529 advice for California based family.

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greenmax
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Joined: Wed Apr 23, 2008 6:49 pm

529 advice for California based family.

Post by greenmax » Tue Dec 09, 2014 7:57 pm

Hi,
I was looking for some advice on investment planning for my young family. We havent had a chance to recalibrate our savings contributions since we were blessed with twins in 2013. Yes, we have managed to ignore their college savings for so long.

Highlights of our earnings and savings so far:

1. Monthly take home: $14,500
2. Total retirement account savings: $400K. Maxing out 401K (50% regular, 50% Roth-401K) and 5500/pp/year Roth backdoor
3. Other Checking, Savings and Brokerage accounts: $440K
4. Monthly mortgage PITI: $2745
5. Monthly Car insurance: $200
6. No car payments or other debt.
7. Assume $3000/month in day care expenses going forward.
8. Assuming $3000/month expenses in other spending, we are left with $5,500/month in surplus.

I stay in California and a 529 contribution is after tax. I was looking for advice from the gurus here on what the best way for us to save for kids college is. Is there anything other than a 529 that might work better. Dave Ramsey talks about UTMA as an option.

Also, does it make sense for us to put after tax money in 401(k) and try to convert it to Roth as suggested here.

http://www.forbes.com/sites/ashleaebeli ... timizely=a

Thanks

Laura
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Re: 529 advice for California based family.

Post by Laura » Tue Dec 09, 2014 9:48 pm

Hello and congratulations on the twins. I bet they are a fun handful. First off, you may want to rethink the 401k contributions. At your tax rate it is very possible you will be in a lower tax bracket upon retirement than now so you could be better off with a traditional 401k only. That said, the roth does give you the ability to save more now and if you are in the same tax bracket I would do the roth.

The 529 allows the money to grow tax free if used for qualified education expenses for college. However, not all expenses are qualified. Also, if you qualify for any possible tax credit you cannot use the same dollar of qualified expenses for both a 529 tax benefit and the tax credit. So you want to make sure you don't over contribute. UTMAs would be possible but they really impact financial aid since student funds are expected to be used at a much higher percentage than parent funds. I would suggest using a taxable account in your own name over a UTMA for education funding but the 529 is the best option of them all.

Look for see if you get a tax credit if you use the state plan. I don't know much about California. You can use any plan if there is no tax credit and Vanguard offers some great ones.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

overvue
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Re: 529 advice for California based family.

Post by overvue » Wed Dec 10, 2014 3:12 am

Laura is right. 529 is the way to go. Personally UTMAs are last on my list just because of the financial aid ding...they are considered student assets. Taxable accounts are preferable to UTMAs. CA has pretty decent 529 plans...cannot go wrong if you decide to invest there. CA does not have any tax deductions for contributing to a 529 plan. Congrats on the twins! Wonderful that you are thinking of their college.

Grt2bOutdoors
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Location: New York

Re: 529 advice for California based family.

Post by Grt2bOutdoors » Wed Dec 10, 2014 8:21 am

overvue wrote:Laura is right. 529 is the way to go. Personally UTMAs are last on my list just because of the financial aid ding...they are considered student assets. Taxable accounts are preferable to UTMAs. CA has pretty decent 529 plans...cannot go wrong if you decide to invest there. CA does not have any tax deductions for contributing to a 529 plan. Congrats on the twins! Wonderful that you are thinking of their college.
And the likelihood of someone with $14.5K in monthly after-tax income getting financial aid is high, medium or low? I don't understand this negativity or perception of why UTMA's are least preferable? If the objective for the parent is to avoid having the child come away with as low a debt burden as possible, then all options should be considered. A 529 plan is my first choice, a UTMA is my second choice. The UTMA offers flexibility, it does not have to be used exclusively for collegiate expenses, it offers the first $2K in annual income/gains tax-free if the custodian files a tax return each year declaring the gains up to that amount, anything after that would expose the child to the kiddie tax - the account value could literally be tax-free at age of majority in California (18 or 21, I don't know). The downside it is the child's asset and you will have to declare it as such if you file a FAFSA and if the child decides to abscond with it because they don't want to go to college, there isn't anything you can do about that - it is their money. But it is up to the parent to tell the child about the account and it's intended purpose and I recommend doing that early on - like before they reach age 10 so they get the "message".

As far as the Forbes article - yes, I'd recommend that as a way to add more after-tax dollars to your Roth. Make sure your plan administrator can accommodate the request of making a direct after-tax rollover of your contributions from your 401k account to your Roth custodian trust company before you start this process. Some plan administrators may not be accustomed to such requests - you want to make sure you are not hit with a premature distribution penalty or anything like that.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

overvue
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Re: 529 advice for California based family.

Post by overvue » Wed Dec 10, 2014 2:40 pm

Not to hijack the thread...but the reason I am not to fond of UTMA is based on my personal feeling about life changes. When things are all fine and everyone has a job then UTMA is certainly fine because there is not much federal and state financial aid at the take home of $14.5K/mo. However life can throw curveballs, folks can lose jobs, lose the earning power, have health issues, then UTMA can hurt the family if the familysuddenly become eligible for financial aid. Other than that nothing against it philisophically and yes it can be used for many more things than college. Since the OP asked specifically about college, I still prefer 529 and then taxable. Just my thoughts. :happy

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kenyan
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Re: 529 advice for California based family.

Post by kenyan » Wed Dec 10, 2014 2:59 pm

UTMA is an ok option, but I'm in the camp that it's not as desirable because it's the kid's money to do with as he/she pleases. For a "good" kid that won't be a problem, but I'd rather have a bit more control over my hard-earned money.

I live in CA, albeit with a lower income than the OP, and contribute to 529s for my young children. There are no tax benefits on contributions, but due to the extremely high capital gains taxes in the state, you still can get a tidy tax benefit on the growth in the right situation. I use CA (lowest-cost index fund options of all plans) and NY (lowest-cost uniform costs of all plans) for our two plans. Other good plans include Utah (for those who like more slice-and-dice options), Nevada (for those who want Vanguard-website agglomeration simplicity), Colorado (just for the decent fixed income option), and Wisconsin (similar options to CA but slightly higher cost).

As mentioned, over-contributing does carry a few risks, such as ineligibility for tax credits or tax penalties on excess withdrawals. My goal is to fund half of our college costs through the 529s, though I'm not yet on that pace.
Retirement investing is a marathon.

rock581
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Re: 529 advice for California based family.

Post by rock581 » Wed Dec 10, 2014 3:09 pm

I am from CA and also started a 529 for my kid's college this year. I use Nevada's plan which is Vanguards and you can never go wrong with Vanguard's plans :)

California's plan is not good and we don't get any deduction so there is no point in sticking to it. Check the article below for Morningstar's ratings, NV's is ranked Gold.

http://www.huffingtonpost.com/chris-wan ... 99191.html

Also look for superfunding your plans, if possible. Check the article below.

https://blog.wealthfront.com/529-plans- ... erfunding/

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kenyan
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Re: 529 advice for California based family.

Post by kenyan » Sun Dec 14, 2014 12:34 pm

rock581 wrote:
California's plan is not good and we don't get any deduction so there is no point in sticking to it. Check the article below for Morningstar's ratings, NV's is ranked Gold.
I don't know why you would say that California's plan is not good. It is one of the best plans out there, and has the cheapest index funds for certain market segments of any plan.

I don't place much stock in Morningstar ratings (preferring to look at the underlying characteristics myself), but if that's your barometer the CA plan is Silver - certainly not bad at all.
Retirement investing is a marathon.

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The529guy
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Re: 529 advice for California based family.

Post by The529guy » Sun Dec 14, 2014 12:41 pm

kenyan wrote:
rock581 wrote:
California's plan is not good and we don't get any deduction so there is no point in sticking to it. Check the article below for Morningstar's ratings, NV's is ranked Gold.
I don't know why you would say that California's plan is not good. It is one of the best plans out there, and has the cheapest index funds for certain market segments of any plan.

I don't place much stock in Morningstar ratings (preferring to look at the underlying characteristics myself), but if that's your barometer the CA plan is Silver - certainly not bad at all.
I agree - the CA plan is great.

Btw, here's what we all need to remember about how Morningstar ranks 529 plans:
The top three ratings, Gold, Silver, and Bronze, all indicate that our analysts think highly of a 529 plan; the difference corresponds to the level of analyst conviction in a plan’s investment options’ ability to collectively outperform their respective benchmarks and peers over time, within the context of the level of risk taken and local tax benefits.
More: http://www.bogleheads.org/forum/viewtop ... 2#p2111899

jackholloway
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Re: 529 advice for California based family.

Post by jackholloway » Sun Dec 14, 2014 1:28 pm

kenyan wrote:
rock581 wrote:
California's plan is not good and we don't get any deduction so there is no point in sticking to it. Check the article below for Morningstar's ratings, NV's is ranked Gold.
I don't know why you would say that California's plan is not good. It is one of the best plans out there, and has the cheapest index funds for certain market segments of any plan.

I don't place much stock in Morningstar ratings (preferring to look at the underlying characteristics myself), but if that's your barometer the CA plan is Silver - certainly not bad at all.
Which segments? Mine 529 is TSM, TBM, and the CO table value, and it looks like the CA plan has lower ERs - .21 and .24 vs. .12 and .18, but the age plans run .19 vs .20.

Interesting that the age plans are cheaper than thier constituents.

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The529guy
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Re: 529 advice for California based family.

Post by The529guy » Sun Dec 14, 2014 1:37 pm

jackholloway wrote:
kenyan wrote:
rock581 wrote:
California's plan is not good and we don't get any deduction so there is no point in sticking to it. Check the article below for Morningstar's ratings, NV's is ranked Gold.
I don't know why you would say that California's plan is not good. It is one of the best plans out there, and has the cheapest index funds for certain market segments of any plan.

I don't place much stock in Morningstar ratings (preferring to look at the underlying characteristics myself), but if that's your barometer the CA plan is Silver - certainly not bad at all.
Which segments? Mine 529 is TSM, TBM, and the CO table value, and it looks like the CA plan has lower ERs - .21 and .24 vs. .12 and .18, but the age plans run .19 vs .20.

Interesting that the age plans are cheaper than thier constituents.
I suspect those are the segments that kenyan meant when defending the CA plan's superiority in fee levels.

Afty
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Re: 529 advice for California based family.

Post by Afty » Sun Dec 14, 2014 2:15 pm

rock581 wrote:I am from CA and also started a 529 for my kid's college this year. I use Nevada's plan which is Vanguards and you can never go wrong with Vanguard's plans :)
We also use the Vanguard/Nevada 529 plan and live in CA. We use the moderate age-based option. We underfund somewhat compared to what we expect college to cost in 15+ years; we don't want to lock up too much money in a 529 that can only be spent on college or grad school. We assume that we'll be able to pay the rest of the college costs out of pocket at the time, or at the worst the kids could take loans.

We also fund UTMAs at a lower rate; we intend the UTMAs to be their money when they grow up, for them to do as they please, buy a house, something like that.

At your income level and assuming your assets continue to grow, you're not going to qualify for financial aid. Thus I wouldn't worry about financial aid implications. It wouldn't hurt to fund both 529 and UTMA accounts. You lose some tax benefits, but you have more flexibility.

epilnk
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Re: 529 advice for California based family.

Post by epilnk » Sun Dec 14, 2014 6:41 pm

We live in CA. I'm happy with the NV plan, and I prefer the simplicity of having everything at VG. My inlaws who live out of state separately started CA 529s for their grandchildren and that's fine too. Which plan has the absolute lowest cost options will probably vary over the course of 18 years; when we started more than 10 years ago NV had a clear advantage over the CA plan but actually OH beat them both. It isn't important for me to know who has the best plan as of today as long as I'm confident our plan was a good choice, and the VG plan is never going to be a bad choice.

Seekay
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Re: 529 advice for California based family.

Post by Seekay » Sun Dec 14, 2014 7:02 pm

epilnk wrote:We live in CA. I'm happy with the NV plan, and I prefer the simplicity of having everything at VG.
...
It isn't important for me to know who has the best plan as of today as long as I'm confident our plan was a good choice, and the VG plan is never going to be a bad choice.
This. Started with UPromise, moved it over to VG later to consolidate. Didn't go for the UTMA for reasons others have mentioned above.

lemonPepper
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Re: 529 advice for California based family.

Post by lemonPepper » Wed Jun 08, 2016 12:29 pm

OP. I'm in a similar sitaution. Just started researching 529 and savings for college. Can you tell me what you did and why?

SpideyIndexer
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Re: 529 advice for California based family.

Post by SpideyIndexer » Wed Apr 05, 2017 1:16 pm

Looking into this, and the top finalists seem to be CA and Utah. The key features are:

1. CA ScholarShare: Seems to have lowest expenses+fees of any 529. Static asset class investment choices are limited to 4 TIAA-CREF funds. Most interesting are Equity Index Fund, similar to VT TSM, fees + expenses = 0.15% and Bond Index Fund, fees + expenses = 0.22%. Also a principal + index investment supposed not to lose principal currently yielding 1.23% (not sure how ironclad is the guarantee.)

2. Utah UESP. Fairly broad selection of VG funds + good selection of DFA funds. Admin fee of 0.2%. Most interesting include VG Total Stock (0.22% total fees + expenses), VG Total Intl (0.27%), VG Total Bond Index (0.24%), VG Short Term Bond Index (0.24%) and VG ST Investment Grade Bond (0.27%). Also FDIC insured bank accounts, recent 1 yr return 0.89%.

Both plans also offer aged-based allocation investments.

There are things I like about both. Utah has a nice choice of investments with pretty low fees, many of which are Vanguard's. CA has even lower fees, but no international stock, no short term bond funds and in general I rank Vanguard higher as a steward. Comments invited.

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