Overfund a 529 or put some in an UTMA?

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Topic Author
Rlew
Posts: 15
Joined: Mon Mar 18, 2019 8:32 pm

Overfund a 529 or put some in an UTMA?

Post by Rlew »

I just had my first child & my parents indicated they want to superfund a 529 for my daughter to the tune of $100k. Obviously this is a very blessed & privileged position to be in, and I want to make sure I manage it appropriately. Parents have indicated they want to do the same for any future children (we plan on having more).

I'm concerned this will lead to significant 529 overfunding unless all my children go to private college and then grad school/med school. My wife and I are frugal/bogleheads types, and will likely be pushing for a good state school down the line; I am a physician and so it is possible one of our kids will want to go to med school, but I have a hard time planning on ALL of our children having the most expensive higher education needs possible.

I asked my parents to consider putting $60k in a 529 & $40k in an UTMA instead. I figure with that balance at birth, the 529 will very likely cover in-state undergrad tuition (or most of an expensive private college); I can always cash flow college if their 529 comes up short. If the kids want to go to grad/med school, well they can use the UTMA proceeds to fund it - I figure they can then withdrawal funds/capital gains cheaply anyways at their tax rate which may even be 0% (or could take out loans for a few years until they aren't subject to the kiddie tax, depending on what tax law looks like in 22 years); furthermore the UTMA will grow tax free until they have enough dividends to trigger the kiddie tax (if invested in VTSAX, would have a good ways to go until the this gets triggered). If no grad school, then they have a great inheritance early in life to help them get started in their 20s or jumpstart retirement savings. My parents have indicated they are happy to go along with this plan if I prefer.

Does this sound like a reasonable plan to you all? Am I underestimating the cost of education or making too much of the penalties for an overfunded 529? I'm a little concerned about creating 'Economic Outpatient Care' for my children with such a sizable UTMA, but am hopeful that if we raise them with the right financial education and values around money, it would be a great blessing for them.

Appreciate all your input!
"When there are multiple solutions to a problem, choose the simplest one" Jack Bogle
runner540
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Joined: Sun Feb 26, 2017 5:43 pm

Re: Overfund a 529 or put some in an UTMA?

Post by runner540 »

Would love to have this problem. I would take the full amount in a 529 now and let it start growing tax free. $100k will just about cover tuition and room and board for 4 years at an instate flagship. If it grows faster than inflation, great. I don't think you're at risk of overfunding with that. If and when there's another child and parents make another generous offer, ask again.
inbox788
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Joined: Thu Mar 15, 2012 5:24 pm

Re: Overfund a 529 or put some in an UTMA?

Post by inbox788 »

I'm sure the answer is, it depends.

Without financial aid considerations, I'm not sure it makes much difference who is the account holder, grandparents, parents or student.

How wonderful to have such generous parents, but one aspect of planning is the annual gift tax limit exclusion, so you can save the lifetime exception for the big bucks. Assuming there were no other gifts this year, I believe each of the parents can gift each of parents and the child $15k/year, so 2x15x3=90k to the correct accounts shouldn't require any extra work on their part. Doing 100k might. It's September, so in January, the clock resets again, and it might be simpler to do 2 gifts than bother the accountant.

I'm not familiar with high UTMA amounts. Never considered that problem. But it seems to me starting 529 makes more sense for tax advantage, especially if you can cascade multiple kids, and you backfill any funds. This is treating monies as one big family fund instead of individual silos, which you may prefer, in which case each child would get their own accounts and amounts. Optimizes fairness, equality vs tax efficiency.

Kiddie tax kicks in fairly quickly at these amounts, but you might benefit a little by funneling UTMA to 529 in some situations. Do you or parents have any appreciated stocks to transfer?
Topic Author
Rlew
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Joined: Mon Mar 18, 2019 8:32 pm

Re: Overfund a 529 or put some in an UTMA?

Post by Rlew »

I'm planning to invest the 529 with a static aggressive allocation (50% US / 50% international) - seems as good a place as any for us to take risk.

At 7% this comes to $338k after 18 years
At 9% this comes to $471k after 18 years

You don't think that is WAY overfunded?
"When there are multiple solutions to a problem, choose the simplest one" Jack Bogle
Prettyfrtnt
Posts: 219
Joined: Fri Aug 23, 2019 6:28 pm

Re: Overfund a 529 or put some in an UTMA?

Post by Prettyfrtnt »

Dude what a gift.

Take it.

Ultimate zeroth world problem.

So jealous.

529 all the way

Overfunded 529 best ever zeroth world problem.

My goodness so perfectionistic.

Bless your parents.
inbox788
Posts: 7735
Joined: Thu Mar 15, 2012 5:24 pm

Re: Overfund a 529 or put some in an UTMA?

Post by inbox788 »

Rlew wrote: Tue Sep 22, 2020 10:38 pm I'm planning to invest the 529 with a static aggressive allocation (50% US / 50% international) - seems as good a place as any for us to take risk.

At 7% this comes to $338k after 18 years
At 9% this comes to $471k after 18 years

You don't think that is WAY overfunded?
Today, 300-400k might pay for 4 years at an elite private college. In 18 years, it might not pay for 1 year. Cross that bridge when you get closer, but chances are you're going to be in quite a shock as to how much college costs can still go up. I think the current slight dip is temporary, and wait till they have to find ways to balance the budgets from all the shortfalls.

And if you have taxes on those gains, that's a lot less than the face value or what you have in the 529.

Don't forget the limited private k-12 school use of 529.
absolute zero
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Re: Overfund a 529 or put some in an UTMA?

Post by absolute zero »

Rlew wrote: Tue Sep 22, 2020 10:38 pm I'm planning to invest the 529 with a static aggressive allocation (50% US / 50% international) - seems as good a place as any for us to take risk.

At 7% this comes to $338k after 18 years
At 9% this comes to $471k after 18 years

You don't think that is WAY overfunded?
Use more realistic return expectations. E.g. 5% real for equity, 0% real for bond. Don’t apply a fixed 5% for the whole 18 years. Scale that 5% down gradually during the final 8 years since you will be slowly shifting to less aggressive investments as your child nears age 18.

It will still come out to a number bigger than necessary eg $200k. I guess if your kid goes to a private school then maybe they would spend that amount. But it definitely becomes a more reasonable number than your 7% or 9 return assumptions.
Mode32
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Joined: Mon Mar 02, 2020 1:24 pm

Re: Overfund a 529 or put some in an UTMA?

Post by Mode32 »

Overfunding 529 early will have tremendous tax-free growth benefits long term. If and when you decide to have more children, it’s fairly easy to move 529 money between qualified beneficiaries without penalties; so concerns about overfunding 529 may not be needed. Also, it is my understanding 529 funds can be used to pay for K-12 private schools or vocational education if needed (someone please verify).

Consider reviewing one of the college cost calculators to get a better idea of potential future college costs (yes, education costs seem unbelievable in the future!): https://vanguard.wealthmsi.com/csp.php

My understanding is that UTMA is a great vehicle to pass on wealth to children after getting the 529 off to a great start.

Either way you go, your child will be in a great position because you as a parent care enough to optimize this wonderful gift from grandparents as evidenced by you asking this forum for insights 😊
inbox788
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Joined: Thu Mar 15, 2012 5:24 pm

Re: Overfund a 529 or put some in an UTMA?

Post by inbox788 »

One data point shows Total costs at a private college doubling about every 17 years. YMMV
Harvard College Tuition, Fees, Room, and Board
Academic Year Tuition Health Services Fee Student Services Fee Room Board Total
2017 $43,280 $1,088 $2,706 $9,894 $6,057 $63,025
2000 $22,054 $711 $1,642 $4,072 $3,685 $32,164
1985 $9,500 $300 $740 $1,635 $1,925 $14,100
https://oir.harvard.edu/fact-book/undergraduate_package
Mode32 wrote: Tue Sep 22, 2020 11:43 pmConsider reviewing one of the college cost calculators to get a better idea of potential future college costs (yes, education costs seem unbelievable in the future!): https://vanguard.wealthmsi.com/csp.php
Yup. Just switched the college from public to private, expensive:

Current annual college cost
$ 60,197 Private 4-year school, expensive

Cost of college
Estimated total cost $594,680
Amount you plan to cover $297,340 (50%)
Last edited by inbox788 on Wed Sep 23, 2020 2:08 am, edited 1 time in total.
renter
Posts: 362
Joined: Sat Aug 23, 2008 2:14 pm

Re: Overfund a 529 or put some in an UTMA?

Post by renter »

I would not over think it. Put it all in a 529, all stock allocation, and leave it be.
hereverycentcounts
Posts: 107
Joined: Wed Sep 02, 2020 8:09 pm
Location: Somewhere Very HCOL

Re: Overfund a 529 or put some in an UTMA?

Post by hereverycentcounts »

Rlew wrote: Tue Sep 22, 2020 10:07 pm I just had my first child & my parents indicated they want to superfund a 529 for my daughter to the tune of $100k. Obviously this is a very blessed & privileged position to be in, and I want to make sure I manage it appropriately. Parents have indicated they want to do the same for any future children (we plan on having more).

I'm concerned this will lead to significant 529 overfunding unless all my children go to private college and then grad school/med school. My wife and I are frugal/bogleheads types, and will likely be pushing for a good state school down the line; I am a physician and so it is possible one of our kids will want to go to med school, but I have a hard time planning on ALL of our children having the most expensive higher education needs possible.

I asked my parents to consider putting $60k in a 529 & $40k in an UTMA instead. I figure with that balance at birth, the 529 will very likely cover in-state undergrad tuition (or most of an expensive private college); I can always cash flow college if their 529 comes up short. If the kids want to go to grad/med school, well they can use the UTMA proceeds to fund it - I figure they can then withdrawal funds/capital gains cheaply anyways at their tax rate which may even be 0% (or could take out loans for a few years until they aren't subject to the kiddie tax, depending on what tax law looks like in 22 years); furthermore the UTMA will grow tax free until they have enough dividends to trigger the kiddie tax (if invested in VTSAX, would have a good ways to go until the this gets triggered). If no grad school, then they have a great inheritance early in life to help them get started in their 20s or jumpstart retirement savings. My parents have indicated they are happy to go along with this plan if I prefer.

Does this sound like a reasonable plan to you all? Am I underestimating the cost of education or making too much of the penalties for an overfunded 529? I'm a little concerned about creating 'Economic Outpatient Care' for my children with such a sizable UTMA, but am hopeful that if we raise them with the right financial education and values around money, it would be a great blessing for them.

Appreciate all your input!
Do it! I'm only a little jealous. :) But -- put that into a 529. Worst case your kids take it out with a penalty to use for something else, or better yet, you generously give any remaining funds to other family members going to school -- or your future grandchildren.
36 year old mom of 2 in a VHCOL area trying to figure out how to afford it all. Non techie in tech.
SchruteB&B
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Joined: Mon Jul 02, 2018 7:48 am

Re: Overfund a 529 or put some in an UTMA?

Post by SchruteB&B »

Rlew wrote: Tue Sep 22, 2020 10:38 pm I'm planning to invest the 529 with a static aggressive allocation (50% US / 50% international) - seems as good a place as any for us to take risk.

At 7% this comes to $338k after 18 years
At 9% this comes to $471k after 18 years

You don't think that is WAY overfunded?
1. Are you planning to keep it that aggressively invested the entire 18 years? Most people dial back the risk as they get closer to college.

2. Many private colleges cost around $300k for tuition, room and board right now!
Topic Author
Rlew
Posts: 15
Joined: Mon Mar 18, 2019 8:32 pm

Re: Overfund a 529 or put some in an UTMA?

Post by Rlew »

SchruteB&B wrote: Wed Sep 23, 2020 7:18 am
Rlew wrote: Tue Sep 22, 2020 10:38 pm I'm planning to invest the 529 with a static aggressive allocation (50% US / 50% international) - seems as good a place as any for us to take risk.

At 7% this comes to $338k after 18 years
At 9% this comes to $471k after 18 years

You don't think that is WAY overfunded?
1. Are you planning to keep it that aggressively invested the entire 18 years? Most people dial back the risk as they get closer to college.

2. Many private colleges cost around $300k for tuition, room and board right now!
1. Yes, I'm planning to invest that aggressively the entire time. My thinking is that I can take the risk - worst case scenario I would cash flow the difference if the 529 took a hit before college.

2. I know some of the private schools are that expensive, and I think it's outrageous/a poor investment (with a few exceptions). I plan on strongly encouraging my children to go to the in-state flagship college. Let's say I end up having 3 kids & they all have the same 529/UTMA setup; if 2 go to state school & 1 goes to private school I think I could probably fund it all from the 3 529s, and then all the kids would have the UTMA inheritance leftover (and I'll let them know they have to use it to fund grad school/med school, if they go that route). I guess this comes down to me thinking my kids are economically much better off with a modestly priced education & a large inheritance early in life, rather than a very expensive education and no inheritance early in life
"When there are multiple solutions to a problem, choose the simplest one" Jack Bogle
runner540
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Re: Overfund a 529 or put some in an UTMA?

Post by runner540 »

Rlew wrote: Wed Sep 23, 2020 8:53 am
SchruteB&B wrote: Wed Sep 23, 2020 7:18 am
Rlew wrote: Tue Sep 22, 2020 10:38 pm I'm planning to invest the 529 with a static aggressive allocation (50% US / 50% international) - seems as good a place as any for us to take risk.

At 7% this comes to $338k after 18 years
At 9% this comes to $471k after 18 years

You don't think that is WAY overfunded?
1. Are you planning to keep it that aggressively invested the entire 18 years? Most people dial back the risk as they get closer to college.

2. Many private colleges cost around $300k for tuition, room and board right now!
1. Yes, I'm planning to invest that aggressively the entire time. My thinking is that I can take the risk - worst case scenario I would cash flow the difference if the 529 took a hit before college.

2. I know some of the private schools are that expensive, and I think it's outrageous/a poor investment (with a few exceptions). I plan on strongly encouraging my children to go to the in-state flagship college. Let's say I end up having 3 kids & they all have the same 529/UTMA setup; if 2 go to state school & 1 goes to private school I think I could probably fund it all from the 3 529s, and then all the kids would have the UTMA inheritance leftover (and I'll let them know they have to use it to fund grad school/med school, if they go that route). I guess this comes down to me thinking my kids are economically much better off with a modestly priced education & a large inheritance early in life, rather than a very expensive education and no inheritance early in life
Keep in mind: instate flagships are getting more and more competitive to get into.

Either way, it’s a generous gift. But in planning, I would put it all in 529 now. Reevaluate in a few years with more kids, market changes, and whether parents can deliver on $100k x 3. Your employment might also look different in 20 years, affecting ability to cash flow one or more
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alpenglow
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Re: Overfund a 529 or put some in an UTMA?

Post by alpenglow »

Rlew wrote: Tue Sep 22, 2020 10:07 pm I just had my first child & my parents indicated they want to superfund a 529 for my daughter to the tune of $100k. Obviously this is a very blessed & privileged position to be in, and I want to make sure I manage it appropriately. Parents have indicated they want to do the same for any future children (we plan on having more).
That is amazing. I'd just fund the 529 and call it a day.

This will never happen for my kids, but I'd love to do something like this for my grandkids some day. Thanks for giving me an idea to aim for.
humblecoder
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Re: Overfund a 529 or put some in an UTMA?

Post by humblecoder »

Some considerations:

1. Money held in UTMA have more of an adverse impact on financial aid, but this is only a consideration if you think you might qualify.

2. Money held in a UTMA will be 100% in control of the child once they reach age of "maturity". Obviously, everybody hopes that their child will turn out to be a responsible adult, but consider the impact of the windfall might have.

3. You cannot transfer money from child A and B if it is held in a UTMA. Let's say child A gets a full scholarship. If the money were in a 529, you could transfer the funds to child B's account who might still have need of the money.

4. 529 account earnings are tax-deferred, so that could outweigh any penalty you would pay if you withdraw any unused money. Or you can keep it in the 529 and "pay it forward" to your grandkids for their college tuition. Just as your parent's are giving your kids a leg up, you could do the same.
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noraz123
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Re: Overfund a 529 or put some in an UTMA?

Post by noraz123 »

I had the opposite problem, albeit with smaller numbers.

My father created an UTMA for my son. I'd have preferred he donated to a 529, because of tax sheltering and ability to control when my son would get the proceeds. The intention is to fund college, and likely all proceeds will be spent before my son graduates college, assuming he goes. So pragmatically, not an issue for me, but would have greatly preferred the 529.

If you overfund a 529, you have option to use proceeds with another kid and if you still have money leftover, use proceeds with grandkids, all the while it growing tax free. Penalty for non education withdrawals is small price.

Also, I think a great business idea is to have educational study abroad programs targeted at the retired set to use up unspent 529 funds. :happy

As someone else said, zeroeth world problem. You are in a great position either way. Congrats on the gift!
financiallycurious
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Re: Overfund a 529 or put some in an UTMA?

Post by financiallycurious »

What a gift! I wouldn't worry about the 529 plan being overfunded. The Vanguard college cost calculator, for example, assumes a 6% average annual return and 5% rate of annual cost increase. Using Vanguard's assumptions, $100,000 in today's dollars will be worth about ~$120,000 in 2038 dollars. I know there are people who are smarter than me on this board who can beat the 6% return or debate Vanguard's assumptions on tuition increases....
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CyclingDuo
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Re: Overfund a 529 or put some in an UTMA?

Post by CyclingDuo »

Rlew wrote: Tue Sep 22, 2020 10:07 pm I just had my first child & my parents indicated they want to superfund a 529 for my daughter to the tune of $100k. Obviously this is a very blessed & privileged position to be in, and I want to make sure I manage it appropriately. Parents have indicated they want to do the same for any future children (we plan on having more).

I'm concerned this will lead to significant 529 overfunding unless all my children go to private college and then grad school/med school. My wife and I are frugal/bogleheads types, and will likely be pushing for a good state school down the line; I am a physician and so it is possible one of our kids will want to go to med school, but I have a hard time planning on ALL of our children having the most expensive higher education needs possible.

I asked my parents to consider putting $60k in a 529 & $40k in an UTMA instead. I figure with that balance at birth, the 529 will very likely cover in-state undergrad tuition (or most of an expensive private college); I can always cash flow college if their 529 comes up short. If the kids want to go to grad/med school, well they can use the UTMA proceeds to fund it - I figure they can then withdrawal funds/capital gains cheaply anyways at their tax rate which may even be 0% (or could take out loans for a few years until they aren't subject to the kiddie tax, depending on what tax law looks like in 22 years); furthermore the UTMA will grow tax free until they have enough dividends to trigger the kiddie tax (if invested in VTSAX, would have a good ways to go until the this gets triggered). If no grad school, then they have a great inheritance early in life to help them get started in their 20s or jumpstart retirement savings. My parents have indicated they are happy to go along with this plan if I prefer.

Does this sound like a reasonable plan to you all? Am I underestimating the cost of education or making too much of the penalties for an overfunded 529? I'm a little concerned about creating 'Economic Outpatient Care' for my children with such a sizable UTMA, but am hopeful that if we raise them with the right financial education and values around money, it would be a great blessing for them.

Appreciate all your input!
What a great gift!!!

Your plan of 60/40 sounds good and provides some nice flexibility.

We began with UTMA's for our kids because 529's didn't exist until a few years later. So we front loaded the UTMA's with our total intention that we would be paying 100% for their school (outside of any potential talent or academic based scholarships) and not worrying if they did or did not qualify for some sort of financial aid. We added 529's with a bit of money, but the UTMA's grew to be the main funding source.

We weren't really sure how far and fast the accounts would grow over the 22-24 year period from birth to cover both undergraduate and graduate school, but it worked out that we were overfunded in the UTMA's. So during high school and college, the kids worked and put money into their Roth IRA's. After they graduated, the UTMA's were converted to standard brokerage accounts for them with a nice balance to begin their taxable account investing journey as debt free college graduates.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
Thought Is Free
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Re: Overfund a 529 or put some in an UTMA?

Post by Thought Is Free »

Another vote for 529. Loved the study abroad funding described earlier, I did semester abroad in college and it was fantastic. Study up on your current 529 plan and review some of the laws governing them as the "qualified educational expense" language is favorable to the owner. 529's can be used to pay for private high school and pay a mortgage if your kid is enrolled at least half-time and working towards a degree.
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