the boglehead forum will probably go to school or some trade school that would have QEs

Like the people who love to quote “half of all marriages fail.” Once you take into age, education, financial status, etc that number gets pretty high for a lot of people.
PatrickA5
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Re: How many families use 529 plans?

Post by PatrickA5 »

Just a note: if your kids are close to going to college and you have a 529 plan, you might want to consider paying the first $4,000 outside the 529 plan in order to qualify for the American Opportunity Credit (if you qualify). If your kids are young, then don't worry about this as I am sure there is going to be a major tax simplification concerning education credits/deductions at some point in the future.

I've used 529's for two kids (that are done with college) and have one left to go. It's a pretty easy process. I will say that I agree that funding a Roth first is probably the best first step - and then fund the 529. My state allows a tax deduction up to $20,000 per year, so I'm saving about $1,000/yr in state taxes. Of course, if my last kid doesn't go to college, I'll have to give this credit back to the state as well as pay a 10% federal penalty on any earnings.

We have too many assets/earnings to get any kind of FAFSA aid, so that part doesn't come into the picture for us.
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dbCooperAir
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Re: How many families use 529 plans?

Post by dbCooperAir »

Jozxyqk wrote:Several posters have argued that contributing to a 529 plan is a bad idea because it may hurt your child's chances for financial aid.

I assume that saving in a 529 plan has no worse impact on financial aid than saving in a taxable account (correct me if I'm wrong).

Is the suggestion then that parents should not save anything for college at all in the hope that their children get more financial aid?
I would say the idea is to fill up all retirement accounts rather if using for retirement and or college (thinking of a Roth) before setting up a 529 with the hope you stand a better chance for FA, scholarships, etc.

I know this is where we fall, with having (2)IRA's, 401k, 403b and a 457 and no way to really fill them we have no worries about using a 529. Not to mention the dollars that we send to a state pension + Ibonds if we like.

We make a decent middle class living, paid for home a few kids in high school and live well below our means, I can say their is about a zero percent chance to fill out the retirement accounts! Welcome to the middle class, I'm happy as can be and feel very fortunate and am doing very well when I compare myself to many, just not as good as many here but I still can afford good beer :sharebeer
Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him. | -Dwight D. Eisenhower-
Leesbro63
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Re: How many families use 529 plans?

Post by Leesbro63 »

PatrickA5 wrote:Just a note: if your kids are close to going to college and you have a 529 plan, you might want to consider paying the first $4,000 outside the 529 plan in order to qualify for the American Opportunity Credit (if you qualify). If your kids are young, then don't worry about this as I am sure there is going to be a major tax simplification concerning education credits/deductions at some point in the future.

I've used 529's for two kids (that are done with college) and have one left to go. It's a pretty easy process. I will say that I agree that funding a Roth first is probably the best first step - and then fund the 529. My state allows a tax deduction up to $20,000 per year, so I'm saving about $1,000/yr in state taxes. Of course, if my last kid doesn't go to college, I'll have to give this credit back to the state as well as pay a 10% federal penalty on any earnings.

We have too many assets/earnings to get any kind of FAFSA aid, so that part doesn't come into the picture for us.
The AOC phases out at upper middle class income levels.
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Re: How many families use 529 plans?

Post by PatrickA5 »

Leesbro63 wrote:
PatrickA5 wrote:Just a note: if your kids are close to going to college and you have a 529 plan, you might want to consider paying the first $4,000 outside the 529 plan in order to qualify for the American Opportunity Credit (if you qualify). If your kids are young, then don't worry about this as I am sure there is going to be a major tax simplification concerning education credits/deductions at some point in the future.

I've used 529's for two kids (that are done with college) and have one left to go. It's a pretty easy process. I will say that I agree that funding a Roth first is probably the best first step - and then fund the 529. My state allows a tax deduction up to $20,000 per year, so I'm saving about $1,000/yr in state taxes. Of course, if my last kid doesn't go to college, I'll have to give this credit back to the state as well as pay a 10% federal penalty on any earnings.

We have too many assets/earnings to get any kind of FAFSA aid, so that part doesn't come into the picture for us.
The AOC phases out at upper middle class income levels.
Right. I wasn't able to use the AOC with my first two kids for that reason. Now, that I'm semi-retired, I'll be able to take advantage with my last kid. I figure 4yrs of the AOC will knock $10K off my outgo. Assuming of course, the AOP isn't done away with before that time. Right now, I think it goes through 2017.
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Re: How many families use 529 plans?

Post by letsgobobby »

PatrickA5 wrote:Just a note: if your kids are close to going to college and you have a 529 plan, you might want to consider paying the first $4,000 outside the 529 plan in order to qualify for the American Opportunity Credit (if you qualify).
Another reasons 529s are oversold for those without high incomes. If your child spends a few thousand a year at a local community college, you can get a tax break per above, plus a tax break by funding a Roth IRA, without ever touching a 529.

If you save $1000 per year in a 529 that (due to glide pathing asset allocation) earns 10% per year for 6 years, then 7% per year for 6 years, then 3% per year for 6 years, you have a total account of $28,834 on contributions of $18,000. That is a $10,000 gain. The taxes on that for a family in the 15% tax bracket is $0, so tax savings are $0. The taxes on that for higher income families is 15% or $1500. A total tax benefit of $1500. On the other hand let's say you put $1000 per year into a Roth IRA earning the same percentages, then in year 19 took out $4000 per year to pay for college and earned the above tax credit. A qualified taxpayer receives up to a $2500 credit on the first $4000 of tuition in the first year alone, which is a greater savings than 18 years worth of tax-deferred growth and ultimately tax-free withdrawals from a 529 combined.

The math just isn't there for middle income Americans to contribute to 529s in lieu of the combined advantages of retirement accounts and educational credits.*

On the other hand, if you can plop down $100k in a 529 at birth and leave it there for 18 years without any need to make more conservative investments as your child ages because you're rich and you've got money in all kinds of accounts... well all of a sudden you end up with $556,000 tax-free, which is a gain of $456,000 and tax savings (in the 25% investment tax bracket) of over $100,000.

So we have to be honest here. 529s largely benefit the very well off. Many Bogleheads fall into this category. The average American does not.

*state tax benefits complicate the math, but only a little.
Last edited by letsgobobby on Thu Jul 31, 2014 7:35 pm, edited 2 times in total.
PatrickA5
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Re: How many families use 529 plans?

Post by PatrickA5 »

letsgobobby wrote:
PatrickA5 wrote:Just a note: if your kids are close to going to college and you have a 529 plan, you might want to consider paying the first $4,000 outside the 529 plan in order to qualify for the American Opportunity Credit (if you qualify).
On the other hand let's say you put $1000 per year into a Roth IRA earning the same percentages, then in year 19 took out $4000 per year to pay for college and earned the above tax credit. For a taxpayer in the 25% bracket, they save 25% of the first $2000 or $500; and 25% of 25% of the next $2000 or $125; for a total of $625 tax savings on the first $4000 of tuition in the first year alone. It only takes three years of the AOC to save more in taxes than 18 years worth of tax-deferred growth and ultimately tax-free withdrawals from a 529.
The AOP is a credit (not a deduction), so the tax bracket doesn't matter (again if you qualify). The credit is 100% of the first 2,000 and 25% of the next $2,000. So, if you have $4,000 of qualifying expenses, in most cases, you'll get a credit of $2,500 (not $625). Up to $1000 is a refundable credit, so even if your tax liability ends up being zero, you "may" qualify for a refund of up to $1,000.
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pennstater2005
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Re: How many families use 529 plans?

Post by pennstater2005 »

I started 529's for the kids in PA with the guaranteed savings plan. A poster above mentioned some of the solvency issues awhile back. That gave me some pause as well. I don't fund the 529s anymore only because we are not maxing tax advantaged space yet, and with our incomes we may never.

My wife and I combined currently make $60k (wife works PT) and I'm not sure where that will put us in regard to qualifying for some form of financial aid. Both our incomes will rise in the future so I'm unsure as to what point we may begin funding the 529s again.
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Re: How many families use 529 plans?

Post by Rodc »

TheEternalVortex wrote:I'm not using a 529 plan for my kids. I realize it's theoretically better, but to me the hassle of trying to guess the exact amount to save and managing a separate account isn't worth it. If my state allowed me to deduct state income tax it would obviously be a much better idea though.
Took me several minutes to set up a 529 and set automatic deposits and then it just runs. I have on a few occasions decided to up the amount of the regular deposits, that took another 2 minutes each time. I might be up to 15 minutes now. Well, I might have taken up to an hour to pick the plan. But really, this is not hard or time consuming.

As to amount I just estimated based on current costs and somewhat higher than CPI inflation the total cost. Aimed for about 50% in case I did not really need to fully fund due to scholarships or whatever. I have other funds to tap, plus income stream (and freed up income stream due to no longer putting money into 529 when they get to college) for the remainder. Now up a bit above 50% funded, but I'll just continue for the few years until college.

I might rather use a ROTH but family income is too high. Also you'd have to consider it you wanted to lose the tax advantaged space.
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Re: How many families use 529 plans?

Post by Grt2bOutdoors »

sunnyday wrote:I don't invest in a 529 and neither does Jack Bogle. I think the article could mislead a lot of parents to invest in a 529 before fully funding retirement

What is the relevance of Jack Bogle to the utilization of a tax-deferred and tax-free investment vehicle called a 529 plan?
So you don't use one, I do - not at the expense of retirement savings plans though. Everyone's choices should be made based on factors that are independent of your own, Jacks or mine.
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Re: How many families use 529 plans?

Post by BillyG »

I started 529s for my two children as soon as they were born. The power of automatic deposits and compounding is amazing... and I get MD state tax breaks. I also periodically increase my automatic contributions as my income has increased. It started at $200/month (or was is $100/month??) and it is now at $500/month each and I occasionally kick in bonus money.

Not to worry, I fully fund my 401(k)s and IRAs.

The 16YO is at $140K and the 14YO is at $133K. I have no idea if this will be too much or not enough by the time they go to college... probably not enough but it will be a huge help. The money can be transferred for use by either child. If they go to grad school and there's no 529 money left they are on their own; they are probably on their own for any required college expenses above the amounts available in their 529s.

The funds adjust their asset allocations similar to target date funds, with the first year of college being the target date. If I'm comfortable with more risk I select a fund with a target date later than the anticipated first year of college.

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The529guy
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Re: How many families use 529 plans?

Post by The529guy »

I never imagined this thread would attract so many great replies. I'm getting closer to 1,000,000 points!
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Re: How many families use 529 plans?

Post by Grt2bOutdoors »

The529guy wrote:I never imagined this thread would attract so many great replies. I'm getting closer to 1,000,000 points!
Enlighten us please. What is this talk about a million points all about?
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Re: How many families use 529 plans?

Post by TomatoTomahto »

Andyrunner wrote:We do. When my daughter (1yr old) gets birthday money I put it straight to the 529. I cant justify putting her money into my bank account or retirement account. I also put in 300 a month.

My goal is to replace my mortgage payment with her tuition bill when the time comes. 529 will just be a supplement. I also plan on her paying half of her tuition.
Is the 529 her account? Usually they are accounts owned by one of the parents with the child as a (changeable at will) beneficiary. It is good that you can't justify putting "her money" into your bank account or towards retirement; it would be stealing to put her money in your account. If the parent is the owner of the 529, it is the same as putting her birthday money in your retirement account.

As a practical matter, I'm sure that you spend more on her than she receives in birthday money, but from a legal perspective, it's not your money .

Re 529s in general, I put around $50k in them at one point but decided that, in NJ, it wasn't worth it, and reverted to putting money in UTMAs and in our own taxable. We did not have a chance at getting any need-based aid in any case.
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Re: How many families use 529 plans?

Post by The529guy »

Grt2bOutdoors wrote:
The529guy wrote:I never imagined this thread would attract so many great replies. I'm getting closer to 1,000,000 points!
Enlighten us please. What is this talk about a million points all about?
Just trying to legitimize my 30 Rock avatar :happy -->
LongerPrimer
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Re: How many families use 529 plans?

Post by LongerPrimer »

We are done. We put more emphasis on college funding than retirement funds. We were very aggressive in our approach to both funds. The question is whether your funding, the funding mechanism, and the historic-expected future returns get you to where you want to be?
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Steelersfan
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Re: How many families use 529 plans?

Post by Steelersfan »

Two children who have children of their own.

Both of them have 529 plans.

Grandparents help fund the 529 plans.
Eric in DC
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Re: How many families use 529 plans?

Post by Eric in DC »

On a side note, does anyone have any specfic thoughts on the best actual 529 plans to use? I'm in DC FYI.
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