Max you should invest in a 529?

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bligh
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Re: Max you should invest in a 529?

Post by bligh » Thu Sep 06, 2018 12:43 am

Klangfool, the ability to cashflow the kids education does not affect the desirability of a 529 plan in my opinion. In my case I hope to be in a position to be able to cashflow my kids education. But I am aggressively funding a 529 plan anyway... here is my thinking :

Lets say I put in $5K right now. In 12 years it is worth $10K. My kids Tuition for 1 semester is $10K too. I can now withdraw $10K from the 529 plan to pay the tuition, it means the $10K I was going to spend to cashflow the tuition I will instead be able to invest in Taxable. Put another way, you could say that my $5K in the 529 plan got "converted" to $10K in taxable along with a free step up in cost basis and I cash flowed the education.

Do you see what I mean?

Had I instead put $5K into taxable.. that would have also grown to $10K in 12 years (assuming no tax drag) .. I would have cash flowed the $10K tuition for the semester because I didn't want to pay the capital gains tax on my taxable investments. In both scenarios I am left with paid tuition, and $10K in my taxable account. The difference with the 529 plan was the big step up in cost basis.

bltn
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Re: Max you should invest in a 529?

Post by bltn » Thu Sep 06, 2018 4:45 am

KlangFool wrote:
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
Both of those assertions may well be correct.
But the opportunity to get tax free earnings over an 18 year period might be too good to pass up. Even for those who might cash flow college costs.

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Thu Sep 06, 2018 6:59 am

bligh wrote:
Thu Sep 06, 2018 12:43 am
Klangfool, the ability to cashflow the kids education does not affect the desirability of a 529 plan in my opinion. In my case I hope to be in a position to be able to cashflow my kids education. But I am aggressively funding a 529 plan anyway... here is my thinking :

Lets say I put in $5K right now. In 12 years it is worth $10K. My kids Tuition for 1 semester is $10K too. I can now withdraw $10K from the 529 plan to pay the tuition, it means the $10K I was going to spend to cashflow the tuition I will instead be able to invest in Taxable. Put another way, you could say that my $5K in the 529 plan got "converted" to $10K in taxable along with a free step up in cost basis and I cash flowed the education.

Do you see what I mean?

Had I instead put $5K into taxable.. that would have also grown to $10K in 12 years (assuming no tax drag) .. I would have cash flowed the $10K tuition for the semester because I didn't want to pay the capital gains tax on my taxable investments. In both scenarios I am left with paid tuition, and $10K in my taxable account. The difference with the 529 plan was the big step up in cost basis.
bligh,

1) Why 5K in the 529 for the college education? It is too little to matter.

<<I would have cash flowed the $10K tuition for the semester because I didn't want to pay the capital gains tax on my taxable investments. >>

2) Long-term capital gain tax is 0% for many of us. So, it does not matter.

3) Because of AOTC, you need to pay 5K outside of 529 in order receive $2,500 in tax credit anyhow.

KlangFool

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Thu Sep 06, 2018 7:07 am

bltn wrote:
Thu Sep 06, 2018 4:45 am
KlangFool wrote:
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
Both of those assertions may well be correct.
But the opportunity to get tax free earnings over an 18 year period might be too good to pass up. Even for those who might cash flow college costs.
bltn,

Versus the opportunity cost of needing to use that money to feed the family over that 10+ years? It is not worth it.

I faced annual and quarterly laid off for the last 10+ years. I could be forced into permanent underemployment and/or unemployment. Not until my portfolio reached 1 million a few years before my kid started college, I know that I could pay for college education.

The cost of college education for my 2 kids is 240K. Not until my portfolio is 1 million, I do not know that I can afford to pay it.

This is the problem with 529. In order for it to work, a person has to assume that he/she does not need the money for 10+ years. If your income is high enough and you have job security, it is possible. For the rest of us, it does not make sense.

A) If we put in a small amount of money, it does not help. But, it affects financial aid eligibility even if we are unemployed.

B) If we put in a large amount of money, we cannot afford it. We may need the money to feed the family.

KlangFool

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Thu Sep 06, 2018 7:11 am

Folks,

For many of us, our income is low enough and we may not have the job security, Roth IRAs is the perfect answer for college education funding. 11K X 18 years = 198K. This is more than enough. We get tax-free growth and we could use the contribution as the emergency fund. And, it would not affect financial eligibility.

For those folks that their income is high enough to disqualify them from direct Roth IRA contribution, then, 529 may make sense.

KlangFool

Bacchus01
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Re: Max you should invest in a 529?

Post by Bacchus01 » Thu Sep 06, 2018 7:30 am

They aren’t for everyone and they generally benefit wealthier individuals disproportionately. Unless you have a state tax break, there are other much better options.

Bacchus01
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Re: Max you should invest in a 529?

Post by Bacchus01 » Thu Sep 06, 2018 7:32 am

GoldStar wrote:
Wed Sep 05, 2018 9:11 am
Bacchus01 wrote:
Wed Sep 05, 2018 7:22 am
For most folks paying 15% on QDI/LTCG, annual tax drag on US total stock market yield of ~1.8% is 27 bps, or $27/yr for every $10k invested in a taxable account. Even for high-earners paying 20% + 3.8% NIIT, it's all of 43 bps. That's like trading your 0.04% ER for 0.31% (or 0.47%, for the high earner). That's not nothing, but it's not astronomical either, and people routinely live with ERs like that in their 401k plans.
State LTCGs add another 5% or so in many states.
It seems LOTs of folks here have switched out of managed funds to index funds to get a 47-52 bps savings so it would make sense they would also trade liquidity for college-savings, provided college-savings is one of their savings goals, to get this savings on their investment growth.
Also - if you are managing your college savings assets in a separate bucket you start shifting to more interest/dividend paying investments which are likely taxed at an even higher rate - even more tax savings.
From reading this thread it sounds like your assessment and KlangFool's assessment is that the tax savings just aren't worth it. I'm certainly taking them! (but as a U.S. taxpayer/citizen I thank you and Klang for the extra tax revenue :) ).
You quoted me on something I didn’t actually write

smitcat
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Re: Max you should invest in a 529?

Post by smitcat » Thu Sep 06, 2018 8:08 am

KlangFool wrote:
Thu Sep 06, 2018 7:11 am
Folks,

For many of us, our income is low enough and we may not have the job security, Roth IRAs is the perfect answer for college education funding. 11K X 18 years = 198K. This is more than enough. We get tax-free growth and we could use the contribution as the emergency fund. And, it would not affect financial eligibility.

For those folks that their income is high enough to disqualify them from direct Roth IRA contribution, then, 529 may make sense.

KlangFool
I would guess that is a pretty good summary. I would also make an educated guess that the OP's situation puts them in the 'high enough' income area based upon their initial post parts of which follow....

"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?), …... Note, this all assumes you've paid off high interest debt, maxed out 401ks, etc."

nomadgecko
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Re: Max you should invest in a 529?

Post by nomadgecko » Thu Sep 06, 2018 8:25 am

Westcoaster7 wrote:
Tue Sep 04, 2018 10:41 am
Curious in how others arrived at their 529 investing plans.
Our assumptions:
* Our 2 girls will attend a private college and we will pay for 75% of total costs
* College costs will increase at 4% per year
* The stock market will return 5% per year

We calculated our monthly contribution based on this and went with Utah Vanguard funds.

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GoldStar
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Re: Max you should invest in a 529?

Post by GoldStar » Thu Sep 06, 2018 8:27 am

Bacchus01 wrote:
Thu Sep 06, 2018 7:32 am

You quoted me on something I didn’t actually write
Sorry about that. I went back and removed it (although can't remove you quoting me misquoting you - you can go back and edit that out).

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UpsetRaptor
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Re: Max you should invest in a 529?

Post by UpsetRaptor » Thu Sep 06, 2018 8:37 am

KlangFool wrote:
Thu Sep 06, 2018 7:11 am
Folks,

For many of us, our income is low enough and we may not have the job security, Roth IRAs is the perfect answer for college education funding. 11K X 18 years = 198K. This is more than enough. We get tax-free growth and we could use the contribution as the emergency fund. And, it would not affect financial eligibility.

For those folks that their income is high enough to disqualify them from direct Roth IRA contribution, then, 529 may make sense.

KlangFool
Plus folks who have already done their Roth contribution, have more funds to allocate, and are planning on having qualified education expenses ahead of them. If you have QEE ahead of you, a 529 basically works the same as a Roth (tax free gains) but with often times the added bonus of a state tax benefit, plus you can contribute more.

I would agree though, to do a Roth first.

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bligh
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Re: Max you should invest in a 529?

Post by bligh » Thu Sep 06, 2018 11:27 am

KlangFool wrote:
Thu Sep 06, 2018 6:59 am
bligh wrote:
Thu Sep 06, 2018 12:43 am
Klangfool, the ability to cashflow the kids education does not affect the desirability of a 529 plan in my opinion. In my case I hope to be in a position to be able to cashflow my kids education. But I am aggressively funding a 529 plan anyway... here is my thinking :

Lets say I put in $5K right now. In 12 years it is worth $10K. My kids Tuition for 1 semester is $10K too. I can now withdraw $10K from the 529 plan to pay the tuition, it means the $10K I was going to spend to cashflow the tuition I will instead be able to invest in Taxable. Put another way, you could say that my $5K in the 529 plan got "converted" to $10K in taxable along with a free step up in cost basis and I cash flowed the education.

Do you see what I mean?

Had I instead put $5K into taxable.. that would have also grown to $10K in 12 years (assuming no tax drag) .. I would have cash flowed the $10K tuition for the semester because I didn't want to pay the capital gains tax on my taxable investments. In both scenarios I am left with paid tuition, and $10K in my taxable account. The difference with the 529 plan was the big step up in cost basis.
bligh,

1) Why 5K in the 529 for the college education? It is too little to matter.

<<I would have cash flowed the $10K tuition for the semester because I didn't want to pay the capital gains tax on my taxable investments. >>

2) Long-term capital gain tax is 0% for many of us. So, it does not matter.

3) Because of AOTC, you need to pay 5K outside of 529 in order receive $2,500 in tax credit anyhow.

KlangFool
I was just using $5K as an example to illustrate the point. The numbers involved would all be much larger of course. The principle applies for $50K as much as it does for $5K.

Agreed, if your Long term capital gains tax is going to be 0% then the step up in cost basis is not going to be a big advantage. In my case I doubt I will have many years of 0% long term capital gains though. Also if you hold bonds in the 529 plan it wont count as income and will compound tax free until you withdraw it. In todays low rate environment it is not as big a deal, but one can hope that in a few years we have a good ~5% yield on bonds in which case it will be awesome.

WL2034
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Re: Max you should invest in a 529?

Post by WL2034 » Thu Sep 06, 2018 11:46 am

Besides the discussion regarding if one should or should not be using a 529 -- anyone else care to comment on how much they are investing yearly? Anyone contributing more than $10k / child per year? What is your goal amount at the time of high school graduation (in today's dollars)?

Thus far we have mainly been utilizing 529 for the state tax benefit, but perhaps we should set a goal amount per child (which would be more than the state tax benefit) to save yearly. I think the reason we have just settled on the maximum for state tax deduction is that it is difficult to predict the future with so many variables.

HereToLearn
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Re: Max you should invest in a 529?

Post by HereToLearn » Thu Sep 06, 2018 12:38 pm

KlangFool wrote:
Thu Sep 06, 2018 6:59 am
bligh wrote:
Thu Sep 06, 2018 12:43 am



3) Because of AOTC, you need to pay 5K outside of 529 in order receive $2,500 in tax credit anyhow.

KlangFool
AOTC requires $4000/year paid from non-529 funds in order to claim the $2500 tax credit.

HereToLearn
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Re: Max you should invest in a 529?

Post by HereToLearn » Thu Sep 06, 2018 12:48 pm

WL2034 wrote:
Thu Sep 06, 2018 11:46 am
Besides the discussion regarding if one should or should not be using a 529 -- anyone else care to comment on how much they are investing yearly? Anyone contributing more than $10k / child per year? What is your goal amount at the time of high school graduation (in today's dollars)?

Thus far we have mainly been utilizing 529 for the state tax benefit, but perhaps we should set a goal amount per child (which would be more than the state tax benefit) to save yearly. I think the reason we have just settled on the maximum for state tax deduction is that it is difficult to predict the future with so many variables.
I think the amount to contribute is somewhat of a personal family decision. Do you want to be able to pay up to the cost of your in-state option? Or the full-pay cost of a private? The private cost will be double the public cost in most states, and in some cases, even more than twice as expensive.

I agree with you that there are so many variables. Cost of attendance has been increasing at close to a 4% annual rate during the past seven or eight years that I have been watching the numbers. The 529 account has enjoyed tremendous gains these past couple of years but that cannot be relied on.

megabad
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Re: Max you should invest in a 529?

Post by megabad » Thu Sep 06, 2018 1:46 pm

HereToLearn wrote:
Thu Sep 06, 2018 12:48 pm
I agree with you that there are so many variables. Cost of attendance has been increasing at close to a 4% annual rate during the past seven or eight years that I have been watching the numbers. The 529 account has enjoyed tremendous gains these past couple of years but that cannot be relied on.
Agree on the lots of variables comment. In my case, in state tuition and fees (not necessarily cost of attendance) at three flagship state universities (3 different states) around me have increased over 10% on average on an annualized basis for the past decade. This is economically unsustainable for an extended period of time unless the supply/demand curve changes significantly for college education. As such, I have no idea what the future will hold.

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Thu Sep 06, 2018 2:13 pm

megabad wrote:
Thu Sep 06, 2018 1:46 pm
HereToLearn wrote:
Thu Sep 06, 2018 12:48 pm
I agree with you that there are so many variables. Cost of attendance has been increasing at close to a 4% annual rate during the past seven or eight years that I have been watching the numbers. The 529 account has enjoyed tremendous gains these past couple of years but that cannot be relied on.
Agree on the lots of variables comment. In my case, in state tuition and fees (not necessarily cost of attendance) at three flagship state universities (3 different states) around me have increased over 10% on average on an annualized basis for the past decade. This is economically unsustainable for an extended period of time unless the supply/demand curve changes significantly for college education. As such, I have no idea what the future will hold.
megabad,

For many of us, we are not rich enough. Hence, this question is irrelevant. I know that I am only willing to pay 30K per year per kid if my net worth is 1 million or more. Or, 120K per 4 years for each kid. The kid will have to find a way to make up the difference if they want or need to pay more.

I am only willing to spend X% of my net worth on my kid's college education. I cannot afford to spend more. So, whatever the actual number could be or will be is irrelevant to me.

KlangFool

SelfEmployed123
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Re: Max you should invest in a 529?

Post by SelfEmployed123 » Thu Sep 06, 2018 9:28 pm

KlangFool wrote:
Thu Sep 06, 2018 7:11 am
Folks,

For many of us, our income is low enough and we may not have the job security, Roth IRAs is the perfect answer for college education funding. 11K X 18 years = 198K. This is more than enough. We get tax-free growth and we could use the contribution as the emergency fund. And, it would not affect financial eligibility.

For those folks that their income is high enough to disqualify them from direct Roth IRA contribution, then, 529 may make sense.

KlangFool
Thank you Klangfool for your very clear/concise points on this. Your posts got me thinking and I decided to run some numbers. Please bear with me. For these numbers, lets assume that we have two families. Each family has a total income of $150,000. Family 1 maxes out all retirement savings (his 401k, her 401k, his IRA, her IRA) and intends to use IRAs to fund college for their child. Family 2 has the same income but underfunds 401k or IRA in favor of funding a 529 plan for their child at $2000 per year. After federal and state taxes, both families live comfortably on about $80,000 per year. Both families invest in an S&P 500 index fund and earn 8% nominal returns per year.

Fast forward 18 years. Each family is ready to send their kid to college. Family 1 has more than enough in their IRAs to pay for college (which can be deducted without penalty for education expenses). Family 2 has about $75000 saved in their 529. Both families go to fill out their FAFSA. Family 1's expected contribution based on their income is about $38000 per year. However, Family 2's expected contribution is about $42000 per year. The assets that both families saved were identical. Their investments were identical. The only difference between them was which bucket they chose to use. In this example, Family 2's college student would receive $4000 less in financial aid per year. That could be a real difference in terms of scholarships/grants from the school.

The reason for the discrepancy is how the Feds calculate expected family contributions. 401k and IRA assets are not counted among family assets, but 529 assets are. See here for details if you want to run your own numbers: https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf

This is just a hypothetical example. However, I would encourage people to run their own numbers to determine whether using a 529 is worthwhile. For many, it will make more sense to prioritize funding a 401k/IRA before making any 529 contributions.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

EddyB
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Re: Max you should invest in a 529?

Post by EddyB » Thu Sep 06, 2018 10:43 pm

KlangFool wrote:
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
No, considering that about half the states tax capital gains at 5%+, it applies to many folks (married filing jointly) with taxable income greater than $77,200.

RetiredCSProf
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Re: Max you should invest in a 529?

Post by RetiredCSProf » Thu Sep 06, 2018 11:51 pm

I invested $55K into an age-based Vanguard 529 when my son was about 6 years old. This was a gift from Gramma (super-gifting $11K per year for five years). By the time my son started college, the fund had grown to $100K (kept up with inflation in college tuition costs). I had previously invested $500 per year for three years in an Education Savings Account (ESA) at 100% equity.

If my son receives a scholarship, an equivalent amount can be withdrawn from the 529 fund without penalty.

FAFSA counts the 529 fund as parents' asset, but does not count primary residence or retirement accounts (tIRA or Roth) as parents' assets. In the year that my son turns 24, FAFSA will count only his assets and income, not his parents'.

The result: My son completed three years of community college, without exhausting his ESA. He planned to transfer to an in-state 4-year public school this fall, but plans went awry (long story) and he enrolled at a private school (tuition $25K per semester). He's changed majors twice and will need three more years (six years total) to finish his undergraduate degree. He may stay at the private school or transfer in a year to the public school -- so, I still don't know if I saved enough to cover his undergraduate degree. :oops:

LinusP
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Re: Max you should invest in a 529?

Post by LinusP » Fri Sep 07, 2018 12:00 am

SelfEmployed123 wrote:
Thu Sep 06, 2018 9:28 pm
The reason for the discrepancy is how the Feds calculate expected family contributions. 401k and IRA assets are not counted among family assets, but 529 assets are. See here for details if you want to run your own numbers: https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf
As I pointed out earlier in this thread, I think that's only part of the story. My understanding is that families fill out the FAFSA each academic year, and that money withdrawn from Roth IRAs (and 529s owned by those other than the parents, for that matter) counts as income. My understanding is that because of the timing of the info needed for the FAFSA, this is irrelevant for the last 2.5 years a kid is in college (go ahead and use the Roth), but in the first 1.5 years, withdrawing from a Roth IRA could significantly decrease financial aid. And since my daughter will likely be only one academic year behind my son, we want to wait until 2.5 years into his higher ed to start pulling from those assets.

People seem to like arguing about 529 vs. Roth IRA for funding college, but as with 401(k)s and Roth IRAs for retirement, I say...why not both? If financial aid is a reasonable possibility, diversify from a financial aid perspective as well as across asset classes and tax treatments - and be strategic about what funds you drawn from, and when.

SelfEmployed123
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Re: Max you should invest in a 529?

Post by SelfEmployed123 » Fri Sep 07, 2018 5:44 am

LinusP wrote:
Fri Sep 07, 2018 12:00 am
SelfEmployed123 wrote:
Thu Sep 06, 2018 9:28 pm
The reason for the discrepancy is how the Feds calculate expected family contributions. 401k and IRA assets are not counted among family assets, but 529 assets are. See here for details if you want to run your own numbers: https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf
People seem to like arguing about 529 vs. Roth IRA for funding college, but as with 401(k)s and Roth IRAs for retirement, I say...why not both? If financial aid is a reasonable possibility, diversify from a financial aid perspective as well as across asset classes and tax treatments - and be strategic about what funds you drawn from, and when.
My main point is for people to look at their own individual situation to make a decision. If you can adequately save for both college and retirement, that's great. However, many people cannot accomplish that. It is also within the realm of possibility to not use IRA funds (or 529 funds for that matter) until the final year of college so that the disbursement is not counted as income. Families with lower incomes but enough saved in an IRA to pay for college could use subsidized Stafford loans instead, which are effectively an interest free loan from the government if you pay it off prior to the 6 month grace period after graduation. Doing so could allow for maximal additional financial aid in the form of grants or scholarships. However, if you diversify funding by saving in both IRAs and a 529 as you state, your child would by default have less financial aid available to him or her due to assets being saved in a 529.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

Bacchus01
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Re: Max you should invest in a 529?

Post by Bacchus01 » Fri Sep 07, 2018 5:47 am

WL2034 wrote:
Thu Sep 06, 2018 11:46 am
Besides the discussion regarding if one should or should not be using a 529 -- anyone else care to comment on how much they are investing yearly? Anyone contributing more than $10k / child per year? What is your goal amount at the time of high school graduation (in today's dollars)?

Thus far we have mainly been utilizing 529 for the state tax benefit, but perhaps we should set a goal amount per child (which would be more than the state tax benefit) to save yearly. I think the reason we have just settled on the maximum for state tax deduction is that it is difficult to predict the future with so many variables.
I think I posted, but we do up to the state tax benefit in WI, which is about $3,100 per person. We also do one each for my wife and I, which we will then roll to our kids. So for 5 people it’s $15,500 but eventually split three kids it’s $5,200 each. We will likely do that the rest of our lives and pass anything to our grandkids that way.

SelfEmployed123
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Re: Max you should invest in a 529?

Post by SelfEmployed123 » Fri Sep 07, 2018 6:00 am

LinusP wrote:
Tue Sep 04, 2018 1:39 pm
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.
Other than the blog post that was cited, I cannot find any support for the 5.64% figure on federal websites. See for example here https://fafsa.ed.gov/fotw1718/help/faahelp69.htm and https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf. The final link shows the actual formula used to calculate the expected family contribution. Can you or someone provide support for the 5.64% figure? Because otherwise it seems like 100% of the 529 balance is counted as assets when calculating the expected family contribution.

Edit. I think I may have figured it out. The following link is the expected family contribution formula for 2010: https://ifap.ed.gov/efcformulaguide/att ... 102011.pdf. Under Parents Contribution From Assets, you can see at the bottom that all assets are multiplied by the asset conversion rate of 12%. Congress must have been changing the formula over time. The current asset conversion rate is 20%, so 20% of assets in a 529 count toward the expected family contribution. We can probably expect that number to continue to rise in the future.
Last edited by SelfEmployed123 on Fri Sep 07, 2018 6:12 am, edited 1 time in total.
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dogagility
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Re: Max you should invest in a 529?

Post by dogagility » Fri Sep 07, 2018 6:01 am

SelfEmployed123 wrote:
Thu Sep 06, 2018 9:28 pm
The reason for the discrepancy is how the Feds calculate expected family contributions. 401k and IRA assets are not counted among family assets, but 529 assets are.
In your example, I can almost guarantee the federal "aid" will be in the form of a loan... maybe not even a subsidized loan.
Taking "risk" since 1995.

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dogagility
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Re: Max you should invest in a 529?

Post by dogagility » Fri Sep 07, 2018 6:07 am

WL2034 wrote:
Thu Sep 06, 2018 11:46 am
Besides the discussion regarding if one should or should not be using a 529 -- anyone else care to comment on how much they are investing yearly? Anyone contributing more than $10k / child per year? What is your goal amount at the time of high school graduation (in today's dollars)?
My suggestion would be to run the net price calculator for several colleges you think your kid might attend. Project their GPA and test scores and your family income/savings (not exact science, I know).
Many parents (including us) end up projecting to save an amount equal to the four year cost of attending an in-state public flagship... anywhere from 70 - 130K in today's dollars, depending upon where you live.
Taking "risk" since 1995.

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Re: Max you should invest in a 529?

Post by SelfEmployed123 » Fri Sep 07, 2018 6:14 am

dogagility wrote:
Fri Sep 07, 2018 6:01 am
SelfEmployed123 wrote:
Thu Sep 06, 2018 9:28 pm
The reason for the discrepancy is how the Feds calculate expected family contributions. 401k and IRA assets are not counted among family assets, but 529 assets are.
In your example, I can almost guarantee the federal "aid" will be in the form of a loan... maybe not even a subsidized loan.
It was just an example. Everyone should run their own numbers before making a decision.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

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

Post by SchruteB&B » Fri Sep 07, 2018 7:02 am

SelfEmployed123 wrote:
Thu Sep 06, 2018 9:28 pm
KlangFool wrote:
Thu Sep 06, 2018 7:11 am
Folks,

For many of us, our income is low enough and we may not have the job security, Roth IRAs is the perfect answer for college education funding. 11K X 18 years = 198K. This is more than enough. We get tax-free growth and we could use the contribution as the emergency fund. And, it would not affect financial eligibility.

For those folks that their income is high enough to disqualify them from direct Roth IRA contribution, then, 529 may make sense.

KlangFool
Thank you Klangfool for your very clear/concise points on this. Your posts got me thinking and I decided to run some numbers. Please bear with me. For these numbers, lets assume that we have two families. Each family has a total income of $150,000. Family 1 maxes out all retirement savings (his 401k, her 401k, his IRA, her IRA) and intends to use IRAs to fund college for their child. Family 2 has the same income but underfunds 401k or IRA in favor of funding a 529 plan for their child at $2000 per year. After federal and state taxes, both families live comfortably on about $80,000 per year. Both families invest in an S&P 500 index fund and earn 8% nominal returns per year.

Fast forward 18 years. Each family is ready to send their kid to college. Family 1 has more than enough in their IRAs to pay for college (which can be deducted without penalty for education expenses). Family 2 has about $75000 saved in their 529. Both families go to fill out their FAFSA. Family 1's expected contribution based on their income is about $38000 per year. However, Family 2's expected contribution is about $42000 per year. The assets that both families saved were identical. Their investments were identical. The only difference between them was which bucket they chose to use. In this example, Family 2's college student would receive $4000 less in financial aid per year. That could be a real difference in terms of scholarships/grants from the school.

The reason for the discrepancy is how the Feds calculate expected family contributions. 401k and IRA assets are not counted among family assets, but 529 assets are. See here for details if you want to run your own numbers: https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf

This is just a hypothetical example. However, I would encourage people to run their own numbers to determine whether using a 529 is worthwhile. For many, it will make more sense to prioritize funding a 401k/IRA before making any 529 contributions.
The only colleges that guarantee to meet need 100% will require the CSS form which are much more in depth about assets than the FAFSA. Colleges that don’t meet need can gap you or offer loans regardless of what the FAFSA says.

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Re: Max you should invest in a 529?

Post by GoldStar » Fri Sep 07, 2018 7:55 am

Summaries of this thread and others I've read on 529 plans at this site:

1) Many bogleheads take advantage of 20+ years of tax-free growth that 529 accounts provide and are proud to state they've saved a lot in taxes.
2) Some bogleheads feel the lack of liquidity isn't worth the hundreds to thousands they could have saved in Capital Gains and other taxes - don't want to chance the 10%-earnings tax penalty (plus income-rate tax on the earnings).
3) Some bogleheads may have special tax circumstances such that the 529 advantages dwindle (very large TLH capability from prior losses for taxable, etc.)
4) Some bogleheads don't believe in funding their children's education so choose not to use 529s.
5) Klangfool does not like 529s and will fight to the death to explain why you shouldn't use them :)

...not trying to pick on anyone - just a trying to add some humor into the thread on a Friday....
:sharebeer

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Re: Max you should invest in a 529?

Post by BuckyBadger » Fri Sep 07, 2018 8:09 am

WL2034 wrote:
Thu Sep 06, 2018 11:46 am
Besides the discussion regarding if one should or should not be using a 529 -- anyone else care to comment on how much they are investing yearly? Anyone contributing more than $10k / child per year? What is your goal amount at the time of high school graduation (in today's dollars)?

Thus far we have mainly been utilizing 529 for the state tax benefit, but perhaps we should set a goal amount per child (which would be more than the state tax benefit) to save yearly. I think the reason we have just settled on the maximum for state tax deduction is that it is difficult to predict the future with so many variables.
I'll play.

We're contributing to a 529 and started several months ago - before this Nugget has even been born (she's still not born, but we're expecting her on Sunday I HOPE!!). We're still trying to figure out exactly how much we want to contribute. Currently we decided to shift the amount we were paying ahead on our mortgage over to the 529, so that's $600 per month increasing by 3% annually. I also lump summed in about $6k this year, so I think we'll be up to about $10k by the end of 2018. Going forward we will continue with the $600+ per month and will assess our desire to pay more. We will probably lump sum in enough extra to hit whatever the gift limit is for that year.

(I'm still a bit confused about how much one can put in, actually. I read things about it being the gift tax limit, but if there are two parents shouldn't it be at least 2x the gift tax limit? And my parents have started a 529 for her in a different state and will contribute about $2k per year. Does this not count as well? Clearly I have more research to do!)

The reasons we've chosen to do this:

*We're a dual PhD household and think it likely that the Nugget will go to university and grad school, so we're not terribly concerned about over funding. She may also go to private school in which case she could use $10k a year toward that if we decided it made sense.
*We will have nieces who could benefit from any extra, as my brother works in a low paying but respectable field and we'd be happy to share excess 529 funds with his girls.
*We are relatively high income (~$325k per year combined) and don't expect to be eligible for any aid due to the expected levels of our taxable accounts in 18 years, so having 529 money count against us isn't relevant.
*We are already maxing out all the tax advantaged retirement accounts available to us and also contributing to a taxable account, so we're saving ~$100k yearly toward retirement. Any extra we saved would go into taxable, so sticking some into a 529 gets us at least a little tax advantage on the federal level. (No state advantage in NC, unfortunately.)
*We had decided, for lack of anything else to do with it, to do a small prepayment of the mortgage. I'm not terribly keen on prepaying the mortgage with a rate of 3.5% and a balance that's less than a year's annual salary, so switching this amount over into a 529 seemed if nothing else at least a neutral choice.
*Up to this point, we've been DINKS with high savings and a lot of fat in our spending. Now we're going to be 38 year old parents of one. We think we should be able to continue funding retirement to the amount we were previously, still stay on track to retire in our early 50's, AND be able to pay for the Nugget to go to any school she wants. Both our parents gave us the gift of college and it helped set us up to go to grad school in a technical field where school was paid for through research assistant-ships and led us to where we are now, so we want to provide the same thing for our kid. And luckily we are able to.

This is just us, though. Just our situation. Because we're already maxing out all our accounts it's an easier choice for us to contribute to the 529, I think, but you did ask, so I answered.

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Re: Max you should invest in a 529?

Post by KlangFool » Fri Sep 07, 2018 8:24 am

GoldStar wrote:
Fri Sep 07, 2018 7:55 am
Summaries of this thread and others I've read on 529 plans at this site:

1) Many bogleheads take advantage of 20+ years of tax-free growth that 529 accounts provide and are proud to state they've saved a lot in taxes.
2) Some bogleheads feel the lack of liquidity isn't worth the hundreds to thousands they could have saved in Capital Gains and other taxes - don't want to chance the 10%-earnings tax penalty (plus income-rate on the earnings).
3) Some bogleheads may have special tax circumstances such that the 529 advantages dwindle (very large TLH capability from prior losses for taxable, etc.)
4) Some bogleheads don't believe in funding their children's education so choose not to use 529s.
5) Klangfool does not like 529s and will fight to the death to explain why you shouldn't use them :)

...not trying to pick on anyone - just a trying to add some humor into the thread on a Friday....
:sharebeer
GoldStar,

1) Most people in the late 20s or early 30s had their first kid. They are at the peak of their career and earning power. They are overly optimistic and they believe that it will be sunny and their earning could only go up from now on. They do not believe that they could be permanently underemployed or unemployed in their 40s and 50s.

Based on that optimistic projection, they funded the 529 and buy a big expensive house ahead of funding their tax-advantaged accounts. It will work out if they do not suffer any longer period of unemployment across multiple recessions and economic crisis. But, many of them don't.

The problem with the Bogleheads forum is the survivorship bias. Those did not survive will not be around posting in the forum. They are on the street somewhere fighting for survival.

Only those that have higher income and better job security than most people have the luxury of funding 529. For most people, after funding the tax-advantaged accounts, there is no money for 529.

2) How many people actually can be continuously fully-employed until retirement age? I know that I am not one of them. So, I am not saving for retirement. I am saving for Financial Independent/ Family survival. I need to make sure that I can feed my family before I can think about funding for college education. And, I have a budget of how much I can afford to pay.

For poorer folks like us, it makes more sense to assume that we can only afford to pay X% of our net worth on college education. We need the rest of the money to feed our family. So, how does college education cost play any part in this? It does not. We can only afford to pay Y.

So, how does it makes any sense to count the chicken before the egg hatches? We do not know how much our net worth could be 10+ years from when the kids were born. Hence, we do not know whether we can afford to pay for our kid's college education and feed our family at the same time.

3) To each its own. If a person believes that he/she are willing to live on the street in order to send their kids to college, it is their choice. If a person is rich enough and has the job security to make sure that they can afford to fund 529 for their kid's college, it is good for them. But, please do not assume that 529 is the only way.

4) Folks do not plan for the situation if things go wrong. But, recessions and the economic crisis occurred regularly. Many folks do not survive financially in every recession and economic crisis. I had been through too many of them over the last 30+ years.

KlangFool

smitcat
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Re: Max you should invest in a 529?

Post by smitcat » Fri Sep 07, 2018 8:44 am

KlangFool wrote:
Fri Sep 07, 2018 8:24 am
GoldStar wrote:
Fri Sep 07, 2018 7:55 am
Summaries of this thread and others I've read on 529 plans at this site:

1) Many bogleheads take advantage of 20+ years of tax-free growth that 529 accounts provide and are proud to state they've saved a lot in taxes.
2) Some bogleheads feel the lack of liquidity isn't worth the hundreds to thousands they could have saved in Capital Gains and other taxes - don't want to chance the 10%-earnings tax penalty (plus income-rate on the earnings).
3) Some bogleheads may have special tax circumstances such that the 529 advantages dwindle (very large TLH capability from prior losses for taxable, etc.)
4) Some bogleheads don't believe in funding their children's education so choose not to use 529s.
5) Klangfool does not like 529s and will fight to the death to explain why you shouldn't use them :)

...not trying to pick on anyone - just a trying to add some humor into the thread on a Friday....
:sharebeer
GoldStar,

1) Most people in the late 20s or early 30s had their first kid. They are at the peak of their career and earning power. They are overly optimistic and they believe that it will be sunny and their earning could only go up from now on. They do not believe that they could be permanently underemployed or unemployed in their 40s and 50s.
We were unemployed twice in our careers.

Based on that optimistic projection, they funded the 529 and buy a big expensive house ahead of funding their tax-advantaged accounts. It will work out if they do not suffer any longer period of unemployment across multiple recessions and economic crisis. But, many of them don't.
We funded a 529 but I don't see how that is related to a 'big expensive home' we did not fund one of those.

The problem with the Bogleheads forum is the survivorship bias. Those did not survive will not be around posting in the forum. They are on the street somewhere fighting for survival.
We are posting here on Bogleheads

2) How many people actually can be continuously fully-employed until retirement age? I know that I am not one of them. So, I am not saving for retirement. I am saving for Financial Independent/ Family survival. I need to make sure that I can feed my family before I can think about funding for college education. And, I have a budget of how much I can afford to pay.
We were not continuously employed but we found employment each time after layoffs.


3) To each its own. If a person believes that he/she are willing to live on the street in order to send their kids to college, it is their choice. If a person is rich enough and has the job security to make sure that they can afford to fund 529 for their kid's college, it is good for them. But, please do not assume that 529 is the only way.
We did have access to the 529 plan when unemployed but did not require using it - had we stayed without income the fees for that year would have been minimal - just like the fees to withdraw 401K accounts if that occurred.

4) Folks do not plan for the situation if things go wrong. But, recessions and the economic crisis occurred regularly. Many folks do not survive financially in every recession and economic crisis. I had been through too many of them over the last 30+ years.

We each lost our jobs/careers twice - it was hard at the time, yet we got jobs shortly after that paid less but started us on the path again.
So while we did not thrive in the recesssions/job loss we certanly survived. Living below your means, staying informed, staying flexible and always wanting to secure a position that allows growth (if not a high salary) allowed us to be in really great shape now.
Even though we were both laid off twice from jobs that were impractical to replace after the layoffs.

Friday wish for all - be positive and enjoy life but also plan and be prepared with a backup plan.

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Re: Max you should invest in a 529?

Post by Grt2bOutdoors » Fri Sep 07, 2018 8:59 am

BuckyBadger wrote:
Fri Sep 07, 2018 8:09 am
WL2034 wrote:
Thu Sep 06, 2018 11:46 am
Besides the discussion regarding if one should or should not be using a 529 -- anyone else care to comment on how much they are investing yearly? Anyone contributing more than $10k / child per year? What is your goal amount at the time of high school graduation (in today's dollars)?

Thus far we have mainly been utilizing 529 for the state tax benefit, but perhaps we should set a goal amount per child (which would be more than the state tax benefit) to save yearly. I think the reason we have just settled on the maximum for state tax deduction is that it is difficult to predict the future with so many variables.
I'll play.

We're contributing to a 529 and started several months ago - before this Nugget has even been born (she's still not born, but we're expecting her on Sunday I HOPE!!).

(I'm still a bit confused about how much one can put in, actually. I read things about it being the gift tax limit, but if there are two parents shouldn't it be at least 2x the gift tax limit? And my parents have started a 529 for her in a different state and will contribute about $2k per year. Does this not count as well? Clearly I have more research to do!)

The reasons we've chosen to do this:

*We're a dual PhD household and think it likely that the Nugget will go to university and grad school, so we're not terribly concerned about over funding. She may also go to private school in which case she could use $10k a year toward that if we decided it made sense.
*We will have nieces who could benefit from any extra, as my brother works in a low paying but respectable field and we'd be happy to share excess 529 funds with his girls.
*We are relatively high income (~$325k per year combined) and don't expect to be eligible for any aid due to the expected levels of our taxable accounts in 18 years, so having 529 money count against us isn't relevant.
*We are already maxing out all the tax advantaged retirement accounts available to us and also contributing to a taxable account, so we're saving ~$100k yearly toward retirement. Any extra we saved would go into taxable, so sticking some into a 529 gets us at least a little tax advantage on the federal level. (No state advantage in NC, unfortunately.)
*We had decided, for lack of anything else to do with it, to do a small prepayment of the mortgage. I'm not terribly keen on prepaying the mortgage with a rate of 3.5% and a balance that's less than a year's annual salary, so switching this amount over into a 529 seemed if nothing else at least a neutral choice.
*Up to this point, we've been DINKS with high savings and a lot of fat in our spending. Now we're going to be 38 year old parents of one. We think we should be able to continue funding retirement to the amount we were previously, still stay on track to retire in our early 50's, AND be able to pay for the Nugget to go to any school she wants. Both our parents gave us the gift of college and it helped set us up to go to grad school in a technical field where school was paid for through research assistant-ships and led us to where we are now, so we want to provide the same thing for our kid. And luckily we are able to.

This is just us, though. Just our situation. Because we're already maxing out all our accounts it's an easier choice for us to contribute to the 529, I think, but you did ask, so I answered.
You can contribute $15k per individual or $30k per married couple. You can elect 5 year forwarding and contribute $150k per married couple. Your parents 529 plan is separate- they too can elect to contribute $150k upfront or put in any amount from $1 to $30k annually. I think that’s overkill, but hey those who are really wealthy have other vehicles to use, they don’t have to use a 529 plan.

Think of a 529 plan as a way to somewhat “even” the playing field- everyone will benefit from tax free gains, though as everything else, those who put in more will usually end up with more but they also had more at stake.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

SelfEmployed123
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Re: Max you should invest in a 529?

Post by SelfEmployed123 » Fri Sep 07, 2018 10:52 am

I again wanted to thank the folks in this thread. It has caused me to do some research into my state's 529 (Maryland). As a result, I discovered Maryland matches contributions from $250 to $500 depending on adjusted gross income. I'd encourage others to look into this as there may be free money on the table depending on where you live and your income. See here for more: https://maryland529.com/MDMatch250/FAQ
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

finite_difference
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Re: Max you should invest in a 529?

Post by finite_difference » Fri Sep 07, 2018 11:04 am

grkmec wrote:
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.
That’s pretty awesome. How are you planning to make it work for future generations? Each kid inherits 1/3 and gets to decide for themselves how to use it?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

Luke Duke
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Re: Max you should invest in a 529?

Post by Luke Duke » Fri Sep 07, 2018 11:05 am

WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college.
False. It can also be used for K-12 private school tuition.
https://www.savingforcollege.com/articl ... ol-tuition

WhiteMaxima
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Re: Max you should invest in a 529?

Post by WhiteMaxima » Fri Sep 07, 2018 11:24 am

Luke Duke wrote:
Fri Sep 07, 2018 11:05 am
WhiteMaxima wrote:
Tue Sep 04, 2018 11:50 am
529 can only be used for college.
False. It can also be used for K-12 private school tuition.
https://www.savingforcollege.com/articl ... ol-tuition
Why use to 12k education? It's been paid by your property tax and how many years you can compound? 529 was designed for college and you have not too long time to compound (one or two bulls).

BuckyBadger
Posts: 849
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Re: Max you should invest in a 529?

Post by BuckyBadger » Fri Sep 07, 2018 11:27 am

WhiteMaxima wrote:
Fri Sep 07, 2018 11:24 am
Why use to 12k education? It's been paid by your property tax and how many years you can compound? 529 was designed for college and you have not too long time to compound (one or two bulls).
Private schools aren't paid for by property tax. And money could have been compounding up to 18 years or more if you're a forward thinker.

WhiteMaxima
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Re: Max you should invest in a 529?

Post by WhiteMaxima » Fri Sep 07, 2018 11:40 am

I mean why waste money in K12 private school? Buy or even rent a home at good school district.

Bacchus01
Posts: 1929
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Re: Max you should invest in a 529?

Post by Bacchus01 » Fri Sep 07, 2018 11:47 am

KlangFool wrote:
Fri Sep 07, 2018 8:24 am
GoldStar wrote:
Fri Sep 07, 2018 7:55 am
Summaries of this thread and others I've read on 529 plans at this site:

1) Many bogleheads take advantage of 20+ years of tax-free growth that 529 accounts provide and are proud to state they've saved a lot in taxes.
2) Some bogleheads feel the lack of liquidity isn't worth the hundreds to thousands they could have saved in Capital Gains and other taxes - don't want to chance the 10%-earnings tax penalty (plus income-rate on the earnings).
3) Some bogleheads may have special tax circumstances such that the 529 advantages dwindle (very large TLH capability from prior losses for taxable, etc.)
4) Some bogleheads don't believe in funding their children's education so choose not to use 529s.
5) Klangfool does not like 529s and will fight to the death to explain why you shouldn't use them :)

...not trying to pick on anyone - just a trying to add some humor into the thread on a Friday....
:sharebeer
GoldStar,

1) Most people in the late 20s or early 30s had their first kid. They are at the peak of their career and earning power. They are overly optimistic and they believe that it will be sunny and their earning could only go up from now on. They do not believe that they could be permanently underemployed or unemployed in their 40s and 50s.

Based on that optimistic projection, they funded the 529 and buy a big expensive house ahead of funding their tax-advantaged accounts. It will work out if they do not suffer any longer period of unemployment across multiple recessions and economic crisis. But, many of them don't.

The problem with the Bogleheads forum is the survivorship bias. Those did not survive will not be around posting in the forum. They are on the street somewhere fighting for survival.

Only those that have higher income and better job security than most people have the luxury of funding 529. For most people, after funding the tax-advantaged accounts, there is no money for 529.

2) How many people actually can be continuously fully-employed until retirement age? I know that I am not one of them. So, I am not saving for retirement. I am saving for Financial Independent/ Family survival. I need to make sure that I can feed my family before I can think about funding for college education. And, I have a budget of how much I can afford to pay.

For poorer folks like us, it makes more sense to assume that we can only afford to pay X% of our net worth on college education. We need the rest of the money to feed our family. So, how does college education cost play any part in this? It does not. We can only afford to pay Y.

So, how does it makes any sense to count the chicken before the egg hatches? We do not know how much our net worth could be 10+ years from when the kids were born. Hence, we do not know whether we can afford to pay for our kid's college education and feed our family at the same time.

3) To each its own. If a person believes that he/she are willing to live on the street in order to send their kids to college, it is their choice. If a person is rich enough and has the job security to make sure that they can afford to fund 529 for their kid's college, it is good for them. But, please do not assume that 529 is the only way.

4) Folks do not plan for the situation if things go wrong. But, recessions and the economic crisis occurred regularly. Many folks do not survive financially in every recession and economic crisis. I had been through too many of them over the last 30+ years.

KlangFool
20s or early 30s is the peak of earnings potential? I literally don't know a single person where this is true.

randomguy
Posts: 6499
Joined: Wed Sep 17, 2014 9:00 am

Re: Max you should invest in a 529?

Post by randomguy » Fri Sep 07, 2018 11:51 am

SelfEmployed123 wrote:
Fri Sep 07, 2018 6:00 am
LinusP wrote:
Tue Sep 04, 2018 1:39 pm
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.
Other than the blog post that was cited, I cannot find any support for the 5.64% figure on federal websites. See for example here https://fafsa.ed.gov/fotw1718/help/faahelp69.htm and https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf. The final link shows the actual formula used to calculate the expected family contribution. Can you or someone provide support for the 5.64% figure? Because otherwise it seems like 100% of the 529 balance is counted as assets when calculating the expected family contribution.

Edit. I think I may have figured it out. The following link is the expected family contribution formula for 2010: https://ifap.ed.gov/efcformulaguide/att ... 102011.pdf. Under Parents Contribution From Assets, you can see at the bottom that all assets are multiplied by the asset conversion rate of 12%. Congress must have been changing the formula over time. The current asset conversion rate is 20%, so 20% of assets in a 529 count toward the expected family contribution. We can probably expect that number to continue to rise in the future.
In general the math is that 100% of a 529 counts as an asset. Of that asset
5.64% of a parents assets count towards aid
20% of a students assets are counted towards aid
529s are normally in the parents name and have the 5.64% rate and not the 20% rate. Grandparent held 529s count as income not as an asset.

And this is all FASFA. CSS has their own rules.

I think something like 1 million per kids is probably the max as that pays full freight at harvard and then med school. Few people are in the place where doing that is a reasonable option.

randomguy
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Re: Max you should invest in a 529?

Post by randomguy » Fri Sep 07, 2018 11:52 am

Bacchus01 wrote:
Fri Sep 07, 2018 11:47 am


20s or early 30s is the peak of earnings potential? I literally don't know a single person where this is true.
Klangfool lives in a world were everyone is fired by 40 and never work a decent job again. That world may or may not match your reality. It doesn't match mine but debating it with him is futile.

KlangFool
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Re: Max you should invest in a 529?

Post by KlangFool » Fri Sep 07, 2018 11:58 am

Bacchus01 wrote:
Fri Sep 07, 2018 11:47 am
KlangFool wrote:
Fri Sep 07, 2018 8:24 am
GoldStar wrote:
Fri Sep 07, 2018 7:55 am
Summaries of this thread and others I've read on 529 plans at this site:

1) Many bogleheads take advantage of 20+ years of tax-free growth that 529 accounts provide and are proud to state they've saved a lot in taxes.
2) Some bogleheads feel the lack of liquidity isn't worth the hundreds to thousands they could have saved in Capital Gains and other taxes - don't want to chance the 10%-earnings tax penalty (plus income-rate on the earnings).
3) Some bogleheads may have special tax circumstances such that the 529 advantages dwindle (very large TLH capability from prior losses for taxable, etc.)
4) Some bogleheads don't believe in funding their children's education so choose not to use 529s.
5) Klangfool does not like 529s and will fight to the death to explain why you shouldn't use them :)

...not trying to pick on anyone - just a trying to add some humor into the thread on a Friday....
:sharebeer
GoldStar,

1) Most people in the late 20s or early 30s had their first kid. They are at the peak of their career and earning power. They are overly optimistic and they believe that it will be sunny and their earning could only go up from now on. They do not believe that they could be permanently underemployed or unemployed in their 40s and 50s.

Based on that optimistic projection, they funded the 529 and buy a big expensive house ahead of funding their tax-advantaged accounts. It will work out if they do not suffer any longer period of unemployment across multiple recessions and economic crisis. But, many of them don't.

The problem with the Bogleheads forum is the survivorship bias. Those did not survive will not be around posting in the forum. They are on the street somewhere fighting for survival.

Only those that have higher income and better job security than most people have the luxury of funding 529. For most people, after funding the tax-advantaged accounts, there is no money for 529.

2) How many people actually can be continuously fully-employed until retirement age? I know that I am not one of them. So, I am not saving for retirement. I am saving for Financial Independent/ Family survival. I need to make sure that I can feed my family before I can think about funding for college education. And, I have a budget of how much I can afford to pay.

For poorer folks like us, it makes more sense to assume that we can only afford to pay X% of our net worth on college education. We need the rest of the money to feed our family. So, how does college education cost play any part in this? It does not. We can only afford to pay Y.

So, how does it makes any sense to count the chicken before the egg hatches? We do not know how much our net worth could be 10+ years from when the kids were born. Hence, we do not know whether we can afford to pay for our kid's college education and feed our family at the same time.

3) To each its own. If a person believes that he/she are willing to live on the street in order to send their kids to college, it is their choice. If a person is rich enough and has the job security to make sure that they can afford to fund 529 for their kid's college, it is good for them. But, please do not assume that 529 is the only way.

4) Folks do not plan for the situation if things go wrong. But, recessions and the economic crisis occurred regularly. Many folks do not survive financially in every recession and economic crisis. I had been through too many of them over the last 30+ years.

KlangFool
20s or early 30s is the peak of earnings potential? I literally don't know a single person where this is true.
Bacchus01,

You have not met me and my peers.

KlangFool

WhiteMaxima
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Re: Max you should invest in a 529?

Post by WhiteMaxima » Fri Sep 07, 2018 12:03 pm

529 can be used as an estate planning tool. You basically have a tax-free scholarship fund for your future generations. I don't believe leave huge inherit for children so they could buy a yacht, racing car. Education is the best investment you could ever have.

letsgobobby
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Re: Max you should invest in a 529?

Post by letsgobobby » Fri Sep 07, 2018 12:14 pm

WhiteMaxima wrote:
Fri Sep 07, 2018 12:03 pm
529 can be used as an estate planning tool. You basically have a tax-free scholarship fund for your future generations. I don't believe leave huge inherit for children so they could buy a yacht, racing car. Education is the best investment you could ever have.
another reason the affluent should use 529s to the fullest. what my kids don’t use, my nieces, nephews, or grandkids will. i’m not worried about overfunding, and my 529 allocation is 100% stocks (my retirement allocation is only 60%). if i have a shortfall i’ll fund from taxable or cash flow. but i’m banking on fifty years before the last of my grandchildren are done needing the money and i doubt bonds are a good investment for that time frame.

markcoop
Posts: 801
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Re: Max you should invest in a 529?

Post by markcoop » Fri Sep 07, 2018 12:21 pm

randomguy wrote:
Fri Sep 07, 2018 11:51 am
SelfEmployed123 wrote:
Fri Sep 07, 2018 6:00 am
LinusP wrote:
Tue Sep 04, 2018 1:39 pm
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.
Other than the blog post that was cited, I cannot find any support for the 5.64% figure on federal websites. See for example here https://fafsa.ed.gov/fotw1718/help/faahelp69.htm and https://ifap.ed.gov/efcformulaguide/att ... aGuide.pdf. The final link shows the actual formula used to calculate the expected family contribution. Can you or someone provide support for the 5.64% figure? Because otherwise it seems like 100% of the 529 balance is counted as assets when calculating the expected family contribution.

Edit. I think I may have figured it out. The following link is the expected family contribution formula for 2010: https://ifap.ed.gov/efcformulaguide/att ... 102011.pdf. Under Parents Contribution From Assets, you can see at the bottom that all assets are multiplied by the asset conversion rate of 12%. Congress must have been changing the formula over time. The current asset conversion rate is 20%, so 20% of assets in a 529 count toward the expected family contribution. We can probably expect that number to continue to rise in the future.
In general the math is that 100% of a 529 counts as an asset. Of that asset
5.64% of a parents assets count towards aid
20% of a students assets are counted towards aid
529s are normally in the parents name and have the 5.64% rate and not the 20% rate. Grandparent held 529s count as income not as an asset.

And this is all FASFA. CSS has their own rules.

I think something like 1 million per kids is probably the max as that pays full freight at harvard and then med school. Few people are in the place where doing that is a reasonable option.
Although CSS Profile schools can do whatever they want, it is my understanding that most count 529 as assets of the parent. In fact, when I filled out the CSS Profile form, 529 money was simply added to the total of parent assets. Again, they can do what they want and some ask additional questions.

As for Grandparent 529s, as long as you use the money after 1.5 years college, it won't be considered income. This only became true starting this past year when the forms started to use "prior prior" years for income. Grandparent owned 529 plans are a great way for grandparents to pay for college assuming you wait till year 2.5 and later. Someone above mentioned something about withdrawing ROTH funds in the last year to prevent it being considered income. That is true, but can be expanded to the last 2.5 years.
Mark

WhiteMaxima
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Re: Max you should invest in a 529?

Post by WhiteMaxima » Fri Sep 07, 2018 12:35 pm

letsgobobby wrote:
Fri Sep 07, 2018 12:14 pm
WhiteMaxima wrote:
Fri Sep 07, 2018 12:03 pm
529 can be used as an estate planning tool. You basically have a tax-free scholarship fund for your future generations. I don't believe leave huge inherit for children so they could buy a yacht, racing car. Education is the best investment you could ever have.
another reason the affluent should use 529s to the fullest. what my kids don’t use, my nieces, nephews, or grandkids will. i’m not worried about overfunding, and my 529 allocation is 100% stocks (my retirement allocation is only 60%). if i have a shortfall i’ll fund from taxable or cash flow. but i’m banking on fifty years before the last of my grandchildren are done needing the money and i doubt bonds are a good investment for that time frame.
fund your retirement 1st. I doubt your children nevertheless your nieces, nephews, or grandkids will pay for your retirement.

BuckyBadger
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Re: Max you should invest in a 529?

Post by BuckyBadger » Fri Sep 07, 2018 12:38 pm

WhiteMaxima wrote:
Fri Sep 07, 2018 11:40 am
I mean why waste money in K12 private school? Buy or even rent a home at good school district.
That's not really the point of this thread, though, is it.

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ray.james
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Re: Max you should invest in a 529?

Post by ray.james » Fri Sep 07, 2018 12:45 pm

I have thought a lot about it and gave up! I have decided to do this -
1) save 30K in the first 3 years of child life in a 529. Let it grow to 18. In 15 years this would be 85K.(this is 50% of expected 4 year)
2) Utilize megabackdoor roth as much as possible and as much as income/job allows
3) cash flow the rest (OR)roth on what works better at that time

There are a few reasons why we decided this way
1) 529 are not flexible
2) One or both kids may do multiple foreign years of education.(Very few international schools are eligible.) This is not FSA/HSA.
3) They may or may not go to college
4) education system will change dramatically and costs flat-line.

I will reevaluate when the eldest turns 10.

<Ofcourse, 401k and roth are filled first. If no income left, none of the above is done.>
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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dogagility
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Re: Max you should invest in a 529?

Post by dogagility » Fri Sep 07, 2018 12:48 pm

GoldStar wrote:
Fri Sep 07, 2018 7:55 am
...not trying to pick on anyone - just a trying to add some humor into the thread on a Friday....
:sharebeer
Mission accomplished! :D
Taking "risk" since 1995.

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