Did you end up overfunding a 529?
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Did you end up overfunding a 529?
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Last edited by letsgobobby on Wed Aug 28, 2019 11:04 pm, edited 1 time in total.
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Re: Did you end up overfunding a 529?
My oldest is scheduled to start college next year and then younger sibling a few years later, so we have not actually spent our 529 funds yet, but I will chime in anyway. Right now, if both kids finish in four years we will have almost perfectly funded our 529s. Even if we do wind up having excess funds, I am not concerned. There seem to be many options open to us: keep it for potential future grandkids, spend it on our own continuing ed in retirement, take it out for non qualified expenses once we retire, which will impose the penalty on earnings, but will be taxed at our (presumambly) much lower income tax bracket in retirement or, most intriguingly I read recently there is a proposal to allow excess 529 funds to be rolled over to a Roth IRA.
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Re: Did you end up overfunding a 529?
No, we had a small amount in our 529 account.
Re: Did you end up overfunding a 529?
I am interested in hearing about this too. Also would be interested in hearing the 529 balance at the time the kids education began and what type of university.
My current plan:
I am currently aiming to fund enough to have be able to pay In-state tuition for all 4 years x 2 kids today. In my state I checked and the Instate tuition for the most expensive state university is shown to be ~$15K/annually, I have 2 kids.. so I am targeting $120K ($15K * 8 years). I will likely reach that before either of my kids turn 10. After that the plan is to contribute only to make sure the balance never falls below the current tuition amount * 8 years. The balance can go over this due to investment returns but not below. So for example, if in state tuition goes to $16K.. I would then add the $8K if the investment returns didn't cover that already.
I would cash flow all expenses beyond tuition or if they got into an elite private university and didn't end up going to instate universities.
My current plan:
I am currently aiming to fund enough to have be able to pay In-state tuition for all 4 years x 2 kids today. In my state I checked and the Instate tuition for the most expensive state university is shown to be ~$15K/annually, I have 2 kids.. so I am targeting $120K ($15K * 8 years). I will likely reach that before either of my kids turn 10. After that the plan is to contribute only to make sure the balance never falls below the current tuition amount * 8 years. The balance can go over this due to investment returns but not below. So for example, if in state tuition goes to $16K.. I would then add the $8K if the investment returns didn't cover that already.
I would cash flow all expenses beyond tuition or if they got into an elite private university and didn't end up going to instate universities.
Re: Did you end up overfunding a 529?
Maybe. My son has about $9,000 in expenses to go for an undergraduate degree, but more than $26,000 in his 529 plan. He should go on to graduate school though.
My daughter went to a more expensive university with about the same assets in her 529 plan. When she received her M.S. her 529 plan was exhausted.
My daughter went to a more expensive university with about the same assets in her 529 plan. When she received her M.S. her 529 plan was exhausted.
Re: Did you end up overfunding a 529?
This is my exact plan, more or less. The only tweak is that I'm making my contributions until they (my contributions, not the actual balance of the accounts) match the 4 year tuition in my state. And then stop. My hope is that the continued growth of the 529 will more or less keep up with costs. Once they're 18 they're set. Any costs beyond what's in their 529 will be borne by them. That's the plan anyway....bligh wrote: ↑Wed Nov 22, 2017 11:50 am
My current plan:
I am currently aiming to fund enough to have be able to pay In-state tuition for all 4 years x 2 kids today. In my state I checked and the Instate tuition for the most expensive state university is shown to be ~$15K/annually, I have 2 kids.. so I am targeting $120K ($15K * 8 years). I will likely reach that before either of my kids turn 10. After that the plan is to contribute only to make sure the balance never falls below the current tuition amount * 8 years. The balance can go over this due to investment returns but not below. So for example, if in state tuition goes to $16K.. I would then add the $8K if the investment returns didn't cover that already.
Re: Did you end up overfunding a 529?
No/Yes/Probably
Daughter #1 went to med school so 529 exhausted. So no in her case.
Daughter #2 had athletic scholarship freshman year and is a RA junior year and likely next year as a senior as well so her 529 had too much in it. Was able to get funds out without penalty though by changing beneficiary to daughter #1. So yes in her case.
Son will probably go to an in state school that will cost a little less than what is in his 529. Will probably withdraw with the penalty unless he goes to graduate school. So probably in his case.
The underlying problem is it is unknown what the cost will be for each child. Could be $18K/year in state, $45K/year out of state, or $70K/year for private. If I had to do it again I would target having enough for in state school in the 529. Then designate some other account that could be used for retirement if not needed for educating kids.
If there was leftover 529 money one could always save it for grandchildren. Pulling it out and figuring tax and penalty would take at least a little effort. Bigger headache might be figuring out how to return any state tax deduction you took for 529 contribution.
Daughter #1 went to med school so 529 exhausted. So no in her case.
Daughter #2 had athletic scholarship freshman year and is a RA junior year and likely next year as a senior as well so her 529 had too much in it. Was able to get funds out without penalty though by changing beneficiary to daughter #1. So yes in her case.
Son will probably go to an in state school that will cost a little less than what is in his 529. Will probably withdraw with the penalty unless he goes to graduate school. So probably in his case.
The underlying problem is it is unknown what the cost will be for each child. Could be $18K/year in state, $45K/year out of state, or $70K/year for private. If I had to do it again I would target having enough for in state school in the 529. Then designate some other account that could be used for retirement if not needed for educating kids.
If there was leftover 529 money one could always save it for grandchildren. Pulling it out and figuring tax and penalty would take at least a little effort. Bigger headache might be figuring out how to return any state tax deduction you took for 529 contribution.
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Re: Did you end up overfunding a 529?
This is why I love Bogleheads so much. Alway having a meaningful conversation.
I am following the same approach. Our InState tuition is about $15,000 x 4 (years) x 2 (kids) = $120,000. This is my working target. I am sure I'll end up having more than that just because my nature of being conservative. If my kids get into elite schools, then I may help out more by paying them with my portfolio money, otherwise, I think we have a good enough working target to start with. Good luck!
I am following the same approach. Our InState tuition is about $15,000 x 4 (years) x 2 (kids) = $120,000. This is my working target. I am sure I'll end up having more than that just because my nature of being conservative. If my kids get into elite schools, then I may help out more by paying them with my portfolio money, otherwise, I think we have a good enough working target to start with. Good luck!
I save and invest my money, so money can make money for me, so I don't have to make money eventually.
Re: Did you end up overfunding a 529?
I've overfunded for various reasons, mostly scholarships, so have thought a lot about what to do with the excess funds:
1) Hold onto it for a very long time and eventually roll it over to a future generation as a gift. Since it grows with tax free earnings on qualified withdrawals, it is a potentially nice tax avoidance vehicle (and generous gift). But only works if you don’t really have to have the money and are satisfied with the 529 investment options you have.
2) If you have children that may eventually go to grad school, that may be an option for liquidating it in the future.
3) If your tax bracket is going to drop considerably in the future, just wait until that time and withdraw the money then. When you withdraw, you will have to pay both taxes and a 10% penalty on the earnings at that time, but at least for me, that is much lower than my current tax bracket.
Option 1 and 3 both require that no significant changes are made to 529 plans over a longer period of time. Be aware that 529 Plans are under constant scrutiny by Congress since they are shown to really only significantly benefit higher wealth individuals, especially those that have over-contributed. So you have that additional risk of a policy change.
Fortunately most 529 plans investment options are not that much more expensive than standard funds, so they are not a bad choice for long term investment and you can always transfer to other states.
1) Hold onto it for a very long time and eventually roll it over to a future generation as a gift. Since it grows with tax free earnings on qualified withdrawals, it is a potentially nice tax avoidance vehicle (and generous gift). But only works if you don’t really have to have the money and are satisfied with the 529 investment options you have.
2) If you have children that may eventually go to grad school, that may be an option for liquidating it in the future.
3) If your tax bracket is going to drop considerably in the future, just wait until that time and withdraw the money then. When you withdraw, you will have to pay both taxes and a 10% penalty on the earnings at that time, but at least for me, that is much lower than my current tax bracket.
Option 1 and 3 both require that no significant changes are made to 529 plans over a longer period of time. Be aware that 529 Plans are under constant scrutiny by Congress since they are shown to really only significantly benefit higher wealth individuals, especially those that have over-contributed. So you have that additional risk of a policy change.
Fortunately most 529 plans investment options are not that much more expensive than standard funds, so they are not a bad choice for long term investment and you can always transfer to other states.
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Re: Did you end up overfunding a 529?
Bligh, My experience with one kid just graduated last May and another one currently in year 2...tuition is at least roughly half of the annual costs to attend. Meanwhile, we are frugal / limiting college costs within reason. So, are you planning to cash flow half or more? Food for thought! Happy planning and good luck all!bligh wrote: ↑Wed Nov 22, 2017 11:50 am I am interested in hearing about this too. Also would be interested in hearing the 529 balance at the time the kids education began and what type of university.
My current plan:
I am currently aiming to fund enough to have be able to pay In-state tuition for all 4 years x 2 kids today. In my state I checked and the Instate tuition for the most expensive state university is shown to be ~$15K/annually, I have 2 kids.. so I am targeting $120K ($15K * 8 years). I will likely reach that before either of my kids turn 10. After that the plan is to contribute only to make sure the balance never falls below the current tuition amount * 8 years. The balance can go over this due to investment returns but not below. So for example, if in state tuition goes to $16K.. I would then add the $8K if the investment returns didn't cover that already.
I would cash flow all expenses beyond tuition or if they got into an elite private university and didn't end up going to instate universities.
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Re: Did you end up overfunding a 529?
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Last edited by letsgobobby on Wed Aug 28, 2019 11:04 pm, edited 1 time in total.
Re: Did you end up overfunding a 529?
I've likely overfunded my kids' 529 plans, but I have decades to go until I'll know for sure. If they use it all for undergrad/grad school, then great. If not, my intent is to leave it as an inter-generational family education fund. That said, here are some creative ways for withdrawing the money (not sure if they're even allowed, so someone ought to check before implementing them):
Please refute the above ideas if they are blatantly wrong. I was just brainstorming...
- Make a non qualified distribution to the beneficiary while he or she is in a 0% tax bracket. Then, the 10% withdrawal penalty + 0% income tax is less than the tax you would have paid (assuming you're also not in the 0% bracket). Of course, this assumes wanting to give the money to the beneficiary and not keep it for yourself.
- Same as above, but distribute to yourself after retirement. I guess this is like a stealth nondeductible traditional IRA with a "bonus" 10% tax.
- Transfer the beneficiary to someone likely to die earlier than you (grandma?). Once the beneficiary dies, you can withdraw the money without the 10% penalty just paying income taxes on the earnings. Again, you can turn it into a stealth nondeductible tIRA now without the "bonus" tax.
Please refute the above ideas if they are blatantly wrong. I was just brainstorming...
Re: Did you end up overfunding a 529?
We have inadvertently over funded the 529plan, by a lot.
We only have 1 child, and saved enough to cover 4 years at one of our in state universities. She received a full academic scholarship to an out of state school she absolutely loves. So we are on the hook for just room, board, and food.
And the market has been great these last two years, so we still have 95K in the account, with 2 more years to go. Maybe she’ll go to grad school, if so, that’s great.
We always told her about the college fund, and told her that was the budget for school. If she went over, she’d have to pay the rest. If there was anything left over, she could keep it for a car, house down payment, etc. I think this early talk about a budget was very useful, and ultimately led her to work hard for scholarships, and to consider price when housing a school.
So yeah, lots left over right now. Trying to figure out how to get it out of there without paying taxes. There will be no penalties as the value of the scholarship exceeds the left over. We may try to change the owner of the account to her, and hope that by doing so, the leftovers will be taxed at her rate.
We only have 1 child, and saved enough to cover 4 years at one of our in state universities. She received a full academic scholarship to an out of state school she absolutely loves. So we are on the hook for just room, board, and food.
And the market has been great these last two years, so we still have 95K in the account, with 2 more years to go. Maybe she’ll go to grad school, if so, that’s great.
We always told her about the college fund, and told her that was the budget for school. If she went over, she’d have to pay the rest. If there was anything left over, she could keep it for a car, house down payment, etc. I think this early talk about a budget was very useful, and ultimately led her to work hard for scholarships, and to consider price when housing a school.
So yeah, lots left over right now. Trying to figure out how to get it out of there without paying taxes. There will be no penalties as the value of the scholarship exceeds the left over. We may try to change the owner of the account to her, and hope that by doing so, the leftovers will be taxed at her rate.
Re: Did you end up overfunding a 529?
Thanks for sharing your experience. I am lucky to have two well ranked state schools within commuting distance from our current home. Ideally my kids will get into and be okay going to one of these two schools. This will save me on room/boarding which would be the biggest expense. If we do end up having to pay for room and boarding, I am confident I will have sufficient cash flow to cover it. If necessary by curtailing expenses, or dialing back on retirement savings.SundayMorning wrote: ↑Wed Nov 22, 2017 12:57 pmBligh, My experience with one kid just graduated last May and another one currently in year 2...tuition is at least roughly half of the annual costs to attend. Meanwhile, we are frugal / limiting college costs within reason. So, are you planning to cash flow half or more? Food for thought! Happy planning and good luck all!bligh wrote: ↑Wed Nov 22, 2017 11:50 am I am interested in hearing about this too. Also would be interested in hearing the 529 balance at the time the kids education began and what type of university.
My current plan:
I am currently aiming to fund enough to have be able to pay In-state tuition for all 4 years x 2 kids today. In my state I checked and the Instate tuition for the most expensive state university is shown to be ~$15K/annually, I have 2 kids.. so I am targeting $120K ($15K * 8 years). I will likely reach that before either of my kids turn 10. After that the plan is to contribute only to make sure the balance never falls below the current tuition amount * 8 years. The balance can go over this due to investment returns but not below. So for example, if in state tuition goes to $16K.. I would then add the $8K if the investment returns didn't cover that already.
I would cash flow all expenses beyond tuition or if they got into an elite private university and didn't end up going to instate universities.
Closer to the time (ie when they are 12 years old or so) depending on my own financial situation and the performance of the 529 plans, I may begin a separate taxable account holding funds to provide an additional buffer for expenses above and beyond the tuition.
If something happens such that we are not able to cash flow the additional expenses, or pull from our taxable retirement savings, I will probably be having bigger issues, and so the kids would be urged more strongly to attend the local universities, or to come up with the room/boarding/private tuition costs via part time jobs and taking on student debt. The same would occur for graduate studies.