Need help saving for college in Taxable Account

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Topic Author
luckybamboo
Posts: 244
Joined: Tue Nov 01, 2016 7:56 pm

Need help saving for college in Taxable Account

Post by luckybamboo »

We have two children DD - 16 yr and DS - 14 yr. We have saved $110,000 in 529 plans total for both of them. That should cover about 2 years of college expenses for each one of them.
We would like to fund 85% of their college expenses and they will be responsible for 15%.
So, we have to save about $88,000 more in 8 years to pay our share of the college bill.
We have following options -
1. Keep funding 529 accounts. Risk here is that if kids get scholarship or get a lot of AP credits then the money in the 529 will be locked in and can be accessed after 10% penalty.
2. Save half the money in i-bonds ($6,000 per year, given the short time frame from now until the need for the money).
3. Save the other half in a taxable account.

My question is -
1. Should we continue to fund 529 or continue with the taxable option?
2. What kind of investments in taxable account (The goal here will be capital preservation and keeping up with inflation)
Some ideas that come to my mind are
Municipal Bond funds like FLTMX, or
Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX) or
Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX)
Vanguard High-Yield Tax Exempt Fund (VWAHX)
Target Retirement Fund - 2021 or
Vanguard Wellesley (VWINX)

Any suggestions are welcome.
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Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Re: Need help saving for college in Taxable Account

Post by Watty »

luckybamboo wrote:1. Keep funding 529 accounts. Risk here is that if kids get scholarship or get a lot of AP credits then the money in the 529 will be locked in and can be accessed after 10% penalty.
You would want to double check but I am pretty sure that it would work OK with scholarships.

A quick google found this.

http://www.kiplinger.com/article/colleg ... ption.html

Few scholarships will also cover room and board so even if they get a scholarship there will still be lots of other costs.

You only have two or three years until your oldest kid in college so by they time that kid starts you will know how many AP credits they are getting. If they get a lot of AP credits then they may still want to go four years to get a strong minor or even a double major. They might also want to do something like study abroad for a semester which can be good for some fields.

I would keep using saving in the 529 until the first kid starts college and then figure out what to do after that.
Ostentatious
Posts: 278
Joined: Fri Aug 15, 2014 6:34 pm

Re: Need help saving for college in Taxable Account

Post by Ostentatious »

luckybamboo wrote:We have two children DD - 16 yr and DS - 14 yr. We have saved $110,000 in 529 plans total for both of them. That should cover about 2 years of college expenses for each one of them.

1. Keep funding 529 accounts. Risk here is that if kids get scholarship or get a lot of AP credits then the money in the 529 will be locked in and can be
Any suggestions are welcome.
The 10% penalty is only on the gains not the principal so, you have nothing to lose by continuing to use 529.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Need help saving for college in Taxable Account

Post by livesoft »

Do you use your taxable account(s) for other goals? What fraction of you taxable account(s) assets would be used for college expenses when that time comes? Could you in fact just pay college expenses from cash flow when that time comes? Do you think your family income (AGI) is too high to take advantage of the American Opportunity Tax Credit for wealthy families?
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Topic Author
luckybamboo
Posts: 244
Joined: Tue Nov 01, 2016 7:56 pm

Re: Need help saving for college in Taxable Account

Post by luckybamboo »

livesoft wrote:Do you use your taxable account(s) for other goals? What fraction of you taxable account(s) assets would be used for college expenses when that time comes?
No, we do not use taxable 'investments' for any other goals. We have enough money saved up for 12 months of living expenses and any other large short term expenses that we are anticipating like new car purchases for kids, home repair/improvement needs like replacing air-conditioners, water-heaters etc.
Recently, we have started investing in the taxable accounts for retirement purposes as our income is too high for any tax advantaged income aside from spouse's 401K. I do not work outside of home. Backdoor Roth isn't an option due to high balances in Rollover IRA from previous employers. So, our taxable investments (not counting the cash for short term purposes) is only 3% of our total investments.
livesoft wrote:Could you in fact just pay college expenses from cash flow when that time comes? Do you think your family income (AGI) is too high to take advantage of the American Opportunity Tax Credit for wealthy families?
The current plan is to payoff home sooner - estimated payout date is 6/2022. Once that happens we can free up $24,000 a year for college purpose. But we might need to use some of that money to remodel our kitchen with is about 20 years old today. So, we are planning to use about $12,000 from that cash flow for 3 years of my son's college education. And yes, we will not qualify for AOTC. We do not want to put our retirement savings on hold in the process to pay for kids college. We have been saving about $6000 a year for past 12 years any way for college. So, we need to somehow boost it to $10,000 a year for next 8 years to meet the goal.
aristotelian
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Re: Need help saving for college in Taxable Account

Post by aristotelian »

529's are better than taxable. The odds of your both kids not needing it are pretty low. You can switch the money from one beneficiary to the other with no penalty at all, and only a 10% penalty on earnings. That said, at this point, only a few years away from college, you should not be investing in anything risky, so the 529 does not have much upside, especially for the older child.

iBonds are a good option too, especially for the older child, and if they are not needed you can use them as a supplemental IRA.

Definitely stay away from the High Yield Muni fund. The euphemism for high yield is "junk" bonds, and there is a reason for that.

Also keep in mind that you can always help your children pay off loans later in life when your own finances are secure. They may be more grateful in the end if they have a true understanding of how much it costs.
livesoft
Posts: 75087
Joined: Thu Mar 01, 2007 8:00 pm

Re: Need help saving for college in Taxable Account

Post by livesoft »

Given what you said you were going to do with your taxable account, then I would suggest just keep adding to the 529 plans. So boosting contributions from $6K a year to $10K seems like a good plan.

It seems you have plenty of assets to pay for college educations that will go on any FAFSA, so that your family will not get financial aid. These include a high salary (not eligible for AOTC), money for cars for your children, money for home renovations, money to pay off mortgage early. It seems you are in great financial shape, so nothing to worry about.
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ks289
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Joined: Sun Mar 11, 2012 12:42 pm

Re: Need help saving for college in Taxable Account

Post by ks289 »

529 sounds reasonable.
Another option which is almost as flexible as parents' taxable account but which would save on taxes would be gifts to UTMA account. No taxes on unearned income up to $1050.
informal guide
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Joined: Mon Aug 29, 2016 10:26 am

Re: Need help saving for college in Taxable Account

Post by informal guide »

raspino wrote:
luckybamboo wrote:We have two children DD - 16 yr and DS - 14 yr. We have saved $110,000 in 529 plans total for both of them. That should cover about 2 years of college expenses for each one of them.

1. Keep funding 529 accounts. Risk here is that if kids get scholarship or get a lot of AP credits then the money in the 529 will be locked in and can be
Any suggestions are welcome.
The 10% penalty is only on the gains not the principal so, you have nothing to lose by continuing to use 529.

In a 529 plan, The Federal Income tax 10% penalty does not apply if there is a non-qualified withdrawal up to the amount of any scholarship received in a calendar year - -only the gain is taxed - at the child's rate too, if the withdrawal is paid to the beneficiary
veindoc
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Re: Need help saving for college in Taxable Account

Post by veindoc »

I'm not so sure I would continue contributing to the older child's account. If you plan to keep on working while the child is in college, why don't you simply cash flow college and supplement with what you already have saved. College is just two years away and four years long (possibly shorter) to realize any significant tax free gain. I think the time horizon for the younger child is sufficient enough to keep contributing. Older child's savings could go to a taxable account which you can tap in the event that you have a larger expense come up such as the kitchen which would make cash flowing a bit tight and uncomfortable.

The only reason I would consider contributing to the 529 for child #1 is if you get a state tax deduction. Do you?
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