Max you should invest in a 529?

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Westcoaster7
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Max you should invest in a 529?

Post by Westcoaster7 » Tue Sep 04, 2018 10:41 am

Hi all, what do people think is the most you SHOULD put in a 529? I believe Vanguard's 529 plan for Nevada has a max of $370k. Wondering how much money people feel comfortable with investing in a 529 (would anyone even put in the max if they had the capital to do so?), and how they balance concerns as to funding more than they need in the 529 (e.g., what if your kid goes to a state school, gets a scholarship, etc.), while also trying to optimize to max tax savings. Also, if you have two or more kids, seems like you could take more risk of overfunding the first kid's 529 given you can transfer it to your younger kids (is that right?). Curious in how others arrived at their 529 investing plans. Note, this all assumes you've paid off high interest debt, maxed out 401ks, etc.

LinusP
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Re: Max you should invest in a 529?

Post by LinusP » Tue Sep 04, 2018 10:59 am

With a fair amount of cash on hand, a 1-year-old, and a baby on the way in weeks, my wife and I recently hashed out how much we want to put into the kids' 529 accounts. We wanted to find the sweet spot where we both 1) invest early and give the money time to compound, and 2) be conservative enough that it doesn't feel like a big hit if one kid ends up not going to college. Here's what we did:
  • Assume the cost will be the current in-state, live-on-campus room and board for a UC school (we live in California), increasing by 4.8% a year (think I got this from a College Board publication).
  • Factor in grandparents' contribution commitment of $5k/year; currently planning on them owning those 529s and only using them to fund the last 2.5 years (because it increases the kid(s) income and could affect financial aid before then).
  • Assume an investment return of 6%/year (could easily be optimistic).
  • Cut the overall amount we'd need in half, just to be conservative for now.
For us, all of that resulted in planning to contribute ~$25k for each kid. We'll re-evaluate as they get to middle school or so and we have some sense for what they're like academically.

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 11:01 am

OP,

1% to 5% of your net worth excluding the house. So, for most people, the answer is nothing.

KlangFool

Darth Xanadu
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Re: Max you should invest in a 529?

Post by Darth Xanadu » Tue Sep 04, 2018 11:02 am

I think, generally speaking, if one has surplus funds, then max 529 is great for future generations. Practically speaking, I am investing in 529 with the goal of funding ~50% of college costs from it. This is to get some tax advantage, but really limit risk of over-funding. I plan to cash flow and/or use I-Bonds to fund the difference if possible, or have kid(s) take loans as the final option.
"A courageous teacher, failure is."

WhiteMaxima
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Re: Max you should invest in a 529?

Post by WhiteMaxima » Tue Sep 04, 2018 11:50 am

529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.

Jack FFR1846
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Re: Max you should invest in a 529?

Post by Jack FFR1846 » Tue Sep 04, 2018 11:55 am

Wife and I put in $2k.....including all 2% from our Fidelity Visa. That's the most we get a deduction for from our state. It's pulled out every year to go towards our son's college costs. He graduates the end of this school year. Son #2 starts next year. We cash flow and use US Savings bonds to pay plus the Staffords my son receives.
Bogle: Smart Beta is stupid

lolbatross
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Re: Max you should invest in a 529?

Post by lolbatross » Tue Sep 04, 2018 12:01 pm

KlangFool wrote:
Tue Sep 04, 2018 11:01 am
OP,

1% to 5% of your net worth excluding the house. So, for most people, the answer is nothing.

KlangFool
Seems arbitrary. Care to explain the 1% to 5% range?

We are at 10% but also are probably done contributing (2 years maxed for 2 kids each).

10% is high by your standard but what we get:
  • IL state deduction (5%)
  • no capital gains (20% of gains after 18 years)
  • Family contributions (+5-7% of balance)
Seems like the right amount is above 0% for many on this board though I admit not everyone will have the same state & family situation.

markcoop
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Re: Max you should invest in a 529?

Post by markcoop » Tue Sep 04, 2018 12:10 pm

I have seen the max out retirement remark many times and I don't agree. I would agree contribute enough to meet your retirement needs, but that does not always mean max out every retirement account I have available to me.

I put in enough to pay for in-state public schools for my 3 kids. I did this with the following understanding:

1) I can move money around between the 3 kids as needed.
2) I have some wiggle room if some get scholarships (lowers amount I pay) and if some go to more expensive private schools (raises the amount I pay).
3) I was able to afford that amount.
4) I prefer for them to understand the money a bit. If one prefers to go to private school, they may need to take out some loans.
5) If I overpaid into the 529, I would be fine for the money to go to grandchildren or even some relative at some point.

So, how am I doing:
a) First child started at out-of-state public and then transferred to in-state public. Did take out a small loan for the first year out of state.
b) Second child got scholarships at out-of-state public that brought the cost down to in-state public.
c) Waiting to see about third child.
So far, doing ok.
Mark

grkmec
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Re: Max you should invest in a 529?

Post by grkmec » Tue Sep 04, 2018 12:14 pm

No correct answer, depends on your financial situation. I am in the "max" camp because

1) I have decided to write a blank check for my kids educational needs
2) If they don't use the money, I likely won't need it and it can help niece / nephews + future generations
3) I can use 10k / year for private high school
4) I have already maxed all tax advantaged vehicles and would like more space to invest without sharing gains w/ uncle sam

I have 3 kids (ages 7, 3.5 and 3 months). Between them they have $767k in 529 plans, of which I super-funded 450k this year. So can't put any money in for 5 years. I think that's enough, so don't plan any additional contributions. When oldest hits private high school, I think I will start taking about 10k / year, especially if balance is >1mm.

senex
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Re: Max you should invest in a 529?

Post by senex » Tue Sep 04, 2018 12:17 pm

If you're truly not capital constrained, there are some upsides to maxing out a 529. You can get money out of your estate without doing trust paperwork, and the money is tax advantaged, and might have better creditor protection than UTMA.

There are a bunch of special cases that allow you to withdraw without penalty. Or the tax penalty can be minimized (I think) by having the child withdraw the residual funds before he takes a high-paying job. (The child's rate, even with the 10% penalty, may be lower than your rate). Or you could reassign the 529 to other family members, etc.

The 529 becomes the child's property when he reaches a certain age (21?). That may be younger than you desire if you're talking lots of money.

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 12:17 pm

lolbatross wrote:
Tue Sep 04, 2018 12:01 pm
KlangFool wrote:
Tue Sep 04, 2018 11:01 am
OP,

1% to 5% of your net worth excluding the house. So, for most people, the answer is nothing.

KlangFool
Seems arbitrary. Care to explain the 1% to 5% range?

We are at 10% but also are probably done contributing (2 years maxed for 2 kids each).

10% is high by your standard but what we get:
  • IL state deduction (5%)
  • no capital gains (20% of gains after 18 years)
  • Family contributions (+5-7% of balance)
Seems like the right amount is above 0% for many on this board though I admit not everyone will have the same state & family situation.
lolbatross,

How many folks have their retirement or FI fully funded when the kids go to college?

A) For most folks that could answer "yes" to that question, their annual savings is high enough that they could "cash flow" the college education when the times come. Hence, they do not need to save for a college education.

B) For people that say no to that question, their savings and income are low enough, there is a strong possibility that their kids could qualify for financial aid without the 529.

In summary, for most people, the right answer is nothing.

KlangFool

dbapaddy
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Re: Max you should invest in a 529?

Post by dbapaddy » Tue Sep 04, 2018 12:24 pm

WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.
I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.

markcoop
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Re: Max you should invest in a 529?

Post by markcoop » Tue Sep 04, 2018 12:25 pm

KlangFool wrote:
Tue Sep 04, 2018 12:17 pm
How many folks have their retirement or FI fully funded when the kids go to college?
Not sure why my retirement needs to be fully funded before I can benefit from a 529 plan. Why can't I simply be on track to meet my retirement needs given my current retirement savings and want to pay for a good chunk of my children's college costs? 529s will save you money in such a case. And I would say many are in that situation.
Mark

dbapaddy
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Re: Max you should invest in a 529?

Post by dbapaddy » Tue Sep 04, 2018 12:29 pm

I have a specific total $$ goal in mind. When I reach that limit for my young kids, I will be done contributing and will add more to my retirement....

Not sure how much those $$ will pay when they get to college/other. Hopefully it'll be a good chunk....can't worry too much about the unknown....

smitcat
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Re: Max you should invest in a 529?

Post by smitcat » Tue Sep 04, 2018 12:29 pm

senex wrote:
Tue Sep 04, 2018 12:17 pm
If you're truly not capital constrained, there are some upsides to maxing out a 529. You can get money out of your estate without doing trust paperwork, and the money is tax advantaged, and might have better creditor protection than UTMA.

There are a bunch of special cases that allow you to withdraw without penalty. Or the tax penalty can be minimized (I think) by having the child withdraw the residual funds before he takes a high-paying job. (The child's rate, even with the 10% penalty, may be lower than your rate). Or you could reassign the 529 to other family members, etc.

The 529 becomes the child's property when he reaches a certain age (21?). That may be younger than you desire if you're talking lots of money.
Yes agreed - we have utilized all of what you said with the 529.

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 12:31 pm

markcoop wrote:
Tue Sep 04, 2018 12:25 pm
KlangFool wrote:
Tue Sep 04, 2018 12:17 pm
How many folks have their retirement or FI fully funded when the kids go to college?
Not sure why my retirement needs to be fully funded before I can benefit from a 529 plan. Why can't I simply be on track to meet my retirement needs given my current retirement savings and want to pay for a good chunk of my children's college costs? 529s will save you money in such a case. And I would say many are in that situation.
markcoop,

You are assuming that you will be continuously fully-employed until retirement age. It may not be the right assumption for many of us. Too many of my peers are permanently under-employed or unemployed at their 40s and 50s for me to make that assumption.

KlangFool

markcoop
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Re: Max you should invest in a 529?

Post by markcoop » Tue Sep 04, 2018 12:46 pm

KlangFool wrote:
Tue Sep 04, 2018 12:31 pm
markcoop wrote:
Tue Sep 04, 2018 12:25 pm
KlangFool wrote:
Tue Sep 04, 2018 12:17 pm
How many folks have their retirement or FI fully funded when the kids go to college?
Not sure why my retirement needs to be fully funded before I can benefit from a 529 plan. Why can't I simply be on track to meet my retirement needs given my current retirement savings and want to pay for a good chunk of my children's college costs? 529s will save you money in such a case. And I would say many are in that situation.
markcoop,

You are assuming that you will be continuously fully-employed until retirement age. It may not be the right assumption for many of us. Too many of my peers are permanently under-employed or unemployed at their 40s and 50s for me to make that assumption.

KlangFool
That is a fair comment. I still think that many (most?) parents will want to at least help pay for the children's college education knowing they are on track to pay for their retirement, even though there is a risk. And why not use 529 money for such money?
Mark

JBTX
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Re: Max you should invest in a 529?

Post by JBTX » Tue Sep 04, 2018 12:51 pm

Personally, we shot for enough to fund 1 out of 2 kids a 4 year education at a public school. But only after funding all retirement account tax deferred possibilities.

MichCPA
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Re: Max you should invest in a 529?

Post by MichCPA » Tue Sep 04, 2018 12:53 pm

dbapaddy wrote:
Tue Sep 04, 2018 12:24 pm
WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.
I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.
This is subject to your state allowing it as well.

smitcat
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Joined: Mon Nov 07, 2016 10:51 am

Re: Max you should invest in a 529?

Post by smitcat » Tue Sep 04, 2018 12:53 pm

markcoop wrote:
Tue Sep 04, 2018 12:46 pm
KlangFool wrote:
Tue Sep 04, 2018 12:31 pm
markcoop wrote:
Tue Sep 04, 2018 12:25 pm
KlangFool wrote:
Tue Sep 04, 2018 12:17 pm
How many folks have their retirement or FI fully funded when the kids go to college?
Not sure why my retirement needs to be fully funded before I can benefit from a 529 plan. Why can't I simply be on track to meet my retirement needs given my current retirement savings and want to pay for a good chunk of my children's college costs? 529s will save you money in such a case. And I would say many are in that situation.
markcoop,

You are assuming that you will be continuously fully-employed until retirement age. It may not be the right assumption for many of us. Too many of my peers are permanently under-employed or unemployed at their 40s and 50s for me to make that assumption.

KlangFool
That is a fair comment. I still think that many (most?) parents will want to at least help pay for the children's college education knowing they are on track to pay for their retirement, even though there is a risk. And why not use 529 money for such money?
If you become unemployed and have a very low income year you could pull the 529 funds for your use and pay the 10% penalty and the then current taxes - which should be very low if unemployed.
Funding your preferred retirement accounts first each year is likely a best practice.

SchruteB&B
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Re: Max you should invest in a 529?

Post by SchruteB&B » Tue Sep 04, 2018 12:59 pm

senex wrote:
Tue Sep 04, 2018 12:17 pm


The 529 becomes the child's property when he reaches a certain age (21?). That may be younger than you desire if you're talking lots of money.
That’s the UTMA not a 529

markcoop
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Re: Max you should invest in a 529?

Post by markcoop » Tue Sep 04, 2018 1:01 pm

So I don't believe my situation is unusual - My wife and I both work and make under the ROTH IRA limits. We are both over 50 (granted we were not over 50 for most years while contributing to the 529). We both can contribute $24K to 401Ks, $6.5K to ROTH. That's $61K not including any matching money or HSA contributions per year. I do not need to max out all my retirement accounts to meet my retirement needs. This was also true before I turned 50. I chose to contribute to a 529 plan.
Mark

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 1:20 pm

markcoop wrote:
Tue Sep 04, 2018 12:46 pm
KlangFool wrote:
Tue Sep 04, 2018 12:31 pm
markcoop wrote:
Tue Sep 04, 2018 12:25 pm
KlangFool wrote:
Tue Sep 04, 2018 12:17 pm
How many folks have their retirement or FI fully funded when the kids go to college?
Not sure why my retirement needs to be fully funded before I can benefit from a 529 plan. Why can't I simply be on track to meet my retirement needs given my current retirement savings and want to pay for a good chunk of my children's college costs? 529s will save you money in such a case. And I would say many are in that situation.
markcoop,

You are assuming that you will be continuously fully-employed until retirement age. It may not be the right assumption for many of us. Too many of my peers are permanently under-employed or unemployed at their 40s and 50s for me to make that assumption.

KlangFool
That is a fair comment. I still think that many (most?) parents will want to at least help pay for the children's college education knowing they are on track to pay for their retirement, even though there is a risk. And why not use 529 money for such money?
markcoop,

Why not Roth IRAs' contribution? They do not have the restriction of 529. And, it will not impact the financial eligibility of our kids. The benefit is minimal for many of us. It is a luxury that we cannot afford. We cannot be sure 10+ years ahead of time that we can survive.

KlangFool

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DaftInvestor
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Re: Max you should invest in a 529?

Post by DaftInvestor » Tue Sep 04, 2018 1:21 pm

I planned out enough to put each child through 4 years of in-state tuition along with room and board.
As the second approached college I put some additional funds into CDs rather than overfund 529s. I do somewhat regret doing this and wish I just dropped that money, as well, into 529s (would have saved me some on taxes over the last couple of years). We are using that money to help pay for Grad-School for one child.
I was in fact maxing out retirement - but with one of us being a stay-at-home-spouse - our max-out is lower than two-income/two-job families (no second 401K plan). If we had access to a full suite of retirement plans for 2 people - I am not sure what we would have done differently as putting the kids through college was always one of our goals. People say "You can borrow for college but can't borrow for retirement" which is true; but on the other hand paying for college comes earlier in life for many of us. A blended approach between retirement savings and college savings makes good sense for a lot of folks.
Last edited by DaftInvestor on Tue Sep 04, 2018 1:46 pm, edited 1 time in total.

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 1:24 pm

smitcat wrote:
Tue Sep 04, 2018 12:53 pm
markcoop wrote:
Tue Sep 04, 2018 12:46 pm
KlangFool wrote:
Tue Sep 04, 2018 12:31 pm
markcoop wrote:
Tue Sep 04, 2018 12:25 pm
KlangFool wrote:
Tue Sep 04, 2018 12:17 pm
How many folks have their retirement or FI fully funded when the kids go to college?
Not sure why my retirement needs to be fully funded before I can benefit from a 529 plan. Why can't I simply be on track to meet my retirement needs given my current retirement savings and want to pay for a good chunk of my children's college costs? 529s will save you money in such a case. And I would say many are in that situation.
markcoop,

You are assuming that you will be continuously fully-employed until retirement age. It may not be the right assumption for many of us. Too many of my peers are permanently under-employed or unemployed at their 40s and 50s for me to make that assumption.

KlangFool
That is a fair comment. I still think that many (most?) parents will want to at least help pay for the children's college education knowing they are on track to pay for their retirement, even though there is a risk. And why not use 529 money for such money?
If you become unemployed and have a very low income year you could pull the 529 funds for your use and pay the 10% penalty and the then current taxes - which should be very low if unemployed.
Funding your preferred retirement accounts first each year is likely a best practice.
smitcat,

If I do not have the 529, I do not have to pay the tax penalty. I can use my Roth IRA contribution and the taxable account to bridge the Roth conversion ladder. After 5 years, I can access my Roth converted money without paying penalty.

If I have the 529, I must spend the money in order to improve my kids' financially eligibility.

KlangFool

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 1:27 pm

markcoop wrote:
Tue Sep 04, 2018 1:01 pm
So I don't believe my situation is unusual - My wife and I both work and make under the ROTH IRA limits. We are both over 50 (granted we were not over 50 for most years while contributing to the 529). We both can contribute $24K to 401Ks, $6.5K to ROTH. That's $61K not including any matching money or HSA contributions per year. I do not need to max out all my retirement accounts to meet my retirement needs. This was also true before I turned 50. I chose to contribute to a 529 plan.
markcoop,

You are unusual. Not many people save that amount of money annually.

KlangFool

LinusP
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Re: Max you should invest in a 529?

Post by LinusP » Tue Sep 04, 2018 1:39 pm

KlangFool wrote:
Tue Sep 04, 2018 1:20 pm
Why not Roth IRAs' contribution? They do not have the restriction of 529. And, it will not impact the financial eligibility of our kids. The benefit is minimal for many of us. It is a luxury that we cannot afford. We cannot be sure 10+ years ahead of time that we can survive.
My understanding is that withdrawals from Roth IRAs that go towards kids' education(s) are included as income on the FAFSA, so they count negatively (in a big way) towards financial aid if used before the spring semester of the sophomore year (assuming 4 years to graduate). See 'Financial Aid' under Cons here: https://momanddadmoney.com/saving-for-college-roth-ira/

Only 5.64% of the assets in parent-owned 529s count towards FAFSA, which is a lot better than Roth IRAs - for the first year and a half of their school, anyway.

ND Fan 1
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Re: Max you should invest in a 529?

Post by ND Fan 1 » Tue Sep 04, 2018 1:55 pm

MichCPA wrote:
Tue Sep 04, 2018 12:53 pm
dbapaddy wrote:
Tue Sep 04, 2018 12:24 pm
WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.
I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.
This is subject to your state allowing it as well.
Only if you claim a tax deduction or credit from your state. So I'm an IN resident, and IN allows a 20% tax credit up to $1000. I put in $5K a year to max out that credit. IN then passed a law stating any funds you put into a 529 and received a credit for, can only be used for college, or the credit will be clawed back. So far you are correct. The IN plan funds will only be used for college.

However, I also plan to contribute around $10K or so to the NY 529 plan and use those funds for private K-12 school costs. Since I will not receive any sort of tax credit of deduction, I can take out those funds penalty free and use towards K-12 qualified education expenses.I have 3 kids with another one likely. We plan on doing Catholic schools, so any excess cash I plan on dumping into the NY 529. Might as well get some tax free growth.

markcoop
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Re: Max you should invest in a 529?

Post by markcoop » Tue Sep 04, 2018 2:02 pm

LinusP - I think you are correct and that is an important point.

Also, when I was contributing to a 529, I did max out our ROTH contributions. I think ROTH money does give you great flexibility for retirement and also for college. If I need more money for college, I will look at my ROTH. I also would look at some I-bonds I have as well (although I am not sure the income restrictions for that).

I don't think many of us are really disagreeing with each-other here. I cannot fault someone for saying till I know for sure I have retirement covered, I can't save for college. I just think many are willing to take on some additional risk to help our children with college.
Mark

DCChak
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Re: Max you should invest in a 529?

Post by DCChak » Tue Sep 04, 2018 2:12 pm

markcoop wrote:
Tue Sep 04, 2018 1:01 pm
So I don't believe my situation is unusual - My wife and I both work and make under the ROTH IRA limits. We are both over 50 (granted we were not over 50 for most years while contributing to the 529). We both can contribute $24K to 401Ks, $6.5K to ROTH. That's $61K not including any matching money or HSA contributions per year. I do not need to max out all my retirement accounts to meet my retirement needs. This was also true before I turned 50. I chose to contribute to a 529 plan.
So for each $1 you put to a 529 plan instead of a 401k or similar plan, aren't you making suboptimal tax decision? 529s only get state tax deductions, and only up a smaller limit; 401ks get both federal and state tax deductions, at a higher limit.

This may be even more relevant to me, because I am about to become a father to a newborn a month before I turn 50. For tax optimization purposes, I believe I should invest to the limits of my catch-up TSP contribution, instead of to a 529 for my daughter-to-be. I also hope to be retired by time she starts college, so I should be able to draw on my TSP contribution for her college years.

MichCPA
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Joined: Fri Jul 06, 2018 9:06 pm

Re: Max you should invest in a 529?

Post by MichCPA » Tue Sep 04, 2018 2:24 pm

ND Fan 1 wrote:
Tue Sep 04, 2018 1:55 pm
MichCPA wrote:
Tue Sep 04, 2018 12:53 pm
dbapaddy wrote:
Tue Sep 04, 2018 12:24 pm
WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.
I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.
This is subject to your state allowing it as well.
Only if you claim a tax deduction or credit from your state. So I'm an IN resident, and IN allows a 20% tax credit up to $1000. I put in $5K a year to max out that credit. IN then passed a law stating any funds you put into a 529 and received a credit for, can only be used for college, or the credit will be clawed back. So far you are correct. The IN plan funds will only be used for college.

However, I also plan to contribute around $10K or so to the NY 529 plan and use those funds for private K-12 school costs. Since I will not receive any sort of tax credit of deduction, I can take out those funds penalty free and use towards K-12 qualified education expenses.I have 3 kids with another one likely. We plan on doing Catholic schools, so any excess cash I plan on dumping into the NY 529. Might as well get some tax free growth.
States can also set withdrawal rules on plans in terms of what they recognize as qualified withdrawals. For instance if you withdraw from state A's 529 plan, but you live in state B, state B can tax you gains as non-qualified withdrawals. In general, people should seek advice from someone familiar with their state's income tax rules before assuming you are off the hook.

LinusP
Posts: 53
Joined: Fri May 18, 2018 10:29 am

Re: Max you should invest in a 529?

Post by LinusP » Tue Sep 04, 2018 2:28 pm

markcoop wrote:
Tue Sep 04, 2018 2:02 pm
I don't think many of us are really disagreeing with each-other here. I cannot fault someone for saying till I know for sure I have retirement covered, I can't save for college. I just think many are willing to take on some additional risk to help our children with college.
I certainly don't know for sure that my retirement is covered, since it's likely still ~20 years away (and I'm fairly old to be a parent of babies!). But, based on my projections of continued contributions and conservative investment gains, I'm feeling pretty good. Not to mention that I've got a stable job and we'll likely inherit significant amounts from our parents.

In our case, it seemed like there was more to be gained in the likely case that at least one kid goes to school and we're okay for retirement, than could be lost in financial aid or penalties if we went all-Roth for college funding or in the unlikely case that we ended up needing that money for retirement. Maybe that makes us 'unusual' in KlangFool's estimation, but it's worth really thinking through your own particular situation and what makes the most sense for you.

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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 2:32 pm

LinusP wrote:
Tue Sep 04, 2018 1:39 pm
KlangFool wrote:
Tue Sep 04, 2018 1:20 pm
Why not Roth IRAs' contribution? They do not have the restriction of 529. And, it will not impact the financial eligibility of our kids. The benefit is minimal for many of us. It is a luxury that we cannot afford. We cannot be sure 10+ years ahead of time that we can survive.
My understanding is that withdrawals from Roth IRAs that go towards kids' education(s) are included as income on the FAFSA, so they count negatively (in a big way) towards financial aid if used before the spring semester of the sophomore year (assuming 4 years to graduate). See 'Financial Aid' under Cons here: https://momanddadmoney.com/saving-for-college-roth-ira/

Only 5.64% of the assets in parent-owned 529s count towards FAFSA, which is a lot better than Roth IRAs - for the first year and a half of their school, anyway.
LinusP,

1) If the income is low enough, it won't matter.

2) If the income is high enough, take a student loan. Pay off the student loan later with Roth IRA contribution.

3) So, there are ways to avoid being counted with Roth IRA. There is no escape with 529.

<<Only 5.64% of the assets in parent-owned 529s count towards FAFSA, which is a lot better than Roth IRAs - for the first year and a half of their school, anyway.>>

4) 0% is better.

KlangFool

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Re: Max you should invest in a 529?

Post by FoolMeOnce » Tue Sep 04, 2018 2:47 pm

DCChak wrote:
Tue Sep 04, 2018 2:12 pm
markcoop wrote:
Tue Sep 04, 2018 1:01 pm
So I don't believe my situation is unusual - My wife and I both work and make under the ROTH IRA limits. We are both over 50 (granted we were not over 50 for most years while contributing to the 529). We both can contribute $24K to 401Ks, $6.5K to ROTH. That's $61K not including any matching money or HSA contributions per year. I do not need to max out all my retirement accounts to meet my retirement needs. This was also true before I turned 50. I chose to contribute to a 529 plan.
So for each $1 you put to a 529 plan instead of a 401k or similar plan, aren't you making suboptimal tax decision? 529s only get state tax deductions, and only up a smaller limit; 401ks get both federal and state tax deductions, at a higher limit.

This may be even more relevant to me, because I am about to become a father to a newborn a month before I turn 50. For tax optimization purposes, I believe I should invest to the limits of my catch-up TSP contribution, instead of to a 529 for my daughter-to-be. I also hope to be retired by time she starts college, so I should be able to draw on my TSP contribution for her college years.
Not quite. The tax implications are similar to 401k v. Roth, where 401k is usually better for most people. Especially here, where 529 dollars are more restricted than Roth dollars. BUT! If you get a state tax deduction up front, that makes it more compelling, like some sort of enhanced Roth. On the portion that is state-deductible, you get state tax free contribution, state and federal tax free growth, and state and federal tax free qualified distributions. So it then has some characteristics of an HSA, but for education instead of health expenses. Not as good, sure.

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UpsetRaptor
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Re: Max you should invest in a 529?

Post by UpsetRaptor » Tue Sep 04, 2018 3:07 pm

DCChak wrote:
Tue Sep 04, 2018 2:12 pm
markcoop wrote:
Tue Sep 04, 2018 1:01 pm
So I don't believe my situation is unusual - My wife and I both work and make under the ROTH IRA limits. We are both over 50 (granted we were not over 50 for most years while contributing to the 529). We both can contribute $24K to 401Ks, $6.5K to ROTH. That's $61K not including any matching money or HSA contributions per year. I do not need to max out all my retirement accounts to meet my retirement needs. This was also true before I turned 50. I chose to contribute to a 529 plan.
So for each $1 you put to a 529 plan instead of a 401k or similar plan, aren't you making suboptimal tax decision? 529s only get state tax deductions, and only up a smaller limit; 401ks get both federal and state tax deductions, at a higher limit.

This may be even more relevant to me, because I am about to become a father to a newborn a month before I turn 50. For tax optimization purposes, I believe I should invest to the limits of my catch-up TSP contribution, instead of to a 529 for my daughter-to-be. I also hope to be retired by time she starts college, so I should be able to draw on my TSP contribution for her college years.
It's not necessarily a sub-optimal tax decision at all, in fact often beneficial, assuming you have qualified educational expenses ahead of you. Let's compare to a Roth IRA, which is similarly tax-free, instead of tax-deferred, to make it simpler:

Roth IRA
- Taxed at income: State Yes, Federal Yes
- Taxed upon withdrawal: State No, Federal No

529
- Taxed at income: State Maybe, Federal: Yes
- Taxed upon withdrawal: State No, Federal No

You could do a similar table for 529 vs tIRA/401k.

Edit: This is assuming all withdrawals satisfy the penalty-free conditions for both Roth and 529.
Last edited by UpsetRaptor on Tue Sep 04, 2018 3:14 pm, edited 1 time in total.

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Re: Max you should invest in a 529?

Post by ND Fan 1 » Tue Sep 04, 2018 3:13 pm

MichCPA wrote:
Tue Sep 04, 2018 2:24 pm
ND Fan 1 wrote:
Tue Sep 04, 2018 1:55 pm
MichCPA wrote:
Tue Sep 04, 2018 12:53 pm
dbapaddy wrote:
Tue Sep 04, 2018 12:24 pm
WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.
I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.
This is subject to your state allowing it as well.
Only if you claim a tax deduction or credit from your state. So I'm an IN resident, and IN allows a 20% tax credit up to $1000. I put in $5K a year to max out that credit. IN then passed a law stating any funds you put into a 529 and received a credit for, can only be used for college, or the credit will be clawed back. So far you are correct. The IN plan funds will only be used for college.

However, I also plan to contribute around $10K or so to the NY 529 plan and use those funds for private K-12 school costs. Since I will not receive any sort of tax credit of deduction, I can take out those funds penalty free and use towards K-12 qualified education expenses.I have 3 kids with another one likely. We plan on doing Catholic schools, so any excess cash I plan on dumping into the NY 529. Might as well get some tax free growth.
States can also set withdrawal rules on plans in terms of what they recognize as qualified withdrawals. For instance if you withdraw from state A's 529 plan, but you live in state B, state B can tax you gains as non-qualified withdrawals. In general, people should seek advice from someone familiar with their state's income tax rules before assuming you are off the hook.
You may be right, and it does seem to be fluid, but then doesn't that defeat the whole purpose of the changes in the tax law? Or does it have to do with the difference between state and federal tax laws. I guess the new tax allows for federal tax free withdraws for qualified education expenses, but does' necessarily preclude the state from charging a tax on the gains? Man if that is the case, that really does damper my hopes of using 529s to pay for K-12 using tax free gains.

Appreciate the advice.

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Re: Max you should invest in a 529?

Post by WhiteMaxima » Tue Sep 04, 2018 3:16 pm

dbapaddy wrote:
Tue Sep 04, 2018 12:24 pm
WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.
I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.
Attend public school. You property tax dollar already pays local school. Buying house in good school district.

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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 3:23 pm

Folks,

https://www.irs.gov/credits-deductions/individuals/aotc

Because of AOTC, you need to pay at least 4K (please confirm my number) per year outside of 529 in order to qualify for the credit. Please bear this in mind.

KlangFool

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Re: Max you should invest in a 529?

Post by WhiteMaxima » Tue Sep 04, 2018 3:23 pm

529 is a good estate planning tool for the rich. If you are not, better save for retirement 1st. Kids can always borrow for college. You can't borrow for reitirement. Have you mega aft-tax 401k yet? It is better than 529 and can be rollover to Roth IRA or Roth 401k. IRS 2018 limit is $55000 if my memory serves me correctly. If you are 30 or 40 years old, you stil have 50-40 years of investment. 529 you have to roll into cash at year 16 or so. during 40-50 years, you can see 3 to 4 bull runs, For 16 years, may be 1 or 2 bull run.

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Re: Max you should invest in a 529?

Post by smitcat » Tue Sep 04, 2018 3:27 pm

KlangFool wrote:
Tue Sep 04, 2018 1:24 pm
smitcat wrote:
Tue Sep 04, 2018 12:53 pm
markcoop wrote:
Tue Sep 04, 2018 12:46 pm
KlangFool wrote:
Tue Sep 04, 2018 12:31 pm
markcoop wrote:
Tue Sep 04, 2018 12:25 pm


Not sure why my retirement needs to be fully funded before I can benefit from a 529 plan. Why can't I simply be on track to meet my retirement needs given my current retirement savings and want to pay for a good chunk of my children's college costs? 529s will save you money in such a case. And I would say many are in that situation.
markcoop,

You are assuming that you will be continuously fully-employed until retirement age. It may not be the right assumption for many of us. Too many of my peers are permanently under-employed or unemployed at their 40s and 50s for me to make that assumption.

KlangFool
That is a fair comment. I still think that many (most?) parents will want to at least help pay for the children's college education knowing they are on track to pay for their retirement, even though there is a risk. And why not use 529 money for such money?
If you become unemployed and have a very low income year you could pull the 529 funds for your use and pay the 10% penalty and the then current taxes - which should be very low if unemployed.
Funding your preferred retirement accounts first each year is likely a best practice.
smitcat,

If I do not have the 529, I do not have to pay the tax penalty. I can use my Roth IRA contribution and the taxable account to bridge the Roth conversion ladder. After 5 years, I can access my Roth converted money without paying penalty.

If I have the 529, I must spend the money in order to improve my kids' financially eligibility.

KlangFool

KlangFool - The reponse was intended for markcoop who posted about utilzing both types of accounts.

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Re: Max you should invest in a 529?

Post by UpsetRaptor » Tue Sep 04, 2018 3:30 pm

ND Fan 1 wrote:
Tue Sep 04, 2018 3:13 pm
MichCPA wrote:
Tue Sep 04, 2018 2:24 pm
ND Fan 1 wrote:
Tue Sep 04, 2018 1:55 pm
MichCPA wrote:
Tue Sep 04, 2018 12:53 pm
dbapaddy wrote:
Tue Sep 04, 2018 12:24 pm


I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.
This is subject to your state allowing it as well.
Only if you claim a tax deduction or credit from your state. So I'm an IN resident, and IN allows a 20% tax credit up to $1000. I put in $5K a year to max out that credit. IN then passed a law stating any funds you put into a 529 and received a credit for, can only be used for college, or the credit will be clawed back. So far you are correct. The IN plan funds will only be used for college.

However, I also plan to contribute around $10K or so to the NY 529 plan and use those funds for private K-12 school costs. Since I will not receive any sort of tax credit of deduction, I can take out those funds penalty free and use towards K-12 qualified education expenses.I have 3 kids with another one likely. We plan on doing Catholic schools, so any excess cash I plan on dumping into the NY 529. Might as well get some tax free growth.
States can also set withdrawal rules on plans in terms of what they recognize as qualified withdrawals. For instance if you withdraw from state A's 529 plan, but you live in state B, state B can tax you gains as non-qualified withdrawals. In general, people should seek advice from someone familiar with their state's income tax rules before assuming you are off the hook.
You may be right, and it does seem to be fluid, but then doesn't that defeat the whole purpose of the changes in the tax law? Or does it have to do with the difference between state and federal tax laws. I guess the new tax allows for federal tax free withdraws for qualified education expenses, but does' necessarily preclude the state from charging a tax on the gains? Man if that is the case, that really does damper my hopes of using 529s to pay for K-12 using tax free gains.

Appreciate the advice.
The federal benefit of tax free gains is universal, and if you start early that's really the gravy here anyways. You also will get the tax-free gains on withdrawals from your state, as long as they're eligible QEE and you don't use Alabama's plan for a non-Alabama university.

If you get a state deduction/credit that's an added bonus. Most states are retaining the state deduction/credit for K-12 expenses, a few are stating they will attempt to claw it back. Here's the current list:
https://www.529conference.com/status-bo ... e-updates/
Last edited by UpsetRaptor on Tue Sep 04, 2018 3:38 pm, edited 1 time in total.

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Re: Max you should invest in a 529?

Post by smitcat » Tue Sep 04, 2018 3:31 pm

KlangFool wrote:
Tue Sep 04, 2018 1:27 pm
markcoop wrote:
Tue Sep 04, 2018 1:01 pm
So I don't believe my situation is unusual - My wife and I both work and make under the ROTH IRA limits. We are both over 50 (granted we were not over 50 for most years while contributing to the 529). We both can contribute $24K to 401Ks, $6.5K to ROTH. That's $61K not including any matching money or HSA contributions per year. I do not need to max out all my retirement accounts to meet my retirement needs. This was also true before I turned 50. I chose to contribute to a 529 plan.
markcoop,

You are unusual. Not many people save that amount of money annually.

KlangFool
We are similar in many ways to marcoop - not sso unsual when considering these topics at least.

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Re: Max you should invest in a 529?

Post by GoldStar » Tue Sep 04, 2018 3:33 pm

WhiteMaxima wrote:
Tue Sep 04, 2018 3:23 pm
529 is a good estate planning tool for the rich. If you are not, better save for retirement 1st. Kids can always borrow for college. You can't borrow for reitirement. Have you mega aft-tax 401k yet? It is better than 529 and can be rollover to Roth IRA or Roth 401k. IRS 2018 limit is $55000 if my memory serves me correctly. If you are 30 or 40 years old, you stil have 50-40 years of investment. 529 you have to roll into cash at year 16 or so. during 40-50 years, you can see 3 to 4 bull runs, For 16 years, may be 1 or 2 bull run.
I let my 529's stay invested in a blended portfolio for 20+ years. Where you are holding money that you plan on using for kids colleges doesn't have to impact how you have the money invested. Your investment timeframe is going to be shorter than your retirement timeframe (provided that's the case) regardless of whether you use a taxable account, Roth IRA, or 529 to pull funds from.
Now if you aren't planning on paying college costs that's a different story. Our goal was to do so.

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Re: Max you should invest in a 529?

Post by WhiteMaxima » Tue Sep 04, 2018 3:40 pm

I like 100% equity investment. So no CD, no bond , no gold. I start save for 529 since my 1st child was born. Being through several bear market. Always hold on to it. You might do well by investing in balanced fund. But 100% equity always beat balanced in long hual. one bull market in 16 years is a sure thing to happen. of course, there will be bear, but you can always add position during these bear market and come out big.

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UpsetRaptor
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Re: Max you should invest in a 529?

Post by UpsetRaptor » Tue Sep 04, 2018 3:54 pm

smitcat wrote:
Tue Sep 04, 2018 3:31 pm
KlangFool wrote:
Tue Sep 04, 2018 1:27 pm
markcoop wrote:
Tue Sep 04, 2018 1:01 pm
So I don't believe my situation is unusual - My wife and I both work and make under the ROTH IRA limits. We are both over 50 (granted we were not over 50 for most years while contributing to the 529). We both can contribute $24K to 401Ks, $6.5K to ROTH. That's $61K not including any matching money or HSA contributions per year. I do not need to max out all my retirement accounts to meet my retirement needs. This was also true before I turned 50. I chose to contribute to a 529 plan.
markcoop,

You are unusual. Not many people save that amount of money annually.

KlangFool
We are similar in many ways to marcoop - not sso unsual when considering these topics at least.
Yeah, same here. "Max out all retirement accounts first before considering a 529" is certainly not universal. If the household has access to only a single IRA, then absolutely. One 401k and an IRA, then sure, maybe. But we have access to 401k, 403b, 457, and two Roths, and do use a decent amount of that. We also have kids in private school, know we have QEE ahead of us, and live in a state with a state 529 deduction.

Eschewing all the benefits of a 529 in order to max out all those retirement accounts to the tune of $66,500 per year would be dumb even if we could do it. When retirement rolls around a (well-funded, stable) pension and then eventually SS will end up covering most if not all our expenses anyways.

jb100
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Re: Max you should invest in a 529?

Post by jb100 » Tue Sep 04, 2018 5:23 pm

KlangFool wrote:
Tue Sep 04, 2018 12:17 pm

A) For most folks that could answer "yes" to that question, their annual savings is high enough that they could "cash flow" the college education when the times come. Hence, they do not need to save for a college education.
This advice seems to be ignoring the tax benefit of 529? When you income is high, your capital gain/dividend is taxed at 20+%.

H-Town
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Re: Max you should invest in a 529?

Post by H-Town » Tue Sep 04, 2018 5:32 pm

MichCPA wrote:
Tue Sep 04, 2018 12:53 pm
dbapaddy wrote:
Tue Sep 04, 2018 12:24 pm
WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college. So don't over do it even it is tax free on earning. Max your retirement 1st, then 529.
I believe this is incorrect.

The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools.
This is subject to your state allowing it as well.
Most states should/will follow federal laws on 529. Even if some states don't, you still get federal benefits on the tax-free growth of 529 plan if it's spent on qualified expenses on both K-12 and college.

https://www.edchoice.org/blog/can-i-use ... -expenses/

H-Town
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Re: Max you should invest in a 529?

Post by H-Town » Tue Sep 04, 2018 5:36 pm

Westcoaster7 wrote:
Tue Sep 04, 2018 10:41 am
Hi all, what do people think is the most you SHOULD put in a 529? I believe Vanguard's 529 plan for Nevada has a max of $370k. Wondering how much money people feel comfortable with investing in a 529 (would anyone even put in the max if they had the capital to do so?), and how they balance concerns as to funding more than they need in the 529 (e.g., what if your kid goes to a state school, gets a scholarship, etc.), while also trying to optimize to max tax savings. Also, if you have two or more kids, seems like you could take more risk of overfunding the first kid's 529 given you can transfer it to your younger kids (is that right?). Curious in how others arrived at their 529 investing plans. Note, this all assumes you've paid off high interest debt, maxed out 401ks, etc.
I determine a set goal: 200k after 18 years. So I just put in $400 a month. My state does not have income tax so I'll just take tax-free growth benefit.

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Re: Max you should invest in a 529?

Post by KlangFool » Tue Sep 04, 2018 6:24 pm

jb100 wrote:
Tue Sep 04, 2018 5:23 pm
KlangFool wrote:
Tue Sep 04, 2018 12:17 pm

A) For most folks that could answer "yes" to that question, their annual savings is high enough that they could "cash flow" the college education when the times come. Hence, they do not need to save for a college education.
This advice seems to be ignoring the tax benefit of 529? When you income is high, your capital gain/dividend is taxed at 20+%.
jb100,

That only applies to folks (married filed jointly) with taxable income greater than 479K.

KlangFool

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Re: Max you should invest in a 529?

Post by Longmonster » Tue Sep 04, 2018 6:49 pm

H-Town wrote:
Tue Sep 04, 2018 5:36 pm
I determine a set goal: 200k after 18 years. So I just put in $400 a month. My state does not have income tax so I'll just take tax-free growth benefit.
We also have a similar goal of $10K per year for 18 years. We have been wondering lately if that is too much though.

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