assuming no financial aid; how much per child in 529?

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bellemastiff
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assuming no financial aid; how much per child in 529?

Post by bellemastiff »

Curious as to Bogleheads thoughts on what's "enough" to save in a 529 for each child.

ASSUMPTIONS:
1. self & wife's retirements are fully funded; tax-deferred retirement vehicles (non-deductible IRAs & 403b) are maxed out yearly.
2. our income & assets will, with 100.0% certainty, preclude our children from getting any financial aid.
3. 529 will be funded in the year of the birth of any child (giving it more time to grow), with the VG moderate age based option

We only have 1 child (9 mo's old) and we funded his 529 with 60k. I have seen other threads, with posters who won't qualify for FA at college, and the consensus seems to be even 100k isn't 'enough' (since the child might go to an Ivy League school or something).

I'm sort of torn -- I partly wonder if I should fund more per child. However if we have 3 kids, what if two go to state school and one goes to an expensive private school? Seems 100K+ -- per child -- and funded with 18 years to compound -- might be excessive in that case?

Another point. I'm assuming the cost of education will NOT grow by 7% a year or so for the next 18 years. If it does, then I guess I should sort of view the cash we fund today as having no future real return (merely staying even with inflation). It's just unsustainable for Un. of Notre Dame to cost $120,000 in 18 years or whatever (even if that's only 70,000 in today's dollars)....
letsgobobby
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Re: assuming no financial aid; how much

Post by letsgobobby »

Let's assume tuition and costs grow at exactly the inflation rate. This has never happened in the last fifty years, but let's pretend.

Then you know what college will cost in 18 years: exactly the same as today in real dollars. In my state, a flagship public school is about $100,000 for four years, including living expenses. A private university costs $250,000 for four years.

However I'd suggest a more realistic expectation of tuition inflation. Even if tuition doesn't continue to grow at 7% per year (even though it has for decades and decades and decades), maybe it grows at 5% per year? If inflation is 2% then that is 3% real each and every year. If 3% per year then that is 1% real each and every year. (Don't forget that if your initial assumption is correct about *definitely* not getting any FA then you are the sucker and your price will go up as fast as the sticker price, even if no one else is expected to pay it. In other words, your price can go up faster than actual costs in order to subsidize the financial aid for others.)

Now ask what rate of return you will get on your investments... guess. It's a pretty conservative track you've picked... I'll guess 5% real, 3% real, 1% real, 0% real in the five year segments Vanguard has established (100/0, 75/25, 50/50, 25/75, 0% stocks after age 15).

Bottom line, since you asked for opinions: If your investments get 3% per year real, you'll more or less keep up with the costs of college but no more. Since that is my wild guesstimate for the age-based option you've picked, I'd argue you should plan to fund, at birth, the cost of the school you wish your children to attend. If you want them to go to public school, plop in $100k. If you want them to go to an Ivy league, plop in a quarter million. If you want to fund less, pick a more aggressive allocation and hope for the best.
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Re: assuming no financial aid; how much per child in 529?

Post by TomatoTomahto »

We came late to 529s, and mostly have money in UTMA accounts for our two children (one a HS senior, the other a HS sophomore).

We have roughly $200k for each child in their accounts. The older child (son) is likely to go to Ivy or equivalent (fingers crossed); the younger one (daughter) will remain a mystery for another year or so. We are also not going to get any need-based aid; son would probably get a lot of merit-based aid at a number of schools, but it's not available at the schools he is hoping for.

We know that for our son, we don't have enough in savings for an Ivy, but we have enough current income to easily fund the difference.

My view is that, after sufficiently funding retirement, putting a good amount in a UTMA is a wonderful thing to give your children, whether it's used for education, a down payment on a home, etc. Others don't necessarily agree... that's what makes horse races.
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bellemastiff
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Re: assuming no financial aid; how much per child in 529?

Post by bellemastiff »

Thanks for the replies so far. I need more time to decide but at least am sure I want to fund another 10k to hit the 70k max for one year.

If I am married, is that max. actually 140k in one year? (I understand I'd then not contribute in the next four years...)
sscritic
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Re: assuming no financial aid; how much per child in 529?

Post by sscritic »

Yes and no. The annual gift tax exclusion in 2013 and 2014 is $14,000 per person per recipient. For a 529, you can give 5 years worth at one time or $140,000 for the two of you. On January 1, you can give another $28,000, since you will have a new 5 year period, and you will have given only $112,000 already for the years 2014, 2015, 2016, and 2017 (the first $28,000 being in 2013 for 2013).
This is wrong, which I realized once I had gone 1/2 mile on my way to my youngest granddaughter's first birthday party. However, it contains a germ of a correct idea. See the follow up post below.
Last edited by sscritic on Sat Nov 02, 2013 5:05 pm, edited 1 time in total.
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TomatoTomahto
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Re: assuming no financial aid; how much per child in 529?

Post by TomatoTomahto »

Additionally, and please correct me if I'm wrong, going beyond the exclusion does not mean that you owe tax, only that you need to track that amount for the lifetime exclusion limit ($5M or something similar).
I get the FI part but not the RE part of FIRE.
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Re: assuming no financial aid; how much per child in 529?

Post by jon-nyc »

We've had lots of threads on this. I'm on the far end of the spectrum, having funded my 4 year old's 529 to about 250k, which today would pay for 4 years of tier 1 private school. Thus I'm banking on the market (at my AA, anyway) outpacing college cost inflation if we need to fund 4+ years of private school. I think its a pretty reasonable bet.

Of course I stand prepared to make mid course corrections if necessary, as I see over time how the market is doing, how college costs are inflating, and how my son is tracking in his educational aspirations. I should add I'm not remotely concerned about overfunding risk.
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bellemastiff
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Re: assuming no financial aid; how much per child in 529?

Post by bellemastiff »

My wife and I googled the cost of some nearby state universities as well as some private schools we are familiar with (e.g. Notre Dame, Georgetown)

Keep in mind I went to a very expensive 4 year private school (graduated 8 years ago) which was over 30k a year all-in when I went (I had to pay off some significant college loans)... so I was 'generally' aware how expensive school is (or, so I thought)...

:oops:

My jaw is still on the ground and my mouth is wide open. Holy cr&p!!

We are going to go ahead and fund the 529 for each kid to 140k, for the time being. This sort of splits the difference btwn the low end (less expensive in state) 100k suggestion and the high end (4 year private prestigious school) 250k suggestion. If we want to add more later, thats always a possibility.

Question, to max out the gift tax exclusion for a married couple (140k total) for our nine month old -- can I make the whole 140k contributions myself? Or does 70k have to physically 'come' from my wife's checking account? Sorry for the dumb question... based on other (good) advice from Bogleheads, I let go my financial advisor earlier this year, so I now have to figure out these nitty gritty details for myself :-)
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Re: assuming no financial aid; how much per child in 529?

Post by letsgobobby »

If you're married I think you're good, but that's not legal or tax advice.

We live in a community property state, and funded our 529s with a joint checking account, so in that case I felt we were *definitely* in the clear.
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Re: assuming no financial aid; how much per child in 529?

Post by goodenyou »

It's just unsustainable for Un. of Notre Dame to cost $120,000 in 18 years or whatever (even if that's only 70,000 in today's dollars)....
One would hope that someone would come to their senses before paying $480,000 on a undergraduate college degree no matter when, where it was from or what you studied. Even $250,000 today is over-the-top. If it costs over $1,000,000 for an undergraduate and graduate degree combined (you will need a graduate degree since most undergraduate degrees are worthless), we are in BIG trouble. One could argue we are in big trouble already.
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Re: assuming no financial aid; how much per child in 529?

Post by sscritic »

Given that $70,000 has been given in 2013. Here are some things you can do.

1) give another $70,000 before 12/31. File two gift tax returns for 2013, one for each of you giving $70,000 and choosing the five year option. Total $140,000

2) wife gives $14,000 before 12/31 and another $70,000 in January. File one gift tax return for husband for 2013 and another for wife in 2014 to choose five year option. Total $154,000.

3) Both file gift tax returns for 2013, assuming husband gave $50,000 and wife gave $20,000, choosing five year option on both. The husband has now give $10,000 in each of the years 2013, 14, 15, 16, and 17. In January, he gives another $20,000, $4,000 for each of the years 2014, 15, 16, 17, and 18. Note that the husband's totals for the years from 2013 through 18 are now 10k, 14k, 14k, 14k, 14k, and 4k, under the current annual exclusion amount. Similarly, the wife has given $4,000 for each of the years 2013 through 17. In January, she gives another $50k, $10k a year for the years 2014 through 18. Her totals are 4k, 14k, 14k, 14k, 14k, and 10k for 2013 through 18, all below the current annual exclusion. If the annual exclusion should ever increase, you can give a new gift to fill up the gap, either in a one year gift or a five year gift for five times the difference. Total $140,000, and requires four gift tax returns.

It's too late now, but the maximum could have been given if $28k in December were the first gift of the year and another $140,000 were given in January. Note that all three strategies allow for additional gifts in 2018.
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Re: assuming no financial aid; how much per child in 529?

Post by bellemastiff »

I think we're going to stick with just the 140k for now. It's only ~60% of the cost of a current four year degree from a prestigious private university so you could argue underfunded. But hopefully it will grow at a faster rate than edu inflation. Even if it doesn't, at least it will mildly incentivize kids to look for "value" when they pick a college (if, for instance, a mildly prestigious state school degree would be 100% paid for by the 529, but a nominally more prestigious private school would only be 60% paid for by the 529, and the kid knows he is borrowing the difference, he'd likely make the "smart choice" :-)
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Re: assuming no financial aid; how much per child in 529?

Post by LH »

i plan to fund the cost of a local private college miami of ohio for each of my two kids.

currently total cost is 160K to go there 4 years, so that is what I am aiming for, two years ago, it was 150k.

I plan to fund each kid equally, and if they get scholarships, to hold the money for the grandkids. If one goes public, she would get that money for her kids fund. If one gets scholarship, ditto.

I may not fully fund it, dunno, depends if market tanks etc. My retirement comes first.

also, I toy around with idea of making them take a loan for the first year, because I had a classmate, went and partied first year, and didnt go to class, expensive party lol.

How much is basically how much you want to pay for your target instituion. I figured by 7-10 years out, to have about 1/2 funded, and then maybe the market will double to the full amount, as I cannot believe school inflation can persist at 6 percent forever, but maybe it can during my timespan.

By time of college, I think I want 3/4 funded. That gives three years to get the other funds for the fourth year.

my rough approach.
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Re: assuming no financial aid; how much per child in 529?

Post by momar »

If something can't continue forever, it won't.
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Re: assuming no financial aid; how much per child in 529?

Post by Grt2bOutdoors »

Take away the credit punchbowl and this bubble will deflate faster than you can say "this cannot continue". We as a country have not learned our lesson with Fannie and Freddie, we now have to sink the young generation. When you have Ivy League grads working as baristas in your local coffee house you know there is a severe disconnect between price and value.
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Re: assuming no financial aid; how much per child in 529?

Post by HopeToGolf »

Grt2bOutdoors wrote:Take away the credit punchbowl and this bubble will deflate faster than you can say "this cannot continue". We as a country have not learned our lesson with Fannie and Freddie, we now have to sink the young generation. When you have Ivy League grads working as baristas in your local coffee house you know there is a severe disconnect between price and value.
Unfortunately, things are going the other way...there are more loan forgiveness programs now so the profs/admin continue to get paid, the banks get paid, and certain taxpayers do the paying. The public service forgiveness I sort of get but the forgiveness because you paid a certain amount based on your income for a number of years and the govt decides that's enough...c'mon really?

....now to tie it back to OP, if you plan to pay 100%, you are on the right track and the good news is if your child does get a scholarship and you decide not to provide the 529 for grad school or grandchildren, you can take out the equivalent of the scholarship without penalty. Based on the current situation it appears loose education credit and govt programs will almost certainly keep tuition rate growing so you will probably not be overfunded.
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Re: assuming no financial aid; how much per child in 529?

Post by FFFollower »

I am surprised that no one mentioned iBonds here. They can be withdrawn tax free for a qualifies education expense. My plan as it am about to start a family:

- fund $150k-$200k in 529
- any shortfall to be covered by iBonds
- if I end with more then is needed, then grad school or grand kids - it would be great to pass down a perpetual ability to find higher education

I also am toying with the idea of putting the kids on a performance system. Something like:

4.0gpa dad pays 100%, and an allowance
3.5gpa dad pays 90%, no allowance
3.0gpa dad pays 80%

And so on. Thoughts?
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Re: assuming no financial aid; how much per child in 529?

Post by TomatoTomahto »

FFFollower wrote:I am surprised that no one mentioned iBonds here. They can be withdrawn tax free for a qualifies education expense. My plan as it am about to start a family:

- fund $150k-$200k in 529
- any shortfall to be covered by iBonds
- if I end with more then is needed, then grad school or grand kids - it would be great to pass down a perpetual ability to find higher education

I also am toying with the idea of putting the kids on a performance system. Something like:

4.0gpa dad pays 100%, and an allowance
3.5gpa dad pays 90%, no allowance
3.0gpa dad pays 80%

And so on. Thoughts?
Re GPA performance system: if you're trying to find a way to encourage safe and easy choices for curriculum, BINGO! you've hit on the solution.

Otherwise, seems like a plan.
I get the FI part but not the RE part of FIRE.
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Re: assuming no financial aid; how much per child in 529?

Post by Blue »

FFFollower wrote: I also am toying with the idea of putting the kids on a performance system. Something like:

4.0gpa dad pays 100%, and an allowance
3.5gpa dad pays 90%, no allowance
3.0gpa dad pays 80%

And so on. Thoughts?
Be careful to not let extrinsic rewards kill intrinsic motivations.
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Re: assuming no financial aid; how much per child in 529?

Post by letsgobobby »

FFFollower wrote:I am surprised that no one mentioned iBonds here. They can be withdrawn tax free for a qualifies education expense. My plan as it am about to start a family:

- fund $150k-$200k in 529
- any shortfall to be covered by iBonds
- if I end with more then is needed, then grad school or grand kids - it would be great to pass down a perpetual ability to find higher education

I also am toying with the idea of putting the kids on a performance system. Something like:

4.0gpa dad pays 100%, and an allowance
3.5gpa dad pays 90%, no allowance
3.0gpa dad pays 80%

And so on. Thoughts?
Recall I bonds have income restrictions, disallowing their tax free use for education for many including many of the posters in this thread.
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Re: assuming no financial aid; how much per child in 529?

Post by FFFollower »

letsgobobby wrote: Recall I bonds have income restrictions, disallowing their tax free use for education for many including many of the posters in this thread.
I did not know that. What is the income limit?
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Re: assuming no financial aid; how much per child in 529?

Post by letsgobobby »

http://www.treasurydirect.gov/indiv/pla ... cation.htm

Tax Year 2012 Income Limits

For single taxpayers, the tax exclusion begins to be reduced with a $72,850 modified adjusted gross income and is eliminated for adjusted gross incomes of $87,850 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $109,250 modified adjusted gross income and is eliminated for adjusted gross incomes of $139,250 and above. Married couples must file jointly to be eligible for the exclusion.

I'm not sure what it is for 2013 - funny that TD still has the 2012 limits up. Regardless, anyone talking about being "100% absolutely certain" they won't receive any FA isn't going to qualify.
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Re: assuming no financial aid; how much per child in 529?

Post by goodenyou »

FFFollower wrote:
letsgobobby wrote: Recall I bonds have income restrictions, disallowing their tax free use for education for many including many of the posters in this thread.
I did not know that. What is the income limit?
Income limits for exclusion reduction increased. For 2012, the amount of your interest exclusion will be gradually reduced (phased out) if your filing status is married filing jointly or qualifying widow(er) with a dependent child, and your modified adjusted gross income is between $109,250 and $139,250. You cannot exclude any of the interest if your MAGI is $139,250 or more. For 2011, the limits that applied to you were $106,650 and $136,650.For any other filing status, your interest exclusion is phased out if your MAGI is between $72,850 and $87,850. You cannot exclude any of the interest if your MAGI is $87,850 or more. For 2011, the limits that applied to you were $71,100 and $86,100. See Effect of the Amount of Your Income on the Amount of Your Exclusion , later.
http://www.irs.gov/publications/p970/ch10.html
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Re: assuming no financial aid; how much per child in 529?

Post by bellemastiff »

Well yah'll certainly convinced me. As of Tuesday, there will be 140k in the 529.

On the one hand I'm thankful for the 529 vehicle. On the other hand, it really put into perspective for me -- current tax/monetary/fiscal policy causes wealth to shrink, on a triple net real basis.

If prospective returns for stocks and bonds are 5% and 1% nominal, respectively, on a forward looking 15 year timeline, then a 50-50 portfolio would average 3% nominal return per year. Assuming 20% of that goes to the tax man you achieve 2.4% net of taxes but before inflation. Current fiscal policy ensures that education costs increase by much more than CPI every year-- they might continue to increase by 7% annually, or the increase might slow to only 4% annually, but no one is arguing that 2.4% will keep up with them. So withOUT the 529, your 'education savings' that you put away today -- due to current tax, monetary, and fiscal policy -- will actually buy LESS education in 18 years , after accounting for the compound investment returns, than it would today. Conceptually, this is a hidden hand that is , umm , metaphorically stealing your taxable-account savings.

I won't take this line of thinking any further because I know political discussions aren't welcome here. But it's truly amazing that, as a responsible saver, I have to use a tax advantaged vehicle to even have a SHOT at preserving the 'real' spending power of my savings (and even then, I give myself less than 50% chances at preserving that spending power, given where yields/valuations/likely future returns are at present).
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Re: assuming no financial aid; how much per child in 529?

Post by momar »

bellemastiff wrote:Well yah'll certainly convinced me. As of Tuesday, there will be 140k in the 529.

On the one hand I'm thankful for the 529 vehicle. On the other hand, it really put into perspective for me -- current tax/monetary/fiscal policy causes wealth to shrink, on a triple net real basis.

If prospective returns for stocks and bonds are 5% and 1% nominal, respectively, on a forward looking 15 year timeline, then a 50-50 portfolio would average 3% nominal return per year. Assuming 20% of that goes to the tax man you achieve 2.4% net of taxes but before inflation. Current fiscal policy ensures that education costs increase by much more than CPI every year-- they might continue to increase by 7% annually, or the increase might slow to only 4% annually, but no one is arguing that 2.4% will keep up with them. So withOUT the 529, your 'education savings' that you put away today -- due to current tax, monetary, and fiscal policy -- will actually buy LESS education in 18 years , after accounting for the compound investment returns, than it would today. Conceptually, this is a hidden hand that is , umm , metaphorically stealing your taxable-account savings.

I won't take this line of thinking any further because I know political discussions aren't welcome here. But it's truly amazing that, as a responsible saver, I have to use a tax advantaged vehicle to even have a SHOT at preserving the 'real' spending power of my savings (and even then, I give myself less than 50% chances at preserving that spending power, given where yields/valuations/likely future returns are at present).
It's important to remember that there is no reason you are guaranteed a return on your capital, especially in a world awash in it.
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Re: assuming no financial aid; how much per child in 529?

Post by livesoft »

If parents put $140,000 into a 529 plan in a single year, would they miss out on any state income tax breaks for years 2,3,4, and 5?
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Re: assuming no financial aid; how much per child in 529?

Post by bellemastiff »

It's important to remember that there is no reason you are guaranteed a return on your capital, especially in a world awash in it.
Correct,but, I guess because I am an American citizen, I don't view it as normal , that the "normal" rate of return on savings, after taxes, would be negative.

As our taxes and "public benefits" both increase over time, I suppose I will eventually come to a more European view of wealth(savings): one should assume that over time, due to taxes, return on savings will be negative. Act accordingly (very conservatively in terms of spending, and with tax avoidance as the foremost goal of investing)
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Re: assuming no financial aid; how much per child in 529?

Post by letsgobobby »

One reason you're being forced to contribute so much is that your 529 investment strategy is very conservative. For someone in your position, I would recommend a more aggressive allocation. Our 529s are 100% stock, to maximize the tax benefits. The consequences if we lose money are not significant, we will just cash flow expenses or choose a cheaper school.
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Re: assuming no financial aid; how much per child in 529?

Post by bellemastiff »

One reason you're being forced to contribute so much is that your 529 investment strategy is very conservative. For someone in your position, I would recommend a more aggressive allocation. Our 529s are 100% stock, to maximize the tax benefits. The consequences if we lose money are not significant, we will just cash flow expenses or choose a cheaper school.
I hope you are right, that the stock market doesn't enter a 15 year period of depressed returns, as it does from time to time. If you're wrong, though, 100%-stock 529's may cause you pain when the college bill comes due.
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Re: assuming no financial aid; how much per child in 529?

Post by momar »

bellemastiff wrote:
It's important to remember that there is no reason you are guaranteed a return on your capital, especially in a world awash in it.
Correct,but, I guess because I am an American citizen, I don't view it as normal , that the "normal" rate of return on savings, after taxes, would be negative.

As our taxes and "public benefits" both increase over time, I suppose I will eventually come to a more European view of wealth(savings): one should assume that over time, due to taxes, return on savings will be negative. Act accordingly (very conservatively in terms of spending, and with tax avoidance as the foremost goal of investing)
American or European has nothing to do with it. There is a huge amount of capital out there unwilling to make productive investments. It's the market.
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Re: assuming no financial aid; how much per child in 529?

Post by bellemastiff »

American or European has nothing to do with it.
It has a lot to do with it, since where you reside, determines the inflation rate of your currency as well as your taxation rates (And thus, implicitly, the real return on savings in taxable accounts, whether that be positive or negative)
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Re: assuming no financial aid; how much per child in 529?

Post by ciscovp »

livesoft wrote:If parents put $140,000 into a 529 plan in a single year, would they miss out on any state income tax breaks for years 2,3,4, and 5?
In my state, any yearly contribution over $5000 can applied for a tax break the next year and year after that until all the contributions are applied.
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Re: assuming no financial aid; how much per child in 529?

Post by amfox1 »

TomatoTomahto wrote:We came late to 529s, and mostly have money in UTMA accounts for our two children (one a HS senior, the other a HS sophomore).

We have roughly $200k for each child in their accounts. The older child (son) is likely to go to Ivy or equivalent (fingers crossed); the younger one (daughter) will remain a mystery for another year or so. We are also not going to get any need-based aid; son would probably get a lot of merit-based aid at a number of schools, but it's not available at the schools he is hoping for.

We know that for our son, we don't have enough in savings for an Ivy, but we have enough current income to easily fund the difference.

My view is that, after sufficiently funding retirement, putting a good amount in a UTMA is a wonderful thing to give your children, whether it's used for education, a down payment on a home, etc. Others don't necessarily agree... that's what makes horse races.
We are in a similar situation (HS junior, HS freshman). Junior is looking at top 50 schools; freshman is too early to consider schools but likely will be the same.

We are not going to get need-based aid but are hopeful of getting some scholarships to defray the cost.

The older child has $93k in a 529 plan, $60k in an UTMA and approx. $7k in I bonds ($160k total).

The younger child has $97k in a 529 plan, $52k in an UTMA and approx. $6k in I bonds ($155k total).

We do not intend to further fund the 529s, as they are ratcheting down risk through date-based target allocations, and we do not wish to be in a position (albeit extremely unlikely) that the 529s are not fully utilized. The UTMAs (which will not be tapped until the 529s are expended) are mostly equity for now, with the thought being that the 529s will get through 3-4 semesters before being fully expended.

The kids will be told at the appropriate time that any moneys left after college is theirs to keep.
jon-nyc
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Joined: Sun Nov 15, 2009 9:02 am
Location: New York

Re: assuming no financial aid; how much per child in 529?

Post by jon-nyc »

FFFollower wrote:
letsgobobby wrote: Recall I bonds have income restrictions, disallowing their tax free use for education for many including many of the posters in this thread.
I did not know that. What is the income limit?

And the act of redeeming an ibond for college adds to your income that year. (I believe, someone correct me if I'm wrong). So even if you are managing your income down in retirement to stay beneath the limit, the act of cashing in an ibond to pay for uni could make you ineligible for the break.

Another downside - ibonds are good for tuition only (and mandatory fees). 529 allows you room and board, travel, etc, as well as tuition.

My original plan with my son was to pay everything with ibonds. In fact, I had a few hundred thousand in ibonds paying over 1% real at the time of his birth. I considered his college fully funded, I was just going to mentally move those bonds from my ledger to his. Then I read about the restrictions, and decided to keep the ibonds as part of the retirement portfolio and fully fund a 529 instead.

I had good timing - son was born in 2009, so every dollar I put in then is worth more than 2 already.
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