Make sense to setup 529 for high school junior?

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rickatbh
Posts: 29
Joined: Sun May 18, 2014 12:17 pm

Make sense to setup 529 for high school junior?

Post by rickatbh » Sat Feb 17, 2018 7:27 am

Hello,

my kid is going to be ready for college in a couple of years. I never opened a 529 in the past. I have enough funds at present to maybe pay for a couple of years of college (about $100K). Does it make sense to take some of that money and setup a 529 now, or should I just leave it a regular savings account? If 529, what would be a good investment(s) to buy in it?

We currently live overseas(i.e. not in the US), and are not tied to any particular US state, it will probably just be a case of which school is selected. Given this, any particular 529 suggestions?

thanks!

3funder
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Joined: Sun Oct 15, 2017 9:35 pm

Re: Make sense to setup 529 for high school junior?

Post by 3funder » Sat Feb 17, 2018 7:29 am

rickatbh wrote:
Sat Feb 17, 2018 7:27 am
Hello,

my kid is going to be ready for college in a couple of years. I never opened a 529 in the past. I have enough funds at present to maybe pay for a couple of years of college (about $100K). Does it make sense to take some of that money and setup a 529 now, or should I just leave it a regular savings account? If 529, what would be a good investment(s) to buy in it?

We currently live overseas(i.e. not in the US), and are not tied to any particular US state, it will probably just be a case of which school is selected. Given this, any particular 529 suggestions?

thanks!
Probably not. There is isn't much time for the money to grow.

tenkuky
Posts: 567
Joined: Sun Dec 14, 2014 4:28 pm

Re: Make sense to setup 529 for high school junior?

Post by tenkuky » Sat Feb 17, 2018 9:08 am

3funder wrote:
Sat Feb 17, 2018 7:29 am
rickatbh wrote:
Sat Feb 17, 2018 7:27 am
Hello,

my kid is going to be ready for college in a couple of years. I never opened a 529 in the past. I have enough funds at present to maybe pay for a couple of years of college (about $100K). Does it make sense to take some of that money and setup a 529 now, or should I just leave it a regular savings account? If 529, what would be a good investment(s) to buy in it?

We currently live overseas(i.e. not in the US), and are not tied to any particular US state, it will probably just be a case of which school is selected. Given this, any particular 529 suggestions?

thanks!
Probably not. There is isn't much time for the money to grow.
+1
And there are other restrictions with 529 that you don't have with taxable:
1. Limitations in what type of investments
2. Likely higher fees than if you were doing it yourself
3. Risk of overfunding and withdrawing at taxable rate (if kid gets scholarships all the way)
4. Additional paperwork and account related hassle.

Plus, I wouldn't try to do investments. Just a low-risk CD since your time line is couple of years. Won't pay much but at least you won't risk principal. Some of the CDs in that time range are paying 2% and upward.

Bacchus01
Posts: 1931
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Re: Make sense to setup 529 for high school junior?

Post by Bacchus01 » Sat Feb 17, 2018 9:21 am

rickatbh wrote:
Sat Feb 17, 2018 7:27 am
Hello,

my kid is going to be ready for college in a couple of years. I never opened a 529 in the past. I have enough funds at present to maybe pay for a couple of years of college (about $100K). Does it make sense to take some of that money and setup a 529 now, or should I just leave it a regular savings account? If 529, what would be a good investment(s) to buy in it?

We currently live overseas(i.e. not in the US), and are not tied to any particular US state, it will probably just be a case of which school is selected. Given this, any particular 529 suggestions?

thanks!
Just one kid?
Any chance you want to pass it down to grandkids for education at some point?

Purdue
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Joined: Mon Aug 01, 2016 3:42 pm

Re: Make sense to setup 529 for high school junior?

Post by Purdue » Sat Feb 17, 2018 9:24 am

You might consider doing it if you receive a state income tax deduction for 529 contributions.

tenkuky
Posts: 567
Joined: Sun Dec 14, 2014 4:28 pm

Re: Make sense to setup 529 for high school junior?

Post by tenkuky » Sat Feb 17, 2018 9:27 am

Purdue wrote:
Sat Feb 17, 2018 9:24 am
You might consider doing it if you receive a state income tax deduction for 529 contributions.
Would OP get one if they live overseas and not tied to any state?
And I also don't know if one can open a US 529 if not a US resident.

TallBoy29er
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Re: Make sense to setup 529 for high school junior?

Post by TallBoy29er » Sat Feb 17, 2018 9:35 am

In the short timeframe you have limited exposure to the upside of tax free growth. Don't forget, there are downsides to 529's. if your funds lose value, you can't claim a capital loss, so you could lose a tax advantage you would otherwise have.

StealthRabbit
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Re: Make sense to setup 529 for high school junior?

Post by StealthRabbit » Sat Feb 17, 2018 6:28 pm

If international based (and taxed)... not sure a 529 will be of any value.

Consider the bigger picture ... What does the DD plan to do with / about college?

If financial expense / immediate payment is the issue...
  • It can be very good financially for parent to actively invest equivalent funds while student is in college and pay off student debt AFTER / when the student graduates.
  • International colleges can be much cheaper (and in some cases much better edu)
  • very low cost options exist in USA (Laramie WY, and many others < $10k / yr)
  • Free FT college instead of High School (WA and Hawaii)
just a few of many options.

rickatbh
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Re: Make sense to setup 529 for high school junior?

Post by rickatbh » Mon Feb 19, 2018 2:11 pm

hello everyone,

thanks for all the detailed replies. Even though I have another kid who will be ready for college in 7 years, I think I could still put some of the funds in a low-risk fund option. Or follow some of the great suggestions by StealthRabbit for investing during college and pay off (or help pay off) the student debt after graduation.

As tenkuky said, I don't have residence in any state, so will not qualify for any state-related deductions.

I do think that US colleges are still better for higher education, due to the breadth and variety of course/study options. Maybe I am just suffering from nostalgia about my days in college there!

Thanks again.

jacoavlu
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Re: Make sense to setup 529 for high school junior?

Post by jacoavlu » Mon Feb 19, 2018 2:33 pm

Will your child become a resident of the state where they go to college? If so, and if they were going to work (and earn income) during college, you may explore the benefit of them opening a 529 in their own name. You could gift the money to them, which they would contribute to the 529 (and receive the state income tax deduction), leave in cash or other ultra-conservative investment option, and then use the funds to pay college expenses.

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just frank
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Re: Make sense to setup 529 for high school junior?

Post by just frank » Mon Feb 19, 2018 7:14 pm

I'd say go for it. I started when my oldest was in 8th grade, and I'm up quite a bit.

You can also do out of pocket at the beginning, and pay it out at the end of college...in 4 years.

rickatbh
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Re: Make sense to setup 529 for high school junior?

Post by rickatbh » Wed Feb 21, 2018 1:49 pm

StealthRabbit wrote:
Sat Feb 17, 2018 6:28 pm

[*]Free FT college instead of High School (WA and Hawaii) [/list]
what is a FT college?
jacoavlu wrote:
Mon Feb 19, 2018 2:33 pm
Will your child become a resident of the state where they go to college? If so, and if they were going to work (and earn income) during college, you may explore the benefit of them opening a 529 in their own name. You could gift the money to them, which they would contribute to the 529 (and receive the state income tax deduction), leave in cash or other ultra-conservative investment option, and then use the funds to pay college expenses.
I did not think of this option. I assume after the first year they become residents, and hence eligible for in-state tuition rates? Can they only open the 529 if they are working while studying? and does any kind of work count, including say part-time teaching or research assistantships?
just frank wrote:
Mon Feb 19, 2018 7:14 pm
I'd say go for it. I started when my oldest was in 8th grade, and I'm up quite a bit.
You can also do out of pocket at the beginning, and pay it out at the end of college...in 4 years.
thanks, JustFrank, this is also a good option. I suppose if it does not grow in the next couple of years, it might still see some growth in about 6 years, when my second one is getting ready.

Also been doing some reading about suitable 529s, and came across articles from 2015 when Obama suggested taxing 529 withdrawals, website posts about how Roth IRA withdrawals can be used for education (withdrawals taxed at ordinary rate, but no additional 10% penalty if funds not used for education), how a 529 can reduce your chances for financial aid, discussions around converting your 401K into Roth plus a traditional IRA (I guess a topic for another post!)

All in all, I am a bit confused now. Will think about this some more. thanks again, everyone!

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DaftInvestor
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Re: Make sense to setup 529 for high school junior?

Post by DaftInvestor » Wed Feb 21, 2018 2:04 pm

3funder wrote:
Sat Feb 17, 2018 7:29 am
rickatbh wrote:
Sat Feb 17, 2018 7:27 am
Hello,

my kid is going to be ready for college in a couple of years. I never opened a 529 in the past. I have enough funds at present to maybe pay for a couple of years of college (about $100K). Does it make sense to take some of that money and setup a 529 now, or should I just leave it a regular savings account? If 529, what would be a good investment(s) to buy in it?

We currently live overseas(i.e. not in the US), and are not tied to any particular US state, it will probably just be a case of which school is selected. Given this, any particular 529 suggestions?

thanks!
Probably not. There is isn't much time for the money to grow.
It depends partially upon federal tax bracket.
OP has $100K - assume putting this money into a safe investment (say bonds earning 2%).
In Year1 the OP could avoid paying taxes on $2000 of interest; Year 2 through 4 on slightly less than this if he draws it down. It certainly would be worth it to me to keep ALL my interest for the 1 year leading up to college and while I am drawing down while he/she is in college. Why not take advantage of 5 years of tax-free interest/growth?

3funder
Posts: 758
Joined: Sun Oct 15, 2017 9:35 pm

Re: Make sense to setup 529 for high school junior?

Post by 3funder » Wed Feb 21, 2018 2:05 pm

DaftInvestor wrote:
Wed Feb 21, 2018 2:04 pm
3funder wrote:
Sat Feb 17, 2018 7:29 am
rickatbh wrote:
Sat Feb 17, 2018 7:27 am
Hello,

my kid is going to be ready for college in a couple of years. I never opened a 529 in the past. I have enough funds at present to maybe pay for a couple of years of college (about $100K). Does it make sense to take some of that money and setup a 529 now, or should I just leave it a regular savings account? If 529, what would be a good investment(s) to buy in it?

We currently live overseas(i.e. not in the US), and are not tied to any particular US state, it will probably just be a case of which school is selected. Given this, any particular 529 suggestions?

thanks!
Probably not. There is isn't much time for the money to grow.
It depends partially upon federal tax bracket.
OP has $100K - assume putting this money into a safe investment (say bonds earning 2%).
In Year1 the OP could avoid paying taxes on $2000 of interest; Year 2 through 4 on slightly less than this if he draws it down. It certainly would be worth it to me to keep ALL my interest for the 1 year leading up to college and while I am drawing down while he/she is in college. Why not take advantage of 5 years of tax-free interest/growth?
Nothing wrong with doing that.

kotsp
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Joined: Sun Jan 14, 2018 9:32 pm

Re: Make sense to setup 529 for high school junior?

Post by kotsp » Wed Feb 21, 2018 4:53 pm

jacoavlu wrote:
Mon Feb 19, 2018 2:33 pm
Will your child become a resident of the state where they go to college? If so, and if they were going to work (and earn income) during college, you may explore the benefit of them opening a 529 in their own name. You could gift the money to them, which they would contribute to the 529 (and receive the state income tax deduction), leave in cash or other ultra-conservative investment option, and then use the funds to pay college expenses.
I would strongly advice against opening 529 in student's name. Student's 529 is considered as student's asset and has significant negative impact on thier Financial Aid. It is always advantage to keep the funds in Parent's name than the students. My strategy was that all the dollar my son earns during his college days, would be used to pay his tuition and avoid any savings under his name. But I do keep track of his earnings, and would pay him after he finishes his college. This way I fund his college while he earns for his future life.

kotsp
Posts: 28
Joined: Sun Jan 14, 2018 9:32 pm

Re: Make sense to setup 529 for high school junior?

Post by kotsp » Wed Feb 21, 2018 5:05 pm

rickatbh wrote:
Mon Feb 19, 2018 2:11 pm
hello everyone,

thanks for all the detailed replies. Even though I have another kid who will be ready for college in 7 years, I think I could still put some of the funds in a low-risk fund option. Or follow some of the great suggestions by StealthRabbit for investing during college and pay off (or help pay off) the student debt after graduation.
Putting funds in low risk funds in 529 will be advantages in another way. If not for claiming State Tax credit, but making the funds grow federal & state tax free.

For the second kid, I would advice opening another 529 for him/her as beneficiary. Since you have 7 more years, you can go with little aggressive strategy. Vanguard has good choices of age based options in their 529. If anything is left over in first kids's 529, you can always roll it over to the second kid's account.

Take a look here for Age based options at Vanguard https://investor.vanguard.com/529-plan/ ... ed-options. You said your second one is ready in 7 years. That means he/she might fall under "Child age 11 to 12 years". The aggressive option has nice 60% Stock, 40% Bond balanced Portfolio with expense ratio of 0.16%. Take a look here https://investor.vanguard.com/529-plan/profile/4405

KlangFool
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Re: Make sense to setup 529 for high school junior?

Post by KlangFool » Wed Feb 21, 2018 5:12 pm

https://en.wikipedia.org/wiki/Foreign_e ... _exclusion

OP,

Do you pay any tax at all? If you don't, why do you care about tax-free growth?

KlangFool

neveragain
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Re: Make sense to setup 529 for high school junior?

Post by neveragain » Wed Feb 21, 2018 6:22 pm

Even if not enough time, what about if he decides to go to graduate school after college? The 529 might earn enough to help him with graduate school expenses. I'd recommend a conservative growth plan for the 529 rather than an aggressive one, for such a shorter time frame.

kotsp
Posts: 28
Joined: Sun Jan 14, 2018 9:32 pm

Re: Make sense to setup 529 for high school junior?

Post by kotsp » Thu Feb 22, 2018 10:24 am

KlangFool wrote:
Wed Feb 21, 2018 5:12 pm
https://en.wikipedia.org/wiki/Foreign_e ... _exclusion

OP,

Do you pay any tax at all? If you don't, why do you care about tax-free growth?

KlangFool
Above wikipedia article is talking about exclusion of foreign earned income. If you have non-earned income from US sources (such as capital gain or dividend income etc.), that is not excluded and must be reported by filing Fed Tax. In such situations, having money marked for kid's college is best served in 529.

bnes
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Re: Make sense to setup 529 for high school junior?

Post by bnes » Thu Feb 22, 2018 10:38 am

Keep in mind you can switch beneficiaries on a 529 plan. So once the first kid is out, switch to the 2nd kid.
The 529 advantage is primarily in sheltering earnings from tax, so you have to have earnings.

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