Start 529 Plan?

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black_knight_32
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Start 529 Plan?

Post by black_knight_32 »

Good Evening -
My wife and I are currently maxing out 401(k) plans and maxing out Backdoor Roth IRA. We have one child one another one the way (Due in July). We are currently contributing our excess funds to a brokerage account but we currently do not have a 529 plan setup. We contribute to a savings account for both but curious if it would be better to contribute to a 529 plan. We are residents of Illinois which allow up to $20,000 (married, filing jointly) contributions.

Should we keep contributing to brokerage and savings accounts or should we take advantage of the tax savings by contributing to a 529 plan since Illinois provides a tax deduction up to $20,000 contribution?
KlangFool
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Re: Start 529 Plan?

Post by KlangFool »

black_knight_32 wrote: Sun May 06, 2018 10:10 am Good Evening -
My wife and I are currently maxing out 401(k) plans and maxing out Backdoor Roth IRA. We have one child one another one the way (Due in July). We are currently contributing our excess funds to a brokerage account but we currently do not have a 529 plan setup. We contribute to a savings account for both but curious if it would be better to contribute to a 529 plan. We are residents of Illinois which allow up to $20,000 (married, filing jointly) contributions.

Should we keep contributing to brokerage and savings accounts or should we take advantage of the tax savings by contributing to a 529 plan since Illinois provides a tax deduction up to $20,000 contribution?
black_knight_32,

1) How old are you?

2) Is it worth your effort to overcomplicate your investment?

3) Essentially, at your saving rate, you do not need to save for college education. Your annual saving is big enough to pay for college education.

4) Do you plan to early retire?

5) What is your current portfolio size?

KlangFool
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dogagility
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Re: Start 529 Plan?

Post by dogagility »

Probably, but difficult to say without knowing your other financial goals or current retirement savings amounts.

Knowing how much each child will need for college costs can be difficult to know prior to their high school years. Many people with kids that aren't high achievers (i.e. won't get significant merit aid), attempt to save as much as the cost of a state flagship university.

I'd suggest having an initial goal of putting half of the public flagship costs in a 529 (factoring in 4% inflation/year for college costs). Adjust this contribution when your kids are near/in high school.

Keep in mind a 529 can be used for graduate degrees too and can be transferred to other (including future) relatives.

:sharebeer
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
Topic Author
black_knight_32
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Re: Start 529 Plan?

Post by black_knight_32 »

KlangFool wrote: Sun May 06, 2018 10:18 am
black_knight_32 wrote: Sun May 06, 2018 10:10 am Good Evening -
My wife and I are currently maxing out 401(k) plans and maxing out Backdoor Roth IRA. We have one child one another one the way (Due in July). We are currently contributing our excess funds to a brokerage account but we currently do not have a 529 plan setup. We contribute to a savings account for both but curious if it would be better to contribute to a 529 plan. We are residents of Illinois which allow up to $20,000 (married, filing jointly) contributions.

Should we keep contributing to brokerage and savings accounts or should we take advantage of the tax savings by contributing to a 529 plan since Illinois provides a tax deduction up to $20,000 contribution?
black_knight_32,

1) How old are you?

2) Is it worth your effort to overcomplicate your investment?

3) Essentially, at your saving rate, you do not need to save for college education. Your annual saving is big enough to pay for college education.

4) Do you plan to early retire?

5) What is your current portfolio size?

KlangFool

1) How old are you?
Wife and I are 32

2) Is it worth your effort to overcomplicate your investment?
That is my initial concern. We also aren't 100% positive we will be residents of Illinois by the time our first child goes to college.

3) Essentially, at your saving rate, you do not need to save for college education. Your annual saving is big enough to pay for college education.

4) Do you plan to early retire?
Yes.

5) What is your current portfolio size?
Net worth is $1.5M with 1.2M invested in various account (Roth IRA, 401(k) and brokerage). Current asset allocation is 90% stocks and 10% bonds. Of the stocks, 70% is US and 30% International.
KlangFool
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Re: Start 529 Plan?

Post by KlangFool »

black_knight_32 wrote: Sun May 06, 2018 10:22 am
KlangFool wrote: Sun May 06, 2018 10:18 am
black_knight_32 wrote: Sun May 06, 2018 10:10 am Good Evening -
My wife and I are currently maxing out 401(k) plans and maxing out Backdoor Roth IRA. We have one child one another one the way (Due in July). We are currently contributing our excess funds to a brokerage account but we currently do not have a 529 plan setup. We contribute to a savings account for both but curious if it would be better to contribute to a 529 plan. We are residents of Illinois which allow up to $20,000 (married, filing jointly) contributions.

Should we keep contributing to brokerage and savings accounts or should we take advantage of the tax savings by contributing to a 529 plan since Illinois provides a tax deduction up to $20,000 contribution?
black_knight_32,

1) How old are you?

2) Is it worth your effort to overcomplicate your investment?

3) Essentially, at your saving rate, you do not need to save for college education. Your annual saving is big enough to pay for college education.

4) Do you plan to early retire?

5) What is your current portfolio size?

KlangFool

1) How old are you?
Wife and I are 32

2) Is it worth your effort to overcomplicate your investment?
That is my initial concern. We also aren't 100% positive we will be residents of Illinois by the time our first child goes to college.

3) Essentially, at your saving rate, you do not need to save for college education. Your annual saving is big enough to pay for college education.

4) Do you plan to early retire?
Yes.

5) What is your current portfolio size?
Net worth is $1.5M with 1.2M invested in various account (Roth IRA, 401(k) and brokerage). Current asset allocation is 90% stocks and 10% bonds. Of the stocks, 70% is US and 30% International.
black_knight_32,

1) I do not think it is worth the effort and complication.

2) The tax benefit is minimal.

KlangFool
amitb00
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Re: Start 529 Plan?

Post by amitb00 »

With your kind of assets, you are not likely to get any need based aid. In case you want to pay for kids education, 529 have awesome benefits. Even if kids don’t need full amount you saved, you can give it to grand kids. It seems to me that if your retirement funding is taken care of and you want to help in kids education, 529 is a no brained.
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Smorgasbord
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Re: Start 529 Plan?

Post by Smorgasbord »

How much extra effort is it to use a 529 plan? For me it took maybe an hour or so to set the thing up, and then 10 minutes a year (2 minutes to enter the numbers into TurboTax and 8 minutes to do the ACH transfer) to get my state's $1,000 a year 529 tax credit.
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dogagility
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Re: Start 529 Plan?

Post by dogagility »

Smorgasbord wrote: Sun May 06, 2018 11:07 am How much extra effort is it to use a 529 plan? For me it took maybe an hour or so to set the thing up, and then 10 minutes a year (2 minutes to enter the numbers into TurboTax and 8 minutes to do the ACH transfer) to get my state's $1,000 a year 529 tax credit.
Exactly
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
KlangFool
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Re: Start 529 Plan?

Post by KlangFool »

Smorgasbord wrote: Sun May 06, 2018 11:07 am How much extra effort is it to use a 529 plan? For me it took maybe an hour or so to set the thing up, and then 10 minutes a year (2 minutes to enter the numbers into TurboTax and 8 minutes to do the ACH transfer) to get my state's $1,000 a year 529 tax credit.
Smorgasbord,

What is the AA of your 529 versus your main portfolio? That is the complication.

KlangFool
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dogagility
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Re: Start 529 Plan?

Post by dogagility »

According to the rules of state income tax deduction, it doesn't seem to matter if you are a resident of Illinois when your kids go off to college. Just need to be a resident during the contribution year.

From https://www.brightstartsavings.com/tax-center/: "If you live in Illinois, you also get some added state tax benefits. Contributions to your Bright Start account are tax deductible. You’ll enjoy a deduction of up to $10,000 per parent, per year ($20,000 if married and filing jointly) and you pay no state income tax on earnings and withdrawals that are used for qualified college expenses. You can also deduct the contribution portion (but not earnings) of rollovers from other state 529 plans."

If you contributed 20K and filed married/jointly, you might save 1K/year in state taxes. A tidy return for little effort.
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
aaja
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Re: Start 529 Plan?

Post by aaja »

KlangFool wrote: Sun May 06, 2018 10:53 am
black_knight_32 wrote: Sun May 06, 2018 10:22 am
KlangFool wrote: Sun May 06, 2018 10:18 am
black_knight_32 wrote: Sun May 06, 2018 10:10 am Good Evening -
My wife and I are currently maxing out 401(k) plans and maxing out Backdoor Roth IRA. We have one child one another one the way (Due in July). We are currently contributing our excess funds to a brokerage account but we currently do not have a 529 plan setup. We contribute to a savings account for both but curious if it would be better to contribute to a 529 plan. We are residents of Illinois which allow up to $20,000 (married, filing jointly) contributions.

Should we keep contributing to brokerage and savings accounts or should we take advantage of the tax savings by contributing to a 529 plan since Illinois provides a tax deduction up to $20,000 contribution?
black_knight_32,

1) How old are you?

2) Is it worth your effort to overcomplicate your investment?

3) Essentially, at your saving rate, you do not need to save for college education. Your annual saving is big enough to pay for college education.

4) Do you plan to early retire?

5) What is your current portfolio size?

KlangFool

1) How old are you?
Wife and I are 32

2) Is it worth your effort to overcomplicate your investment?
That is my initial concern. We also aren't 100% positive we will be residents of Illinois by the time our first child goes to college.

3) Essentially, at your saving rate, you do not need to save for college education. Your annual saving is big enough to pay for college education.

4) Do you plan to early retire?
Yes.

5) What is your current portfolio size?
Net worth is $1.5M with 1.2M invested in various account (Roth IRA, 401(k) and brokerage). Current asset allocation is 90% stocks and 10% bonds. Of the stocks, 70% is US and 30% International.
black_knight_32,

1) I do not think it is worth the effort and complication.

2) The tax benefit is minimal.

KlangFool
One question here. Is your statement about tax benefits just about the Illinois benefits at time or contribution or also about distribution time? Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings. Doesn't this make the 529 worth it?
blueman457
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Re: Start 529 Plan?

Post by blueman457 »

Again, it's hard to say without knowing the full picture. But if you're doing a backdoor Roth I assume you're probably on the higher income side. Assuming your retirement savings and general cash savings are appropriate, a 529 should work. I am planning on balancing between a 529 and taxable account for college/general investing to hedge my bets on whether my kid goes to public vs private school.

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Re: Start 529 Plan?

Post by informal guide »

There is real money to gain if you use a 529. First, the Illinois state income tax deduction of $20K is worth $990 per year - -(at 4.95%) more valuable now that the Federal state and local tax destructibility is capped at $10K (our property tax alone is over that amount). Second the gain in portfolio value is never taxed, as long as the funds are used for college expenses. If you start young, it is not unreasonable to expect the portfolios to double or more. The gains are simply not taxed at the Federal or State level if the funds are used for qualified education ed expenses. So if your income is high, the capital gains tax saved is $4000 or more at the Federal level (20%, plus any state taxes).

We have two kids and did not completely use the 529 for undergrad.....but, never despair..they are working now for grad school. Our back-up plan is to use for grandkids that might come along some day.

Finally, I'd suggest using a savings plan, not a prepaid plan (IL still offers one). That is because there are typically lower gains (growth of college tuition) than market gains and typically prepaid administrative rules to make use of prepaid plan assets for education are more cumbersome and restrictive.
KlangFool
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Re: Start 529 Plan?

Post by KlangFool »

aaja wrote: Sun May 06, 2018 11:36 am
One question here. Is your statement about tax benefits just about the Illinois benefits at time or contribution or also about distribution time? Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings. Doesn't this make the 529 worth it?
aaja,

I am answering OP's question in his context.

A) He has 1.2 million at 32 years old.

B) He is saving 50K to 100K per year.

C) He is going to early retire.

So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.

Whether it is worth your effort, that is a totally different question and answer.

<<Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings.>>

Depending on your income tax bracket and so on, the difference between the taxable account and 529 may not be that great. And, at OP's annual saving level, no distribution is needed to fund the college education. The annual saving is big enough to "cash flow" the college education.

If you contribute to the max of all your tax-advantaged accounts, your annual saving is probably big enough to pay for the college education. So, why would you need to save for college education?

KlangFool

P.S.: For folks that want to retire early, it is useful to have a large taxable account beyond the tax-advantaged accounts.
Last edited by KlangFool on Sun May 06, 2018 12:17 pm, edited 1 time in total.
KlangFool
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Re: Start 529 Plan?

Post by KlangFool »

informal guide wrote: Sun May 06, 2018 11:59 am
There is real money to gain if you use a 529. First, the Illinois state income tax deduction of $20K is worth $990 per year
informal guide,

Why that amount is worth OP's effort? It is worth your effort but it may not be true for OP. And, from now on, OP has to maintain a separate 529 portfolio over the next 15 to 20 years. If he has 2 kids, he has 2 X 529 portfolios.

Keep it simple. One portfolio does it all could be the right answer for some folks.

KlangFool
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Re: Start 529 Plan?

Post by abuss368 »

We opened a 529 Plan for each child and have contributed to it. While there will be some amount that is borrow, the 529 plans have been nice in terms of having funds marked for higher education and segregated from our retirement accounts. In addition, there have been state tax benefits. I eventually left our state plan and transferred the assets to Vanguard's 529 plan which is organized in the State of Nevada.
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letsgobobby
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Re: Start 529 Plan?

Post by letsgobobby »

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avoidingdumbmistakes
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Re: Start 529 Plan?

Post by avoidingdumbmistakes »

I have about half the estimated instate undergrad degree cost saved in 529s for my 2 thirteen year olds. I treat the 529 completely separate from my other assets. I get a state tax benefit spread over the next 10 years unless I move.

529 growth is tax free if used for qualified expenses. Even if there was no state tax benefit it still makes financial sense for many to grow money tax free for college. I was unable to fund 529s for my current college seniors due to the aftershock of the 09 meltdown on my financial picture and I really wish I did invest in 529s for them. Wife and I bootstrapped 2 college kids at once and it was not easy to say the least.

I still have a fairly aggressive portfolio in the 529s becuase I can pay the first 2 years no problem without needing a 529 if the market tanks. I will reallocate within the next 2-3 years but the 529 plans have grown nicely and it feels great to not have to worry about tapping any other investments for at least half of next round of college expenses.

I like having half the estimated cost in the 529s and not more in case one of my kids gets a free ride or decides not to go at all. I can change the beneficiary at any time. 529s are a personal decision but it's hard to argue against multi year tax free growth even if there is limited/no state income tax benefit. They are not complicated to set up, reallocate, or contribute.
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Smorgasbord
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Re: Start 529 Plan?

Post by Smorgasbord »

KlangFool wrote: Sun May 06, 2018 11:27 am Smorgasbord,What is the AA of your 529 versus your main portfolio? That is the complication.
KlangFool
Right now they are both structured for draw downs to begin in 15+ years, so they are approximately the same. I suppose if I wanted to avoid the complication of adjusting the 529 plan I would go with an age based option.
marcopolo
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Re: Start 529 Plan?

Post by marcopolo »

black_knight_32 wrote: Sun May 06, 2018 10:10 am Good Evening -
My wife and I are currently maxing out 401(k) plans and maxing out Backdoor Roth IRA. We have one child one another one the way (Due in July). We are currently contributing our excess funds to a brokerage account but we currently do not have a 529 plan setup. We contribute to a savings account for both but curious if it would be better to contribute to a 529 plan. We are residents of Illinois which allow up to $20,000 (married, filing jointly) contributions.

Should we keep contributing to brokerage and savings accounts or should we take advantage of the tax savings by contributing to a 529 plan since Illinois provides a tax deduction up to $20,000 contribution?
A 529 plan is essentially the equivalent of a Roth IRA for education expenses. You have already maxed out all your other tax-advantaged savings options. If you are fairly certain you will be paying some of the college expenses for your child, then a 529 is a great savings vehicle for that portion of your savings, especially with the state tax break.
Once in a while you get shown the light, in the strangest of places if you look at it right.
FullYellowJacket
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Re: Start 529 Plan?

Post by FullYellowJacket »

If it helps, I've run several simulations to help determine how much a 529 is worth for my situation (high income in CA), and it looks like our net worth will be 30k higher due to 529 use through tax savings. Another way to think about it is that we would need to save about 15% more per month for college if we do not use a 529.

Having said that, we are targeting 8k per semester for 4 years inside of a 529. Everything above and beyond will hopefully be cash flow rolled.
marcopolo
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Re: Start 529 Plan?

Post by marcopolo »

KlangFool wrote: Sun May 06, 2018 12:06 pm
So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.
What "effort" are you concerned about?
What amount of tax savings would make it worth the "effort"
By this same reasoning, why bother to do a backdoor Roth IRA, it takes some effort to get that tax break as well.

May be you are so wealthy, you don't need to save thousands of dollars in taxes. But, it seems very presumptuous to advice the OP to miss out on those tax savings because they may not be worth the effort to you.
Once in a while you get shown the light, in the strangest of places if you look at it right.
yogesh
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Re: Start 529 Plan?

Post by yogesh »

letsgobobby wrote: Sun May 06, 2018 12:37 pm
KlangFool wrote: Sun May 06, 2018 12:06 pm
aaja wrote: Sun May 06, 2018 11:36 am
One question here. Is your statement about tax benefits just about the Illinois benefits at time or contribution or also about distribution time? Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings. Doesn't this make the 529 worth it?
aaja,

I am answering OP's question in his context.

A) He has 1.2 million at 32 years old.

B) He is saving 50K to 100K per year.

C) He is going to early retire.

So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.

Whether it is worth your effort, that is a totally different question and answer.

<<Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings.>>

Depending on your income tax bracket and so on, the difference between the taxable account and 529 may not be that great. And, at OP's annual saving level, no distribution is needed to fund the college education. The annual saving is big enough to "cash flow" the college education.

If you contribute to the max of all your tax-advantaged accounts, your annual saving is probably big enough to pay for the college education. So, why would you need to save for college education?

KlangFool

P.S.: For folks that want to retire early, it is useful to have a large taxable account beyond the tax-advantaged accounts.
He is absolutely a candidate for 529s. Minimal effort could easily save him tens of thousands of dollars in state and federal taxes over his lifetime.
Indeed OP is good candidate to take advantage of 529 as yet another tax advantaged account that grows tax free.
We funded $100K for kid in 2009 and now its sitting with 2x compound growth. That's a lot of tax savings when I start drawing it for college tuition. In my experience 529 gave a lot of return/effort ratio than the TIRA to ROTH conversions per year (small amounts with more efforts).
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040
KlangFool
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Re: Start 529 Plan?

Post by KlangFool »

marcopolo wrote: Sun May 06, 2018 1:34 pm
KlangFool wrote: Sun May 06, 2018 12:06 pm
So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.
What "effort" are you concerned about?
What amount of tax savings would make it worth the "effort"
By this same reasoning, why bother to do a backdoor Roth IRA, it takes some effort to get that tax break as well.

May be you are so wealthy, you don't need to save thousands of dollars in taxes. But, it seems very presumptuous to advice the OP to miss out on those tax savings because they may not be worth the effort.
marcopolo,

What is the cost of keeping a separate 529 portfolio? It is not free.

<<May be you are so wealthy, you don't need to save thousands of dollars in taxes. But, it seems very presumptuous to advice the OP to miss out on those tax savings because they may not be worth the effort.>>

Vice versa. It is worth your effort. It may or may not worth OP's effort. And, it will cost OP in term of his taxable account's contribution. There are tax advantages for a taxable account investment with early retired folks.

Let's not only look at one side of the equation.

<<May be you are so wealthy,>>

OP is very wealthy. He has 1.2 million at 32 years old.

KlangFool
ks289
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Re: Start 529 Plan?

Post by ks289 »

letsgobobby wrote: Sun May 06, 2018 12:37 pm
KlangFool wrote: Sun May 06, 2018 12:06 pm
aaja wrote: Sun May 06, 2018 11:36 am
One question here. Is your statement about tax benefits just about the Illinois benefits at time or contribution or also about distribution time? Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings. Doesn't this make the 529 worth it?
aaja,

I am answering OP's question in his context.

A) He has 1.2 million at 32 years old.

B) He is saving 50K to 100K per year.

C) He is going to early retire.

So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.

Whether it is worth your effort, that is a totally different question and answer.

<<Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings.>>

Depending on your income tax bracket and so on, the difference between the taxable account and 529 may not be that great. And, at OP's annual saving level, no distribution is needed to fund the college education. The annual saving is big enough to "cash flow" the college education.

If you contribute to the max of all your tax-advantaged accounts, your annual saving is probably big enough to pay for the college education. So, why would you need to save for college education?

KlangFool

P.S.: For folks that want to retire early, it is useful to have a large taxable account beyond the tax-advantaged accounts.
He is absolutely a candidate for 529s. Minimal effort could easily save him tens of thousands of dollars in state and federal taxes over his lifetime.

I agree. OP will have a large taxable account in addition to the 529. With regard to effort, most 529 plans include numerous age based options. Minimal effort or tracking needed. It would be slightly more effort for me if I had to allocate those same funds to a taxable account instead of the 529.

The benefit of tax free growth can really be significant even with allocating a few thousand dollars a year. Yes, the tax savings could be in the tens of thousands from a 529 for OP.
letsgobobby
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Re: Start 529 Plan?

Post by letsgobobby »

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Grt2bOutdoors
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Re: Start 529 Plan?

Post by Grt2bOutdoors »

OP - 529 plan would be advantageous for you to fund. With your assets you will not receive need based aid, even if child is a genius the top cost schools will not hand out merit/scholarship, not with your assets. Save now, Don’t pass up on these tax free gains.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
grkmec
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Re: Start 529 Plan?

Post by grkmec »

I think setting up a 529s is a no-brainer if you are already maxing out all retirement accounts and you plan on paying for your kids education....

I have 2 kids (3.5yr and 7yr) and #3 is arriving in about a month. My wife and I have income from CT and NY and each state allows 10k deduction for 529s.

As of 12/31/2017, we had paid $224k into 529s and their current value was $290k (+66k in gains since inception). My wife and I are subject to ACA taxes, so assuming our tax rate for stocks is 20% + 7% +3.8% = 30.8% and for bond interest it is 47.8%. Assuming 75/25 asset allocation, blended tax rate would be around 35%. 66k * 35% = 23k

About 120k of our contributions inception to date qualified for state deductions . That's another $1,600 in value.

So over the last 6 years, setting up 529s has provided us with close to 25k in value.

As a result, my wife and elected to superfund both kids with 150k each in January 2018. So now we have around 590k in 529 assets. Assuming this doubles over the next 10 years, that will represent over 200k in cumulative value + state tax deductions of around 25k.

So to make close to quarter million for a few minutes of work seems like a no-brainer. I wish my day job was that easy !
yogesh
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Re: Start 529 Plan?

Post by yogesh »

Just so OP knows the efforts for 529 compared to TIRA to ROTH conversion dance per year for someone with high net worth and have kids.
01/2009: Open a 529 account with child as beneficiary and transfer $100K (Gift tax exclusion with five year worth contributions from dad & mom)
01/2009: One time enrollment form choose default age index portfolio of ER 0.15 - https://www.fidelity.com/529-plans/investment-options
01/2020: Direct checks delivered from 529 to college for all four years' tuition. Expected tax savings: ~$30K
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040
letsgobobby
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Re: Start 529 Plan?

Post by letsgobobby »

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aaja
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Re: Start 529 Plan?

Post by aaja »

KlangFool wrote: Sun May 06, 2018 12:06 pm
aaja wrote: Sun May 06, 2018 11:36 am
One question here. Is your statement about tax benefits just about the Illinois benefits at time or contribution or also about distribution time? Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings. Doesn't this make the 529 worth it?
aaja,

I am answering OP's question in his context.

A) He has 1.2 million at 32 years old.

B) He is saving 50K to 100K per year.

C) He is going to early retire.

So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.

Whether it is worth your effort, that is a totally different question and answer.

<<Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings.>>

Depending on your income tax bracket and so on, the difference between the taxable account and 529 may not be that great. And, at OP's annual saving level, no distribution is needed to fund the college education. The annual saving is big enough to "cash flow" the college education.

If you contribute to the max of all your tax-advantaged accounts, your annual saving is probably big enough to pay for the college education. So, why would you need to save for college education?

KlangFool

P.S.: For folks that want to retire early, it is useful to have a large taxable account beyond the tax-advantaged accounts.
Thanks for the reply. My situation is very similar to OP, except for I am in a state with no tax advantages. I might be close to my early retirement date when my kid goes to college and should have enough saved up in taxable. I am maxing out all tax advantaged including mega backdoor and then rest goes to taxable.

I guess my confusion comes from the fact that when I dip into the savings to pay for college won't the gains be taxed at long term capital gains rate? Isn't this what I am avoiding with the 529?

What am I missing here.
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black_knight_32
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Re: Start 529 Plan?

Post by black_knight_32 »

Thanks for all the advice!

For those who are funding above what expected college/grad expenses will be, what are your plans to do with the excess money? After kids graduate change the beneficiary to grandkids?
letsgobobby
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Re: Start 529 Plan?

Post by letsgobobby »

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KlangFool
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Re: Start 529 Plan?

Post by KlangFool »

aaja wrote: Sun May 06, 2018 3:51 pm
KlangFool wrote: Sun May 06, 2018 12:06 pm
aaja wrote: Sun May 06, 2018 11:36 am
One question here. Is your statement about tax benefits just about the Illinois benefits at time or contribution or also about distribution time? Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings. Doesn't this make the 529 worth it?
aaja,

I am answering OP's question in his context.

A) He has 1.2 million at 32 years old.

B) He is saving 50K to 100K per year.

C) He is going to early retire.

So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.

Whether it is worth your effort, that is a totally different question and answer.

<<Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings.>>

Depending on your income tax bracket and so on, the difference between the taxable account and 529 may not be that great. And, at OP's annual saving level, no distribution is needed to fund the college education. The annual saving is big enough to "cash flow" the college education.

If you contribute to the max of all your tax-advantaged accounts, your annual saving is probably big enough to pay for the college education. So, why would you need to save for college education?

KlangFool

P.S.: For folks that want to retire early, it is useful to have a large taxable account beyond the tax-advantaged accounts.
Thanks for the reply. My situation is very similar to OP, except for I am in a state with no tax advantages. I might be close to my early retirement date when my kid goes to college and should have enough saved up in taxable. I am maxing out all tax advantaged including mega backdoor and then rest goes to taxable.

I guess my confusion comes from the fact that when I dip into the savings to pay for college won't the gains be taxed at long term capital gains rate? Isn't this what I am avoiding with the 529?

What am I missing here.
aaja,

Why do you need to dip into savings to pay for the college education?

For example, my annual savings is 60K. The college education costs for my 2 kids are 60K per year. So, why do I need to sell anything to pay for college?

A) I could stop my tax-advantaged accounts contribution and pay for college.

B) I could sell my taxable account investment and contribute to the tax-advantaged accounts at the same time if it saves me taxes.

C) I could spend my taxable account distribution.

Or, a combination of (A) to (C). I am doing (B) and (C) now because I pay fewer taxes by doing this. My effective Federal tax rate is less than 5%. And, I am moving 40K to 50K of my money into tax-advantaged accounts.

When your annual saving is high enough, you do not need to save for college education.

KlangFool
grkmec
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Re: Start 529 Plan?

Post by grkmec »

black_knight_32 wrote: Sun May 06, 2018 3:57 pm Thanks for all the advice!

For those who are funding above what expected college/grad expenses will be, what are your plans to do with the excess money? After kids graduate change the beneficiary to grandkids?
I might start using 10k / year for middle / youngest child's private high school if the account balances look so high that are not going to be used. Plan B would be to see if any of my kids wanted to become pilots and use this money for flight training. Plan C would be to help niece / nephews. Plan D is for grandkids.
letsgobobby
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Re: Start 529 Plan?

Post by letsgobobby »

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Last edited by letsgobobby on Fri May 24, 2019 5:54 pm, edited 1 time in total.
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SmileyFace
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Re: Start 529 Plan?

Post by SmileyFace »

You should use 529s. Why pay taxes on 20 years of growth if you don't have to? Plus you get the benefit of a state tax deduction. It's not complicated at all.
JBTX
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Re: Start 529 Plan?

Post by JBTX »

In many cases I think people overvalue 529s but in your case I think it is worthwhile. Perhaps contribute enough to get one child through 4 years of public school. Given you are already maxing out retirement vehicles, have a nice amount saved for your age, and are in a higher tax benefit the benefits of 529 outweigh the risks.
JBTX
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Re: Start 529 Plan?

Post by JBTX »

KlangFool wrote: Sun May 06, 2018 4:11 pm
aaja wrote: Sun May 06, 2018 3:51 pm
KlangFool wrote: Sun May 06, 2018 12:06 pm
aaja wrote: Sun May 06, 2018 11:36 am
One question here. Is your statement about tax benefits just about the Illinois benefits at time or contribution or also about distribution time? Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings. Doesn't this make the 529 worth it?
aaja,

I am answering OP's question in his context.

A) He has 1.2 million at 32 years old.

B) He is saving 50K to 100K per year.

C) He is going to early retire.

So, why should he trouble himself with a few thousands of 529 contributions? At his net worth and annual savings, it is not worth his effort.

Whether it is worth your effort, that is a totally different question and answer.

<<Assuming my kid goes to college aren't the distributions tax free saving me money on the earnings.>>

Depending on your income tax bracket and so on, the difference between the taxable account and 529 may not be that great. And, at OP's annual saving level, no distribution is needed to fund the college education. The annual saving is big enough to "cash flow" the college education.

If you contribute to the max of all your tax-advantaged accounts, your annual saving is probably big enough to pay for the college education. So, why would you need to save for college education?

KlangFool

P.S.: For folks that want to retire early, it is useful to have a large taxable account beyond the tax-advantaged accounts.
Thanks for the reply. My situation is very similar to OP, except for I am in a state with no tax advantages. I might be close to my early retirement date when my kid goes to college and should have enough saved up in taxable. I am maxing out all tax advantaged including mega backdoor and then rest goes to taxable.

I guess my confusion comes from the fact that when I dip into the savings to pay for college won't the gains be taxed at long term capital gains rate? Isn't this what I am avoiding with the 529?

What am I missing here.
aaja,

Why do you need to dip into savings to pay for the college education?

For example, my annual savings is 60K. The college education costs for my 2 kids are 60K per year. So, why do I need to sell anything to pay for college?

A) I could stop my tax-advantaged accounts contribution and pay for college.

B) I could sell my taxable account investment and contribute to the tax-advantaged accounts at the same time if it saves me taxes.

C) I could spend my taxable account distribution.

Or, a combination of (A) to (C). I am doing (B) and (C) now because I pay fewer taxes by doing this. My effective Federal tax rate is less than 5%. And, I am moving 40K to 50K of my money into tax-advantaged accounts.

When your annual saving is high enough, you do not need to save for college education.

KlangFool
I think you have it backward here. No matter how much you have, you are always going to want to take advantage of any tax preference opportunity, provided the risks and liquidity downsides are not too great. If you already have a lot of savings the risks of 529s are less.

As to asset allocation, given their savings and income they can allocate their 529 as aggressively as they see fit. If the 529 tanks prior to college they have plenty of other sources to tap into if need be.
Jack FFR1846
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Re: Start 529 Plan?

Post by Jack FFR1846 »

529 beneficiaries can be easily changed. So if your first kid doesn't use up his own 529, change the beneficiary and use the money for the second kid. If there's money left over at the end.....so what? Pay the penalty and pull it out at that point.

Your tax benefit is enormous, in my opinion. I'm in a state where only $2k a year is tax advantaged for all of about $100 savings on our taxes.

There is absolutely no complication in your AA by starting a 529. I give no consideration to the amount or allocation of my son's 529. It's separate money for his college costs.

With your high net worth, I'm going to make a wild assumption that you may think like I do. While state colleges are fine, if the kid excels and is accepted into a better, more expensive, private college, I support their decision and pay for it. I'm paying $65k for son #1 who is doing fantastic at a top notch private college in engineering.

In short, I'd say to go ahead and open a 529. If you're unsure, put in smaller amounts.
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JoeRetire
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Re: Start 529 Plan?

Post by JoeRetire »

black_knight_32 wrote: Sun May 06, 2018 10:10 amshould we take advantage of the tax savings by contributing to a 529 plan since Illinois provides a tax deduction up to $20,000 contribution?
This.
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lolbatross
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Re: Start 529 Plan?

Post by lolbatross »

black_knight_32 wrote: Sun May 06, 2018 3:57 pm Thanks for all the advice!

For those who are funding above what expected college/grad expenses will be, what are your plans to do with the excess money? After kids graduate change the beneficiary to grandkids?
Based on historical returns & inflation we have about a 25% chance of being over funded for 4 years at IL flagship. (Our 529 goal is to fund ~50% and cash flow the rest - a trade off between tax advantage and downside risk of over funding) In the event that we are over funded we will pay the taxes and reinvest in our taxable.
Rupert
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Re: Start 529 Plan?

Post by Rupert »

lolbatross wrote: Mon May 07, 2018 7:56 am
black_knight_32 wrote: Sun May 06, 2018 3:57 pm Thanks for all the advice!

For those who are funding above what expected college/grad expenses will be, what are your plans to do with the excess money? After kids graduate change the beneficiary to grandkids?
Based on historical returns & inflation we have about a 25% chance of being over funded for 4 years at IL flagship. (Our 529 goal is to fund ~50% and cash flow the rest - a trade off between tax advantage and downside risk of over funding) In the event that we are over funded we will pay the taxes and reinvest in our taxable.
Note that if the account is overfunded, you can transfer ownership of the 529 to your child so that taxes are paid at their (lower) rate. And don't forget that you can still withdraw funds penalty-free if your child earns scholarships.
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UpsetRaptor
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Re: Start 529 Plan?

Post by UpsetRaptor »

black_knight_32 wrote: Sun May 06, 2018 3:57 pm Thanks for all the advice!

For those who are funding above what expected college/grad expenses will be, what are your plans to do with the excess money? After kids graduate change the beneficiary to grandkids?
That's probably my plan, if I have any left over. But it's also worth noting 529s can be used for postgrad stuff too. Grad school, Nursing School, dental school, med school, etc.
e5116
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Re: Start 529 Plan?

Post by e5116 »

Wow, after reading the initial post, I was wondering if I was reading about myself. :shock: Same age, children and ages (including month of expecting), state of residence, etc. Except then you posted your net worth on a subsequent post and mine is significantly less although still substantial for age. :wink: I have debated the same thing and decided that I'm going to pull the trigger for a 529 this year. Yes, it's probably not "necessary" but it's a significant tax savings for minimal effort, so why not? I'll take free money and the savings after 18+ years on top of the tax savings in the year of contribution can be substantial. Honestly, 529s are tax vehicles for the well off as they're the ones that have money left over and benefit the most from the tax savings, so if you have a high income/savings, that's exactly the type of person that a 529 is most valuable for (again, even if you can cash flow the education later, I think the little effort is worth the savings).
gowest
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Re: Start 529 Plan?

Post by gowest »

black_knight_32 wrote: Sun May 06, 2018 3:57 pm Thanks for all the advice!

For those who are funding above what expected college/grad expenses will be, what are your plans to do with the excess money? After kids graduate change the beneficiary to grandkids?
black knight,

We are in a similar situation to you and I wrestled with this issue. What we decided to do is save for college in BOTH a 529 account AND in a taxable account. We put $20k per year into the 529 accounts ($10k per year per kid, with 2 kids) and we also put 2-3x that (i.e., $20-30k per year per kid) in a taxable account. Both of these have an AA that suits our needs for college savings. Once we get to about $400k total, we plan to stop contributing to college savings. (Obviously adjust the figures to fit your scenario and ability/desire to contribute. I'm just giving you some specifics so that you can have a data point.)

This way, we have very little risk of "overfunding" the 529 plans, since we'll only end up contributing about $50-60k into each of the 529s, which should be pretty easy to spend! (And the rest will have been invested via the taxable account.) And this way, we still get some tax benefit from the 529s.

This does add another degree of complication, and it might not be worth it for you. (Klang Fool suggests it might not be worth it, and KF might very well be right!) That being said, our 529s are very easy to maintain. Our state does not provide a state tax deduction, so we invested in the Nevada plan, which is administered directly by Vanguard. (What this means is that the 529 accounts are listed alongside our IRAs and taxable investments, all of which is in Vanguard.) So it's really not that complicated. Yes, it is a little more complicated, but at least I don't have to worry about overfunding 529s. It sounds like your state DOES offer a state tax deduction, which is even better. It shouldn't matter that you might not live in that same state at the time the kids go to college. It just matters at the time of the contributions--at least that's my understanding.

Good luck.
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