Fellow non-529ers

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SagaciousTraveler
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Fellow non-529ers

Post by SagaciousTraveler » Wed May 16, 2018 5:03 am

Good morning all,

In other threads I've had a few discussions on here about alternative ways to invest for our children outside of a 529.

Currently I have both children's (4,1) money in our Taxable Account in the Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX), and keep track in an excel sheet.

Few questions:

1. I shied away from using Target Retirement funds due to their lack of tax efficiency. With that said how would I become less exposed to the market as they reach closer to 18? Right now VTMFX is 47.5% Stocks and 52.5% Bonds/Reserves, which isn't aggressive at all (nice 6.74% after tax and sale though).

2. What strategies are you guys using?

Thank you for your time.

frankie1800
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Re: Fellow non-529ers

Post by frankie1800 » Wed May 16, 2018 5:21 am

Interesting topic as i have been confused on how to save for my children's college education. So far, I have shunned the 529 also. I started a total world fund for them. I too have pondered the possibility of the world economy stalling right around college time. Also, I started buying i bonds from the treasury. there are some tax advantages if money used for college education.

livesoft
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Re: Fellow non-529ers

Post by livesoft » Wed May 16, 2018 5:25 am

The main problem I see with what the OP is doing: They are sequestering money away for college for their children as both a separate investing and separately mentally. If they are not going to use a 529 plan, then they should just have one portfolio asset allocation invested tax-efficiently. That would mean hold equities only in taxable and fixed income in tax-deferred, if they could.

That's always what we did. When it came time for college, the taxable account was so large that the annual gains were enough to pay for college and the principal did not have to be touched.
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DaftInvestor
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Re: Fellow non-529ers

Post by DaftInvestor » Wed May 16, 2018 5:26 am

My strategy has been using 529. :) 20+ years of tax free gains - I can't imagine anything else that would have been better for me.
Interesting thread - discussing alternates to the best college savings solution for someone that is maxing out other tax advantaged accounts.

NS_Bane
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Re: Fellow non-529ers

Post by NS_Bane » Wed May 16, 2018 5:42 am

What is the rationale for not using a 529? Just by depositing money in the 529 and then immediately taking it out to pay tuition, you could be taking advantage of up to a $10,000 state tax deduction in some states.

Not to mention the tax free gains.

Just wondering what the thinking is behind not taking advantage of those savings. I understand not everyone can save, and not everyone plans ahead, but if you’re already doing both, why *wouldnt* you use a 529? I’m assuming you’re in the US so ignore all of the above if you aren’t.

GoldenFinch
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Re: Fellow non-529ers

Post by GoldenFinch » Wed May 16, 2018 5:44 am

DaftInvestor wrote:
Wed May 16, 2018 5:26 am
My strategy has been using 529. :) 20+ years of tax free gains - I can't imagine anything else that would have been better for me.
Interesting thread - discussing alternates to the best college savings solution for someone that is maxing out other tax advantaged accounts.
I too have been really, really happy I have used 529s for the kids. Fund them early and you will thank yourself later!

Grt2bOutdoors
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Re: Fellow non-529ers

Post by Grt2bOutdoors » Wed May 16, 2018 6:33 am

livesoft wrote:
Wed May 16, 2018 5:25 am
The main problem I see with what the OP is doing: They are sequestering money away for college for their children as both a separate investing and separately mentally. If they are not going to use a 529 plan, then they should just have one portfolio asset allocation invested tax-efficiently. That would mean hold equities only in taxable and fixed income in tax-deferred, if they could.

That's always what we did. When it came time for college, the taxable account was so large that the annual gains were enough to pay for college and the principal did not have to be touched.
That’s not likely to happen today if projected returns are lower than they were in past 20 years. One may be using principal too.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

rkhusky
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Re: Fellow non-529ers

Post by rkhusky » Wed May 16, 2018 6:42 am

Put equities in taxable. If market is down during college years, still pay for college from taxable and rebalance in tax-advantaged.

daheld
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Re: Fellow non-529ers

Post by daheld » Wed May 16, 2018 7:49 am

NS_Bane wrote:
Wed May 16, 2018 5:42 am
What is the rationale for not using a 529? Just by depositing money in the 529 and then immediately taking it out to pay tuition, you could be taking advantage of up to a $10,000 state tax deduction in some states.

Not to mention the tax free gains.

Just wondering what the thinking is behind not taking advantage of those savings. I understand not everyone can save, and not everyone plans ahead, but if you’re already doing both, why *wouldnt* you use a 529? I’m assuming you’re in the US so ignore all of the above if you aren’t.
I have the same question. I might be missing something obvious, but why would you not utilize a 529?

SagaciousTraveler
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Re: Fellow non-529ers

Post by SagaciousTraveler » Wed May 16, 2018 8:02 am

daheld wrote:
Wed May 16, 2018 7:49 am
NS_Bane wrote:
Wed May 16, 2018 5:42 am
What is the rationale for not using a 529? Just by depositing money in the 529 and then immediately taking it out to pay tuition, you could be taking advantage of up to a $10,000 state tax deduction in some states.

Not to mention the tax free gains.

Just wondering what the thinking is behind not taking advantage of those savings. I understand not everyone can save, and not everyone plans ahead, but if you’re already doing both, why *wouldnt* you use a 529? I’m assuming you’re in the US so ignore all of the above if you aren’t.
I have the same question. I might be missing something obvious, but why would you not utilize a 529?
Thank you for everyone's input.

I personally do not care for the rules with a 529. I want to have my own freedom of choosing investments and I don't want to be told what I can and can not do with said money.

I feel with our family maxing out every other retirement vehicle and living debt free, I'm ok with losing this tax advantage.

I can not predict the future, so while this money is earmarked for College education, it is accumulating quickly and it will probably be used on other things (car, wedding, down payment on house, etc..).

livesoft
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Re: Fellow non-529ers

Post by livesoft » Wed May 16, 2018 8:20 am

^Then it is sort of wasted in a tax-managed balanced fund. Go for 100% equities in taxable for the tax-efficiency.
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daheld
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Re: Fellow non-529ers

Post by daheld » Wed May 16, 2018 8:21 am

SagaciousTraveler wrote:
Wed May 16, 2018 8:02 am
daheld wrote:
Wed May 16, 2018 7:49 am
NS_Bane wrote:
Wed May 16, 2018 5:42 am
What is the rationale for not using a 529? Just by depositing money in the 529 and then immediately taking it out to pay tuition, you could be taking advantage of up to a $10,000 state tax deduction in some states.

Not to mention the tax free gains.

Just wondering what the thinking is behind not taking advantage of those savings. I understand not everyone can save, and not everyone plans ahead, but if you’re already doing both, why *wouldnt* you use a 529? I’m assuming you’re in the US so ignore all of the above if you aren’t.
I have the same question. I might be missing something obvious, but why would you not utilize a 529?
Thank you for everyone's input.

I personally do not care for the rules with a 529. I want to have my own freedom of choosing investments and I don't want to be told what I can and can not do with said money.

I feel with our family maxing out every other retirement vehicle and living debt free, I'm ok with losing this tax advantage.

I can not predict the future, so while this money is earmarked for College education, it is accumulating quickly and it will probably be used on other things (car, wedding, down payment on house, etc..).
I mean, to each their own. But if you want to use that money for a car, wedding, down payment, or whatever, you just pay whatever taxes you would otherwise on a taxable account. If you do use it for education expenses, there are enormous tax advantages.

soccerrules
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Re: Fellow non-529ers

Post by soccerrules » Wed May 16, 2018 8:26 am

DaftInvestor wrote:
Wed May 16, 2018 5:26 am
My strategy has been using 529. :) 20+ years of tax free gains - I can't imagine anything else that would have been better for me.
Interesting thread - discussing alternates to the best college savings solution for someone that is maxing out other tax advantaged accounts.
+1
Our state does not offer a tax deduction but I was able to get years and years of tax free gain.

OP you will have 14-17 years with kiddo #1 and 17-21 years with #2 -- TAX FREE earnings, plus the money is not comingle with other savings and easy to track growth and account values for planning purposes.

The general consensus is typically not to overfund the 529 and have leftover monies, but that doesn't seem to be your concern at this point.
Don't let your outflow exceed your income or your upkeep will be your downfall.

keystone
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Re: Fellow non-529ers

Post by keystone » Wed May 16, 2018 8:27 am

SagaciousTraveler wrote:
Wed May 16, 2018 5:03 am

Currently I have both children's (4,1) money in our Taxable Account in the Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX), and keep track in an excel sheet.
Selling the Vanguard Tax Managed Balanced fund shares will most likely trigger capital gains. This doesn't seem like an ideal college savings strategy unless you plan to be in a low tax bracket when your kids are college. I'd probably only consider this if I was sure I'd be in the 12% or lower bracket after selling shares.

SagaciousTraveler
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Re: Fellow non-529ers

Post by SagaciousTraveler » Wed May 16, 2018 9:03 am

soccerrules wrote:
Wed May 16, 2018 8:26 am
DaftInvestor wrote:
Wed May 16, 2018 5:26 am
My strategy has been using 529. :) 20+ years of tax free gains - I can't imagine anything else that would have been better for me.
Interesting thread - discussing alternates to the best college savings solution for someone that is maxing out other tax advantaged accounts.
+1
Our state does not offer a tax deduction but I was able to get years and years of tax free gain.

OP you will have 14-17 years with kiddo #1 and 17-21 years with #2 -- TAX FREE earnings, plus the money is not comingle with other savings and easy to track growth and account values for planning purposes.

The general consensus is typically not to overfund the 529 and have leftover monies, but that doesn't seem to be your concern at this point.
That's my general problem. I'm not seeing how I can not overfund the 529.

We fortunately have grandparents already contributing to the kids 529 and what happens if in 15 years college education becomes more affordable (crazy I know). I'm left with too much in the account that I cant touch without getting slaughtered on taxes.

I know this is a good problem to have. I saw an earlier post where I should just focus on equites (VTSAX) , so perhaps that's my best course of action.

adman_c
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Re: Fellow non-529ers

Post by adman_c » Wed May 16, 2018 9:19 am

SagaciousTraveler wrote:
Wed May 16, 2018 8:02 am
daheld wrote:
Wed May 16, 2018 7:49 am
NS_Bane wrote:
Wed May 16, 2018 5:42 am
What is the rationale for not using a 529? Just by depositing money in the 529 and then immediately taking it out to pay tuition, you could be taking advantage of up to a $10,000 state tax deduction in some states.

Not to mention the tax free gains.

Just wondering what the thinking is behind not taking advantage of those savings. I understand not everyone can save, and not everyone plans ahead, but if you’re already doing both, why *wouldnt* you use a 529? I’m assuming you’re in the US so ignore all of the above if you aren’t.
I have the same question. I might be missing something obvious, but why would you not utilize a 529?
Thank you for everyone's input.

I personally do not care for the rules with a 529. I want to have my own freedom of choosing investments and I don't want to be told what I can and can not do with said money.

I feel with our family maxing out every other retirement vehicle and living debt free, I'm ok with losing this tax advantage.

I can not predict the future, so while this money is earmarked for College education, it is accumulating quickly and it will probably be used on other things (car, wedding, down payment on house, etc..).
While I certainly can appreciate your desire for flexibility, you can still take some advantage of 529 plans' tax advantages even if you do not plan to fully fund your children's education from a 529 plan. For example, you could devote 50% of your planned college savings to a 529 account and the rest to taxable. You'd retain total control and flexibility over the amounts in taxable, while you would still reap the benefits of tax free growth of the amounts in the 529 plan. To the extent that your reticence to use 529 plans stems from the mediocre investment options, this is beginning to change. For example, our state 529 plan (Illinois) offers automatic age-adjusting funds based on Vanguard index funds (See here). The fees for these funds range between 0.12% and 0.15%. I'm willing to pay a few extra basis points vs the underlying funds to obtain ~20 years of tax-free growth. At the amounts we plan to contribute/draw from our 529, this should amount to between $60,000 and $120,000 in real tax-free growth, depending on the real rate of return over the next 20 years. That potential benefit is worth the loss of additional flexibility we would have with all of our college savings in a taxable account. And that doesn't count the (small but real) state tax deduction we are able to take each year we contribute.

Of course, there are many ways to skin a cat. Good luck!

EDIT: just saw you mention that you're pretty confident that any investments you made would result in over-funding the 529 plan. I guess that sort of answers the question. If you don't need to save for college (grandparents have it covered), then there's no point in putting any additional money in a 529 plan.

GCD
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Re: Fellow non-529ers

Post by GCD » Wed May 16, 2018 9:55 am

SagaciousTraveler wrote:
Wed May 16, 2018 9:03 am

That's my general problem. I'm not seeing how I can not overfund the 529.
I wrestled with this too and ultimately just dumped in as much as possible until I got to the point where I thought it was roughly fully funded. Then I shifted it all out of equities and left it alone. Here are some points I considered which may or may not resonate with you:

- Once you reach the point where you think you are fully funded, just stop contributing.

- IMO, whatever happens to alleviate the cost of college in the future will likely be addressed to the poor and the middle class. The wealthy are going to be on their own and if you are concerned about over funding the 529 you are probably in the wealthy category -- whether you think of yourself as that or not.

- Left over money can go toward med or law school. Usually grad school is fully funded.

- Excess money can go for study abroad, etc.

- Excess money can be spent on nicer dorm rooms, food plan etc. Both in undergrad and law, med, grad school.

- Nice for the kid to have the option of a SLAC versus an in-state school if they want.

- True excess at the end of all the kids school can become an educational "trust" fund for the grandkids. Takes a chunk of worry off your kids and gives them more options.

- You can spend it on yourself. Sign up for one of those "semester at sea" or study winemaking in France or something.

I've got no suggestions on alternate investments. Just thought I would mention how I thought through the overfunding issue.

NS_Bane
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Re: Fellow non-529ers

Post by NS_Bane » Wed May 16, 2018 10:25 am

At the very least, when you begin paying tuition, deposit into a 529 the amount that is tax deductible in your state, then immediately withdraw to pay tuition. You will get the tax deduction benefit for contributions.

soccerrules
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Re: Fellow non-529ers

Post by soccerrules » Wed May 16, 2018 11:01 am

SagaciousTraveler wrote:
Wed May 16, 2018 9:03 am
soccerrules wrote:
Wed May 16, 2018 8:26 am
DaftInvestor wrote:
Wed May 16, 2018 5:26 am
My strategy has been using 529. :) 20+ years of tax free gains - I can't imagine anything else that would have been better for me.
Interesting thread - discussing alternates to the best college savings solution for someone that is maxing out other tax advantaged accounts.
+1
Our state does not offer a tax deduction but I was able to get years and years of tax free gain.

OP you will have 14-17 years with kiddo #1 and 17-21 years with #2 -- TAX FREE earnings, plus the money is not comingle with other savings and easy to track growth and account values for planning purposes.

The general consensus is typically not to overfund the 529 and have leftover monies, but that doesn't seem to be your concern at this point.
That's my general problem. I'm not seeing how I can not overfund the 529.

We fortunately have grandparents already contributing to the kids 529 and what happens if in 15 years college education becomes more affordable (crazy I know). I'm left with too much in the account that I cant touch without getting slaughtered on taxes.

I know this is a good problem to have. I saw an earlier post where I should just focus on equites (VTSAX) , so perhaps that's my best course of action.
This can be an ongoing evaluation over the next 15 years. I would agree overfunding is probably not the best choice, but some level of funding would be appropriate. If the grandparents are funding a projected 50+% of the expected cost of college, than maybe your monies go to a taxable account.
Also keep in mind there is a new benefit for 529's and formative private school funding. Do you want to send you kids to private schools ?
Start a plan and then reevaluate every 2 years as you evaluate your overall retirement,savings,college funding plan.
Don't let your outflow exceed your income or your upkeep will be your downfall.

Frank Grimes
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Re: Fellow non-529ers

Post by Frank Grimes » Wed May 16, 2018 11:37 am

Regarding getting "slaughtered on taxes" when trying to withdraw excess funds - is it really that much worse than the taxes you'd pay in a taxable account?

IIRC there is an additional 10% tax on capital gains when you withdraw for reasons other than school expenses, but there's also been years of tax free growth without dividend or interest tax drag and the ability to sell in and out of investments without triggering capital gains.

GAAP
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Re: Fellow non-529ers

Post by GAAP » Wed May 16, 2018 11:40 am

OP isn't getting much support on this...

For the 529 fans, consider my kids. Both went to college for a couple quarters/semesters and then stopped for a while. One eventually went back and completed a degree. The other joined the army, served a tour in Afghanistan, left the army and used the GI bill. For a while, it was unlikely that either would ever go to college. My wife and I already had advanced degrees and no interest in getting yet another one.

Potential fallacies I've seen in this thread include
  • Assuming your child will go to college
  • Assuming you will have grandchildren that may need the funds
  • Assuming that you will go back to college
  • Assuming your child won't join the military and not need the funds
  • Assuming your child will go to college some place where you get all of the benefits
  • Assuming that you can successfully estimate college costs 14+ years from now
  • Assuming your child won't get a full-ride scholarship
  • etc.
I'm not saying that 529 plans are bad -- merely that OP may have other concerns that outweigh the benefits.

If they are applicable to OP's situation in 14 years, the suggestions around immediate contributions and use are another tool OP should keep in mind.

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unclescrooge
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Re: Fellow non-529ers

Post by unclescrooge » Wed May 16, 2018 11:43 am

Frank Grimes wrote:
Wed May 16, 2018 11:37 am
Regarding getting "slaughtered on taxes" when trying to withdraw excess funds - is it really that much worse than the taxes you'd pay in a taxable account?

IIRC there is an additional 10% tax on capital gains when you withdraw for reasons other than school expenses, but there's also been years of tax free growth without dividend or interest tax drag and the ability to sell in and out of investments without triggering capital gains.
The gains are taxed at regular income tax rates instead of the lower capital gains tax rates. For investors in high-income brackets this is a considerable difference. And then you add in the 10% penalty, and it's nearly 50% tax (esp in CA with the high state taxes).

Frank Grimes
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Re: Fellow non-529ers

Post by Frank Grimes » Wed May 16, 2018 11:44 am

unclescrooge wrote:
Wed May 16, 2018 11:43 am
Frank Grimes wrote:
Wed May 16, 2018 11:37 am
Regarding getting "slaughtered on taxes" when trying to withdraw excess funds - is it really that much worse than the taxes you'd pay in a taxable account?

IIRC there is an additional 10% tax on capital gains when you withdraw for reasons other than school expenses, but there's also been years of tax free growth without dividend or interest tax drag and the ability to sell in and out of investments without triggering capital gains.
The gains are taxed at regular income tax rates instead of the lower capital gains tax rates. For investors in high-income brackets this is a considerable difference. And then you add in the 10% penalty, and it's nearly 50% tax (esp in CA with the high state taxes).
Good to know, thanks for the clarification

Darth Xanadu
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Re: Fellow non-529ers

Post by Darth Xanadu » Wed May 16, 2018 11:51 am

NS_Bane wrote:
Wed May 16, 2018 10:25 am
At the very least, when you begin paying tuition, deposit into a 529 the amount that is tax deductible in your state, then immediately withdraw to pay tuition. You will get the tax deduction benefit for contributions.
Good advice, and should be a no-brainer for those living in a state that has a 529 tax deduction. This can be done even if you decide to save elsewhere for college expenses.
"A courageous teacher, failure is."

KlangFool
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Re: Fellow non-529ers

Post by KlangFool » Wed May 16, 2018 11:55 am

rkhusky wrote:
Wed May 16, 2018 6:42 am
Put equities in taxable. If market is down during college years, still pay for college from taxable and rebalance in tax-advantaged.
+1.

KlangFool

Atgard
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Re: Fellow non-529ers

Post by Atgard » Wed May 16, 2018 11:56 am

I can understand not wanting to overfund, but there is a lot of room between "zero" and "overfunding." Isn't the answer to put in some portion up to an amount you think you'll almost certainly use? (Keep in mind there is flexibility among siblings, other relatives, K-12, undergrad, grad school, room & board, ancillary supplies, refund if they get a scholarship, etc.)

As for being constrained on investments, aren't there a wide variety of 529 plans you can use with various options? I don't know what state you're in, but the Vanguard plan has a whole bunch of investment choices. Unless you're trying to pick individual stocks or options or something like that, which you are still free to do in your taxable or retirement accounts.

dsmil
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Re: Fellow non-529ers

Post by dsmil » Wed May 16, 2018 12:02 pm

My primary strategy is to use Roths for college before 529's. $11k per year of contributions should get us pretty far, followed by cash flow, and tapping into home equity if needed. We're 15 years away but this is the plan for now.

avoidingdumbmistakes
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Re: Fellow non-529ers

Post by avoidingdumbmistakes » Wed May 16, 2018 12:06 pm

I didn't fund 529s for my first 2 in college and I deeply regret it. I bootstrapped it and survived but it wasn't fun. I have half of the estimated in-state tuition in 529s for my next 2. I agree with others about being careful about over funding. I'm not 100% sure that both of my young teens are going to go to college so if once decides not to then I can just change the beneficiary to the other and have 100% of undergrad costs in a 529 for one kid. One or both may elect to get an AA degree from a community college first before finishing at a large institution. This greatly reduces the overall cost of college in general so that's another consideration for not trying to fully fund 529s for the entire estimated 4 year cost.

If you're not going to fund 529s then it's pretty straightforward. Just save and invest like you would for any other large expense. Start protecting some of the investment from market risk once your kids hit high school so you don't get forced into liquidating during a down market. I suppose Roths may be a good tool for college investing and you can also take out money from an IRA for qualified education expenses without penalty (taxed as ordinary income though).

Off topic but one piece of advice I will give is to have your kids apply for every possible scholarship they can. My older daughters were able to both get a couple grand each in scholarship money from random companies. They both got state grant money awarded a couple times but they had to create accounts with the state and apply each year just like with FAFSA. I have no idea how the state grant money is calculated/awarded. It's a bit of a mystery because they received some grant money during lower and higher income years. It wasn't a large sum or anything but every little bit helps with college bills.

Darth Xanadu
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Re: Fellow non-529ers

Post by Darth Xanadu » Wed May 16, 2018 12:14 pm

To the OP's question #2:

My strategy is to fund the 529, in a somewhat limited fashion. I have one kid, under 1 year of age. I anticipate, base on my current funding, to have somewhere between $70k-$100k in the 529 when he turns 18. I also started purchasing I-Bonds, and will continue to do so annually for the foreseeable future. I would not expect to contribute much more to the 529 even if I have a 2nd kid, to minimize likelihood of over-funding. I also have Roth IRA contributions I can tap, and my taxable account, and likely cash flow options.

In any case, if I live in a state that offers a tax deduction when I am paying for college, any amounts paid that are not already in a 529 will be passed through one for the tax benefit.
"A courageous teacher, failure is."

CnC
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Re: Fellow non-529ers

Post by CnC » Wed May 16, 2018 12:22 pm

Don't 529 plans have limits to what you can choose and cause you some additional risk to funding it with taxable?

I'm from Illinois by the way.

Rupert
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Re: Fellow non-529ers

Post by Rupert » Wed May 16, 2018 12:40 pm

Frank Grimes wrote:
Wed May 16, 2018 11:44 am
unclescrooge wrote:
Wed May 16, 2018 11:43 am
Frank Grimes wrote:
Wed May 16, 2018 11:37 am
Regarding getting "slaughtered on taxes" when trying to withdraw excess funds - is it really that much worse than the taxes you'd pay in a taxable account?

IIRC there is an additional 10% tax on capital gains when you withdraw for reasons other than school expenses, but there's also been years of tax free growth without dividend or interest tax drag and the ability to sell in and out of investments without triggering capital gains.
The gains are taxed at regular income tax rates instead of the lower capital gains tax rates. For investors in high-income brackets this is a considerable difference. And then you add in the 10% penalty, and it's nearly 50% tax (esp in CA with the high state taxes).
Good to know, thanks for the clarification
This is an important point that many people overlook. And note that if your kid earns a scholarship, you can withdraw funds from 529s penalty-free, but you still pay ordinary income tax rates on the gains. The scholarship turns your tax-free 529 investment into a tax-deferred 529 investment.

Rupert
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Re: Fellow non-529ers

Post by Rupert » Wed May 16, 2018 12:42 pm

CnC wrote:
Wed May 16, 2018 12:22 pm
Don't 529 plans have limits to what you can choose and cause you some additional risk to funding it with taxable?

I'm from Illinois by the way.
Yes, you have to choose from the investments offered by the particular 529 plan you choose, but there aren't many truly bad 529 plans out there anymore. Most plans today offer a slate of low-cost mutual fund investments.

PFInterest
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Re: Fellow non-529ers

Post by PFInterest » Wed May 16, 2018 1:01 pm

SagaciousTraveler wrote:
Wed May 16, 2018 5:03 am
Good morning all,

In other threads I've had a few discussions on here about alternative ways to invest for our children outside of a 529.

Currently I have both children's (4,1) money in our Taxable Account in the Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX), and keep track in an excel sheet.

Few questions:

1. I shied away from using Target Retirement funds due to their lack of tax efficiency. With that said how would I become less exposed to the market as they reach closer to 18? Right now VTMFX is 47.5% Stocks and 52.5% Bonds/Reserves, which isn't aggressive at all (nice 6.74% after tax and sale though).

2. What strategies are you guys using?

Thank you for your time.
Use individual funds not fund of funds. Adjust manually.
Or use a 529.

dash1s
Posts: 24
Joined: Thu Feb 08, 2018 8:42 pm

Re: Fellow non-529ers

Post by dash1s » Thu May 17, 2018 9:18 pm

unclescrooge wrote:
Wed May 16, 2018 11:43 am
Frank Grimes wrote:
Wed May 16, 2018 11:37 am
Regarding getting "slaughtered on taxes" when trying to withdraw excess funds - is it really that much worse than the taxes you'd pay in a taxable account?

IIRC there is an additional 10% tax on capital gains when you withdraw for reasons other than school expenses, but there's also been years of tax free growth without dividend or interest tax drag and the ability to sell in and out of investments without triggering capital gains.
The gains are taxed at regular income tax rates instead of the lower capital gains tax rates. For investors in high-income brackets this is a considerable difference. And then you add in the 10% penalty, and it's nearly 50% tax (esp in CA with the high state taxes).
This +1,000,000%. I've modeled this and the upside / downside on a early long-term 529 investment plan doesn't make sense to me, unless I had 100% conviction I could use it for qualified expenses.

Based on how understand it (and please someone correct me if I am wrong):

Long-term Capital Gains in a Taxable account = 15%

vs

Withdraw Excess Funds, Income Is taxed at Ordinary Federal Marginal, mine personally = 24-32%, AND WITH THE 10% Penalty!

^^ so total taxation = 34-42%, aka a 19-27% hike above the taxation of the long-term cap gains tax in a taxable brokerage..... Which, in my opinion, would massively dilute the benefit of the risk-adjusted returns of potential tax deferred growth in a 529.

Though totally on board with, if you have qualified expenses in the current year, deposit and immediate withdraw to get the state tax break.

ThePrince
Posts: 315
Joined: Sun Aug 20, 2017 9:15 pm
Location: U.S.A.

Re: Fellow non-529ers

Post by ThePrince » Thu May 17, 2018 9:44 pm

NS_Bane wrote:
Wed May 16, 2018 5:42 am
What is the rationale for not using a 529? Just by depositing money in the 529 and then immediately taking it out to pay tuition, you could be taking advantage of up to a $10,000 state tax deduction in some states.

Not to mention the tax free gains.

Just wondering what the thinking is behind not taking advantage of those savings. I understand not everyone can save, and not everyone plans ahead, but if you’re already doing both, why *wouldnt* you use a 529? I’m assuming you’re in the US so ignore all of the above if you aren’t.
+1

sc9182
Posts: 167
Joined: Wed Aug 17, 2016 7:43 pm

Re: Fellow non-529ers

Post by sc9182 » Thu May 17, 2018 9:56 pm

If you are very high-earner(s), or have rich uncles/grand-parents and/or have high state-income tax, may be 529 makes sense depending on situations (but only after filling up mortgage, 401k/403b, HSA, tax-deferred, Roth, Brokerage buckets filled-up to the hilt).

Otherwise, see thread below on additional 529 "gotchas" :
viewtopic.php?f=10&t=146595&p=3189085#p3189085

123
Posts: 3494
Joined: Fri Oct 12, 2012 3:55 pm

Re: Fellow non-529ers

Post by 123 » Thu May 17, 2018 10:04 pm

We used a separate segregated brokerage account starting when children were less than a year old and invested 100% in Vanguard Total Stock Market. Account was funded primarily with gifts from generous relatives. As a side account we also had Coverdell ESA accounts through Schwab even though the contribution was limited to $2K a year per child (These were also invested in Vanguard Total Stock Market),

We always treated the college accounts as totally separate and distinct from our own asset allocation. We had other funds that could cover college expenses if a market downturn crippled the college accounts. Luckily the 100% buy-and-hold stock allocation worked extraordinary well over the 20+ year investment period (which included 2008).

We willingly paid capital gains taxes as funds were needed. We just wanted to be able to freely invest and pick colleges without having to deal with the various conditions and limits that some 529 plans end up saddling you with. Hindsight, of course, tells me that we could have saved on taxes had we gone the 529 route based on the colleges the children ultimately attended. But we have no regrets about the path we took.
The closest helping hand is at the end of your own arm.

JBTX
Posts: 3599
Joined: Wed Jul 26, 2017 12:46 pm

Re: Fellow non-529ers

Post by JBTX » Thu May 17, 2018 10:09 pm

GAAP wrote:
Wed May 16, 2018 11:40 am
OP isn't getting much support on this...

For the 529 fans, consider my kids. Both went to college for a couple quarters/semesters and then stopped for a while. One eventually went back and completed a degree. The other joined the army, served a tour in Afghanistan, left the army and used the GI bill. For a while, it was unlikely that either would ever go to college. My wife and I already had advanced degrees and no interest in getting yet another one.

Potential fallacies I've seen in this thread include
  • Assuming your child will go to college
  • Assuming you will have grandchildren that may need the funds
  • Assuming that you will go back to college
  • Assuming your child won't join the military and not need the funds
  • Assuming your child will go to college some place where you get all of the benefits
  • Assuming that you can successfully estimate college costs 14+ years from now
  • Assuming your child won't get a full-ride scholarship
  • etc.
I'm not saying that 529 plans are bad -- merely that OP may have other concerns that outweigh the benefits.

If they are applicable to OP's situation in 14 years, the suggestions around immediate contributions and use are another tool OP should keep in mind.
I think 529s are useful, but like you I think there are downsides. We live in state with no tax break. I’ve funded 529 and coverdells that will cover 2-3 years for one child in state school. But that was all early funding. I haven’t funded new funding in years (except for fidelity credit card cash back contributions). My 2nd child is special needs and won’t go to a typical college. In elementary school it wasn’t entirely clear my 1st child would be able to make it in college as she struggled with behavioral and academic issues. I have a relative both parents graduated with Masters and one of two children likely won’t go. The odds that one of your kids won’t go is not immaterial, even for college educated parents.

It used to be that the fees were so high that it almost offset the tax deferral aspect but luckily that has changed.

nyclon
Posts: 276
Joined: Fri Oct 02, 2015 5:30 pm

Re: Fellow non-529ers

Post by nyclon » Thu May 17, 2018 10:50 pm

dash1s wrote:
Thu May 17, 2018 9:18 pm
unclescrooge wrote:
Wed May 16, 2018 11:43 am
Frank Grimes wrote:
Wed May 16, 2018 11:37 am
Regarding getting "slaughtered on taxes" when trying to withdraw excess funds - is it really that much worse than the taxes you'd pay in a taxable account?

IIRC there is an additional 10% tax on capital gains when you withdraw for reasons other than school expenses, but there's also been years of tax free growth without dividend or interest tax drag and the ability to sell in and out of investments without triggering capital gains.
The gains are taxed at regular income tax rates instead of the lower capital gains tax rates. For investors in high-income brackets this is a considerable difference. And then you add in the 10% penalty, and it's nearly 50% tax (esp in CA with the high state taxes).
This +1,000,000%. I've modeled this and the upside / downside on a early long-term 529 investment plan doesn't make sense to me, unless I had 100% conviction I could use it for qualified expenses.

Based on how understand it (and please someone correct me if I am wrong):

Long-term Capital Gains in a Taxable account = 15%

vs

Withdraw Excess Funds, Income Is taxed at Ordinary Federal Marginal, mine personally = 24-32%, AND WITH THE 10% Penalty!

^^ so total taxation = 34-42%, aka a 19-27% hike above the taxation of the long-term cap gains tax in a taxable brokerage..... Which, in my opinion, would massively dilute the benefit of the risk-adjusted returns of potential tax deferred growth in a 529.

Though totally on board with, if you have qualified expenses in the current year, deposit and immediate withdraw to get the state tax break.
LTCG can be increased significantly due to NIIT, AMT and deduction phaseouts depending on your income. It's not very straightforward - I once had an investment I held for 7 years taxed at 38% instead of 15% due to what I just mentioned. YMMV

not4me
Posts: 395
Joined: Thu May 25, 2017 3:08 pm

Re: Fellow non-529ers

Post by not4me » Fri May 18, 2018 11:33 am

dash1s wrote:
Thu May 17, 2018 9:18 pm

Based on how understand it (and please someone correct me if I am wrong):

Long-term Capital Gains in a Taxable account = 15%

vs

Withdraw Excess Funds, Income Is taxed at Ordinary Federal Marginal, mine personally = 24-32%, AND WITH THE 10% Penalty!

^^ so total taxation = 34-42%, aka a 19-27% hike above the taxation of the long-term cap gains tax in a taxable brokerage..... Which, in my opinion, would massively dilute the benefit of the risk-adjusted returns of potential tax deferred growth in a 529.

Though totally on board with, if you have qualified expenses in the current year, deposit and immediate withdraw to get the state tax break.
probably small point & you did say correct you if wrong...this may not be wrong, I just wasn't sure I followed...IF you are in a situation in which you get a deduction for contribution (see your last sentence), then you didn't explicitly show that the "excess funds" case was using "pre-tax" $s (state perspective) & "after-tax" for the ltcg case...or did I miss it? Either way, I'm not disputing your conclusion as much as thinking of others who might not be in quite the same case as yours

User avatar
DaftInvestor
Posts: 3970
Joined: Wed Feb 19, 2014 10:11 am

Re: Fellow non-529ers

Post by DaftInvestor » Fri May 18, 2018 12:04 pm

nyclon wrote:
Thu May 17, 2018 10:50 pm
dash1s wrote:
Thu May 17, 2018 9:18 pm
unclescrooge wrote:
Wed May 16, 2018 11:43 am
Frank Grimes wrote:
Wed May 16, 2018 11:37 am
Regarding getting "slaughtered on taxes" when trying to withdraw excess funds - is it really that much worse than the taxes you'd pay in a taxable account?

IIRC there is an additional 10% tax on capital gains when you withdraw for reasons other than school expenses, but there's also been years of tax free growth without dividend or interest tax drag and the ability to sell in and out of investments without triggering capital gains.
The gains are taxed at regular income tax rates instead of the lower capital gains tax rates. For investors in high-income brackets this is a considerable difference. And then you add in the 10% penalty, and it's nearly 50% tax (esp in CA with the high state taxes).
This +1,000,000%. I've modeled this and the upside / downside on a early long-term 529 investment plan doesn't make sense to me, unless I had 100% conviction I could use it for qualified expenses.

Based on how understand it (and please someone correct me if I am wrong):

Long-term Capital Gains in a Taxable account = 15%

vs

Withdraw Excess Funds, Income Is taxed at Ordinary Federal Marginal, mine personally = 24-32%, AND WITH THE 10% Penalty!

^^ so total taxation = 34-42%, aka a 19-27% hike above the taxation of the long-term cap gains tax in a taxable brokerage..... Which, in my opinion, would massively dilute the benefit of the risk-adjusted returns of potential tax deferred growth in a 529.

Though totally on board with, if you have qualified expenses in the current year, deposit and immediate withdraw to get the state tax break.
LTCG can be increased significantly due to NIIT, AMT and deduction phaseouts depending on your income. It's not very straightforward - I once had an investment I held for 7 years taxed at 38% instead of 15% due to what I just mentioned. YMMV
I don't believe most people want to leave all their college savings in 100% stock funds right up until they need it to pay for college (which also kind of kills the 15% assumption). In any case - for me it was 0% taxes paid since I didn't save more than I used - with more than one kid I knew I'd have at least one going to college - and with a little over-funding I am now helping one child with graduate school (and my plan was simply to move the money to another child if it wasn't used - I think most of us that use 529s never get taxed on anything). This doesn't have to be an all or nothing decision - you could save half in 529s and half elsewhere. In any case - as an American citizen it makes me happy that some folks seem to fear 529s - we could use your taxes :)

guyesmith
Posts: 200
Joined: Fri Mar 23, 2018 11:16 am

Re: Fellow non-529ers

Post by guyesmith » Fri May 18, 2018 12:11 pm

DaftInvestor wrote:
Fri May 18, 2018 12:04 pm
In any case - as an American citizen it makes me happy that some folks seem to fear 529s - we could use your taxes :)
:D

1CEBITN
Posts: 45
Joined: Mon May 07, 2018 2:14 pm

Re: Fellow non-529ers

Post by 1CEBITN » Fri May 18, 2018 12:19 pm

adman_c wrote:
Wed May 16, 2018 9:19 am
While I certainly can appreciate your desire for flexibility, you can still take some advantage of 529 plans' tax advantages even if you do not plan to fully fund your children's education from a 529 plan. For example, you could devote 50% of your planned college savings to a 529 account and the rest to taxable.
This is exactly the route I took, we have 2 kids, one grade apart, so will have some very lumpy college expenses hitting us all at once over a 3-4 year time period (assuming they go to college and they both don't get a full-ride or something). The other side of this equation is how do you know how much your kids will spend in college if they go? Are you forcing them into a state school or allowing them to go to Harvard? In-state or out of state?There's a big difference in expenses between those scenarios so having some tax-free flexibility to cover the unknowns is a nice hedge imho.

I planned on 50% of state college tuition for both kids so I will likely not be overfunding for their needs and I can pull from my taxable accounts to shore it up if necessary or let them get a job or scholarships so I don't have to lose out on compounding for retirement (I am not a believer that college is something we are entitled to so my kids should expect to pay something for it so it is meaningful to them - and so they go to class and study). I don't plan on having any of this money for retirement planning purposes so, if I end up paying income taxes on distributions, I'll just wait until retired when I have zero income (pulling from Roth money before SS is required) and pay it out of the lowest tax bracket I can weasel my way into. Much better than pulling it out of the bracket I'm in now.

letsgobobby
Posts: 11415
Joined: Fri Sep 18, 2009 1:10 am

Re: Fellow non-529ers

Post by letsgobobby » Fri May 18, 2018 12:33 pm

It’s not unreasonable to forgo 529s because of their limitations. It’s potentially a very expensive choice, easily costing high income/high saving households six figures in additional taxes over their lifetimes - but to each his/her own.

I’m with livesoft. I don’t see the advantage of a segregated taxable kid/college account over just investing the entire portfolio, then drawing out the cash from wherever it makes the most sense when needed.

Other than our 529s, we have just one portfolio.

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