529 age-based plan dilemma

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meadowrue
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529 age-based plan dilemma

Post by meadowrue »

Our oldest turns 14 next month, which is when her aggressive growth 529 plan will automatically shift AA from 80/20 to 70/30. I consider myself an aggressive investor and though I hate to see the YTD decline of the 529 (-21%) I am confident the market will recover. That said, I don’t like the idea of the fund technically locking in a loss by selling 10% equities next month (on her birthday) to purchase 10% more bonds. I realize an age-based plan is supposed to be hands off but is there any merit in reallocating current funds now to mimic 80/20 outside of the age-based fund so I can avoid selling equities at a loss? The plan would be to purchase bonds with new money over the course of the next year to get on track with the age-based plan. I realize this is market timing to some extent and I could get raked over the coals for that! But it just seems counterintuitive to sell stocks in order to buy bonds in the current environment. In my 401K I am doing the opposite, but of course the runway is much longer.
Atgard
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Re: 529 age-based plan dilemma

Post by Atgard »

Honestly I thought of a lot of potential replies but it all comes down to trying to time the market.

I also would not want to sell stocks while they're down if at all possible, but you are coming up on needing to access the funds relatively soon, there's a reason the AA is starting to shift. Sure you could try to time it yourself and hold just a little longer and hope they recover, before then moving more to bonds... but it IS possible to have the market stay down for an extended period of time.
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Wiggums
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Re: 529 age-based plan dilemma

Post by Wiggums »

I struggled with a response. The declining AA is meant to become more conservative as you get closer to withdrawing the funds. You are betting on equities and I also think that they will recovery faster than bonds. Obviously, this is totally a guess on my part. The BH thing to do is stay the course. The returns for 70/30 and 80/20 are very similar.

Our kids had a brokerage account since they were a few years old. We used a 70/30 level plan even after our kids were in college. They used their account to pay their expenses regardless of what the market was doing. It worked out well, but we got lucky.

You know the pros/cons of holding more equities when the college money is needed 3 to 7 years from now. Can you cash flow college if the market does not cooperate?
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Outer Marker
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Re: 529 age-based plan dilemma

Post by Outer Marker »

meadowrue wrote: Mon Jun 20, 2022 10:37 pm Our oldest turns 14 next month, which is when her aggressive growth 529 plan will automatically shift AA from 80/20 to 70/30. I consider myself an aggressive investor and though I hate to see the YTD decline of the 529 (-21%) I am confident the market will recover. That said, I don’t like the idea of the fund technically locking in a loss by selling 10% equities next month (on her birthday) to purchase 10% more bonds.....
Yes, seeing a significant loss close to when you'll need the funds is painful -- but we may yet have a long way down to go. I use money market instead of bonds for fixed income in my 529 plans because I don't like taking risk on the fixed income side. One way to split the difference would be to use 75% S&P 500, 25% money market. It will be slightly more conservative, both in terms of overall AA, and less risky fixed income, but still give you plenty of upside potential to recoup the loss.
rkhusky
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Re: 529 age-based plan dilemma

Post by rkhusky »

meadowrue wrote: Mon Jun 20, 2022 10:37 pm Our oldest turns 14 next month, which is when her aggressive growth 529 plan will automatically shift AA from 80/20 to 70/30. I consider myself an aggressive investor and though I hate to see the YTD decline of the 529 (-21%) I am confident the market will recover. That said, I don’t like the idea of the fund technically locking in a loss by selling 10% equities next month (on her birthday) to purchase 10% more bonds. I realize an age-based plan is supposed to be hands off but is there any merit in reallocating current funds now to mimic 80/20 outside of the age-based fund so I can avoid selling equities at a loss? The plan would be to purchase bonds with new money over the course of the next year to get on track with the age-based plan. I realize this is market timing to some extent and I could get raked over the coals for that! But it just seems counterintuitive to sell stocks in order to buy bonds in the current environment. In my 401K I am doing the opposite, but of course the runway is much longer.
Appears that you have fallen for the "Anchoring" cognitive bias, by anchoring to the peak value from the past.
See:
https://en.wikipedia.org/wiki/List_of_cognitive_biases
https://en.wikipedia.org/wiki/Anchoring ... tive_bias)

If you are confident the market will return to its peak value in the near term, why not go 100% stocks?
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meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

Appreciate all the replies and I agree about the anchoring bias. I accept the market might take a long time to recover to previous highs but I believe wholeheartedly that it eventually will. I admit, it can be an investing blind spot for me, always thinking the good times will return! I like the suggestion of money market for fixed income (75/25) instead of bonds to eliminate risk on the fixed income side. I honestly had no idea bonds could implode like they have (lack of experience with bonds) and that has been more frustrating to me than the drop in equities. To answer one of the questions, yes, we could cash flow college for a year or two if needed. We are paying for private school now and in-state college tuition is not much higher. The state college is very good and offers the exact program our child wants so that plan is unlikely to change. I have also considered that, worst case, we could transfer the 529 to our younger child who is still 10 years away from college.
3funder
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Re: 529 age-based plan dilemma

Post by 3funder »

I would stay the course.
Global stocks, US bonds, and time.
shess
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Re: 529 age-based plan dilemma

Post by shess »

meadowrue wrote: Tue Jun 21, 2022 8:39 am Appreciate all the replies and I agree about the anchoring bias. I accept the market might take a long time to recover to previous highs but I believe wholeheartedly that it eventually will. I admit, it can be an investing blind spot for me, always thinking the good times will return!
The question isn't whether the good times will return, the question is whether the good times will return on the schedule you are fairly committed to.

Keep in mind that money is fungible. Don't get in your head about needing really specific results from the 529, look at your entire portfolio. IMHO considering using cashflow to pay for college so that your 529 can "recover" is IMHO thinking about it in the wrong way. The 529 is a tax tool, use it as a tax tool. If you are that convinced about recovery, consider spending the 529 on college and investing the cashflow into new purchases.

If you don't wish to change your overall AA, shift your 401k or other investments in the opposite ways that your 529 age-based portfolio shifts. I recently did a tax-loss harvest where I sold taxable equity ETF positions to fixed income, and sold fixed income in my 401k to not-identical equity funds. I did this to setup my spending reserves, so now I won't have to sell equities for gains to support cashflow needs for the next few years.
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windaar
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Re: 529 age-based plan dilemma

Post by windaar »

I'd leave it alone. Once you start timing you can get bitten hard. You've chosen an aggressive plan and this just comes with the territory. I hope everything works out well for you!
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HMSVictory
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Re: 529 age-based plan dilemma

Post by HMSVictory »

Your dilemma is the reason I do not like age based or glide path portfolios.

The adjustments to AA are made irrespective of your performance / goal status / or market returns. I prefer to control my own destiny.

My own plan is to use the Vanguard Growth fund (75/25 AA) until they hit high school. At that point I will dial the risk back a lot probably 25/75.

Are you going to fund college no matter what? If you are then all that matters is how the 529 plan fits within your overall portfolio. If you are only going to use the 529 plan money to fund college (no matter what the returns are) then you need to dial back the risk dramatically in high school. Even though the markets are now down -21% YTD they could go down another -30% (its possible). If the 529 plan is just part of your overall portfolio then the performance prior to college is not as material (sell stocks at loss and buy stocks while down in your other accounts to maintain AA).
Stay the course!
deikel
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Re: 529 age-based plan dilemma

Post by deikel »

- her plan is not an aggressive plan, aggressive plans are 100% stocks
- these age adjusting plans make zero sense to me. the investment horizon is much too small (depending when you start saving for college and how old the kid is when hitting college, somewhere between 18 years and down - I would guess some statistical average around 10-12 years)
- the change of 10% will probably make little difference in the overall outcome, no need to sweat it
- these plans should all be much more conservative and simply benefit from the tax advantage IMO, trying to make up funding by hoping for a stock rally inside a 529 with the kids college future to play with and nothing to balance it against is a fools errand - its a completely wrong time horizon in this single account
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
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meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

shess wrote: Tue Jun 21, 2022 9:48 am
meadowrue wrote: Tue Jun 21, 2022 8:39 am Appreciate all the replies and I agree about the anchoring bias. I accept the market might take a long time to recover to previous highs but I believe wholeheartedly that it eventually will. I admit, it can be an investing blind spot for me, always thinking the good times will return!
The question isn't whether the good times will return, the question is whether the good times will return on the schedule you are fairly committed to.

Keep in mind that money is fungible. Don't get in your head about needing really specific results from the 529, look at your entire portfolio. IMHO considering using cashflow to pay for college so that your 529 can "recover" is IMHO thinking about it in the wrong way. The 529 is a tax tool, use it as a tax tool. If you are that convinced about recovery, consider spending the 529 on college and investing the cashflow into new purchases.

If you don't wish to change your overall AA, shift your 401k or other investments in the opposite ways that your 529 age-based portfolio shifts. I recently did a tax-loss harvest where I sold taxable equity ETF positions to fixed income, and sold fixed income in my 401k to not-identical equity funds. I did this to setup my spending reserves, so now I won't have to sell equities for gains to support cashflow needs for the next few years.
This is so helpful, thank you! I need to review all my investments holistically to see where my current AA really is and how to adjust to get where I want it to be. Question: Would you spend the 529 for college even if it was down during the withdrawal period? Maybe I’m trying to eke out too much of a return from essentially a short term investment. I started investing in the 529 in 2015 (right before that late year downturn :oops: ) and the 529 has just been a frustration and disappointment, honestly, besides the state tax deduction. Like you said, it is a tax tool. I just viewed it as a growth tool too … which was perhaps a mistake. It has only returned a little over 4% average annual return, in spite of (or because of?!) an aggressive approach.
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arcticpineapplecorp.
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Re: 529 age-based plan dilemma

Post by arcticpineapplecorp. »

meadowrue wrote: Mon Jun 20, 2022 10:37 pm Our oldest turns 14 next month, which is when her aggressive growth 529 plan will automatically shift AA from 80/20 to 70/30. I consider myself an aggressive investor and though I hate to see the YTD decline of the 529 (-21%) I am confident the market will recover.
few questions:

1. what fund are you using?

2. blackrock's 80/20 target allocation fund is showing at most -19.26% ytd (investor c shares) as of 6/17/22 and possibly a little less depending upon the class used (-18.98% for class K and/or institutional):
https://www.blackrock.com/us/individual ... ass-c-fund

3. i am not seeing that amount of stock in a 529 plan for a 14 year old, even in an aggressive portfolio. Franklin Growth allocation for 529 for age 13-14 shows just 51% equities, not 80% (source: https://www.savingforcollege.com/529-pl ... re-class-a)

Image

smart asset shows suggested allocations for different ages and levels of risk. The most they indicate for a 14 year old is around 50% equities, not 80%:

Image

Vanguard's 529 for suggested portfolio for someone whose enrollment is 2026/2027 (4 years from now) is 30% equities: https://investor.vanguard.com/accounts- ... portfolios

Similarly, Vanguard shows average plans for aggressive, moderate and conservative and someone with 4 years to enrollment looks to be at most 60% equities for an aggressive approach (source: https://corporate.vanguard.com/content/ ... line-2.pdf):

Image

4. you don't have to sell stocks to buy bonds, you can simply buy bonds over the 4 years. Would that not be enough and you're concerned about having to sell stocks over the next 4 years anyway regardless of changing allocation this year? This is why I question what fund you're using. It's way too aggressive obviously. You're going to have to sell stocks sometime between now and 4 years from now. Even if you reduce by 10% (probably should be more though) you're just losing 2% of the portfolio if you sell stocks since you'd be selling 10% of something that fell 20% (.10 X .20 = .02). That's not a huge deal necessarily, though permanently losing any money isn't desired.
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meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

The glide path for the plan shifts at 14. My child is still 13 (until July) so currently the portfolio is:
48% VIPTX
32% VTPSX
14% VTBNX
6% VTIFX

It is very aggressive and will only glide to 40/60 by age 18. I think I might be better off constructing my own allocation, utilizing new contributions to get to an appropriate AA. I think the bonds make me more nervous than the equities. I am seriously considering switching to money market for fixed income moving forward. The problem I have now is that my aggressive investing nature tells me to purchase more equities now, not money market funds, but that is market timing, right? Maybe I have to accept that this 529 has not been my smartest investment, outside of a nice tax deduction. I just rechecked the overall gain and it’s an annual return of 3% :annoyed
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arcticpineapplecorp.
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Re: 529 age-based plan dilemma

Post by arcticpineapplecorp. »

meadowrue wrote: Tue Jun 21, 2022 11:11 am The glide path for the plan shifts at 14. My child is still 13 (until July) so currently the portfolio is:
48% VIPTX
32% VTPSX
14% VTBNX
6% VTIFX

It is very aggressive and will only glide to 40/60 by age 18. I think I might be better off constructing my own allocation, utilizing new contributions to get to an appropriate AA. I think the bonds make me more nervous than the equities. I am seriously considering switching to money market for fixed income moving forward. The problem I have now is that my aggressive investing nature tells me to purchase more equities now, not money market funds, but that is market timing, right? Maybe I have to accept that this 529 has not been my smartest investment, outside of a nice tax deduction. I just rechecked the overall gain and it’s an annual return of 3% :annoyed
but a 529 isn't the problem, just the 529 you've chosen. You can see both the vanguard and the franklin 529s are more conservative than what you're holding. You don't have to just accept one 529 plan, you can actually choose a 529 plan in a different state if yours isn't good. Clark Howard posts a list of the best 529 plans:

https://clark.com/personal-finance-cred ... /529-plan/

and it may be market timing to buy stocks when they've fallen or it could be rebalancing if they've fallen below the allocation you desire.
Last edited by arcticpineapplecorp. on Tue Jun 21, 2022 12:41 pm, edited 1 time in total.
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m@ver1ck
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Re: 529 age-based plan dilemma

Post by m@ver1ck »

I'm hedging bets with I-Bonds. I'll go from stocks to bonds in 529 once market recovers.
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meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

arcticpineapplecorp. wrote: Tue Jun 21, 2022 12:31 pm
meadowrue wrote: Tue Jun 21, 2022 11:11 am The glide path for the plan shifts at 14. My child is still 13 (until July) so currently the portfolio is:
48% VIPTX
32% VTPSX
14% VTBNX
6% VTIFX

It is very aggressive and will only glide to 40/60 by age 18. I think I might be better off constructing my own allocation, utilizing new contributions to get to an appropriate AA. I think the bonds make me more nervous than the equities. I am seriously considering switching to money market for fixed income moving forward. The problem I have now is that my aggressive investing nature tells me to purchase more equities now, not money market funds, but that is market timing, right? Maybe I have to accept that this 529 has not been my smartest investment, outside of a nice tax deduction. I just rechecked the overall gain and it’s an annual return of 3% :annoyed
but a 529 isn't the problem, just the 529 you've chosen. You can both the vanguard and the franklin 529s are more conservative than what you're holding. You don't have to just accept one 529 plan, you can actually choose a 529 plan in a different state if yours isn't good. Clark Howard posts a list of the best 529 plans:

https://clark.com/personal-finance-cred ... /529-plan/

and it may be market timing to buy stocks when they've fallen or it could be rebalancing if they've fallen below the allocation you desire.
I always assumed to get my state tax deduction that I had to choose a plan in my state. Is that incorrect? I guess I’m also a little biased towards my state plan because of super low fees and a general preference to keeping things close to home (maybe ridiculous!) This plan has not been good. Would it be too late, or somewhat pointless, to change plans now with a 4-7 year time horizon?
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arcticpineapplecorp.
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Re: 529 age-based plan dilemma

Post by arcticpineapplecorp. »

meadowrue wrote: Tue Jun 21, 2022 12:40 pm
arcticpineapplecorp. wrote: Tue Jun 21, 2022 12:31 pm
meadowrue wrote: Tue Jun 21, 2022 11:11 am The glide path for the plan shifts at 14. My child is still 13 (until July) so currently the portfolio is:
48% VIPTX
32% VTPSX
14% VTBNX
6% VTIFX

It is very aggressive and will only glide to 40/60 by age 18. I think I might be better off constructing my own allocation, utilizing new contributions to get to an appropriate AA. I think the bonds make me more nervous than the equities. I am seriously considering switching to money market for fixed income moving forward. The problem I have now is that my aggressive investing nature tells me to purchase more equities now, not money market funds, but that is market timing, right? Maybe I have to accept that this 529 has not been my smartest investment, outside of a nice tax deduction. I just rechecked the overall gain and it’s an annual return of 3% :annoyed
but a 529 isn't the problem, just the 529 you've chosen. You can both the vanguard and the franklin 529s are more conservative than what you're holding. You don't have to just accept one 529 plan, you can actually choose a 529 plan in a different state if yours isn't good. Clark Howard posts a list of the best 529 plans:

https://clark.com/personal-finance-cred ... /529-plan/

and it may be market timing to buy stocks when they've fallen or it could be rebalancing if they've fallen below the allocation you desire.
I always assumed to get my state tax deduction that I had to choose a plan in my state. Is that incorrect? I guess I’m also a little biased towards my state plan because of super low fees and a general preference to keeping things close to home (maybe ridiculous!) This plan has not been good. Would it be too late, or somewhat pointless, to change plans now with a 4-7 year time horizon?
actually there are...
However, seven tax parity states offer a state income tax benefit for contributions to any 529 plan:

Arizona
Arkansas
Kansas
Minnesota
Missouri
Montana
Pennsylvania

source: https://www.savingforcollege.com/articl ... ally-worth
are you living in any of those states?
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meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

m@ver1ck wrote: Tue Jun 21, 2022 12:33 pm I'm hedging bets with I-Bonds. I'll go from stocks to bonds in 529 once market recovers.
This is interesting. I have never bought I-Bonds. Do I need $10,000 to start (which I don’t have!) or could I purchase a smaller amount? Would I need to hold for a full 5 years to get full interest? Has the “deadline” for the 9% interest opportunity passed? Clearly, I know nothing about this! But this is an interesting alternative to funnelling money into a failing 529. Although the tax perk is nice. We can deduct up to $15K a year from state taxes.
m@ver1ck
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Re: 529 age-based plan dilemma

Post by m@ver1ck »

With I-Bonds you cak invest max 10K a year per person and withdrawals are tax free If used for education.we don't have state tax in WA anyway.
If withdrawing in less than 5 years, you pay 3 months interest.

Why would I buy bonds that give 3% when I can get I-Bonds giving 9% - specially for this use case of saving money for education.
Topic Author
meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

However, seven tax parity states offer a state income tax benefit for contributions to any 529 plan:

Arizona
Arkansas
Kansas
Minnesota
Missouri
Montana
Pennsylvania

source: https://www.savingforcollege.com/articl ... ally-worth
are you living in any of those states?
[/quote]

Nope! Maybe I just need to look for other investments within my current 529, at least for new contributions. The options are limited but there is an Interest Accumulation Portfolio (like a money market) that is zero risk with a nominal return, currently 0.55% YTD. Chasing high returns seems to be a flawed strategy here. As an aggressive investor comfortable with risk, the conservative path is actually uncomfortable for me! I appreciate all the thoughtful advice. And I realize doing nothing (staying the course) is a valid option too.
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arcticpineapplecorp.
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Re: 529 age-based plan dilemma

Post by arcticpineapplecorp. »

m@ver1ck wrote: Tue Jun 21, 2022 12:55 pm With I-Bonds you cak invest max 10K a year per person and withdrawals are tax free If used for education.we don't have state tax in WA anyway.
If withdrawing in less than 5 years, you pay 3 months interest.

Why would I buy bonds that give 3% when I can get I-Bonds giving 9% - specially for this use case of saving money for education.
Only 9% through this 6 month period not ongoing. But yes ibonds will at least hold the value invested now for the next 5 years which stocks and bonds cannot guarantee.
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shess
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Re: 529 age-based plan dilemma

Post by shess »

meadowrue wrote: Tue Jun 21, 2022 10:10 amQuestion: Would you spend the 529 for college even if it was down during the withdrawal period? Maybe I’m trying to eke out too much of a return from essentially a short term investment. I started investing in the 529 in 2015 (right before that late year downturn :oops: ) and the 529 has just been a frustration and disappointment, honestly, besides the state tax deduction. Like you said, it is a tax tool. I just viewed it as a growth tool too … which was perhaps a mistake. It has only returned a little over 4% average annual return, in spite of (or because of?!) an aggressive approach.
Earlier, you said you had a 14-year-old. I have an 18yo (heading to college) and a 21yo (already in college), and their 529 plans are in age-based/conservative positions. The reason is because at this point, I want predictability in those plans, because I don't really have time to get reliable returns. In our case, their college costs are unrelated to the 529 plan size, so I just want to have some planning stability for the next few years.

I mean, I can flip this on its head: With the 18yo, we'll have spending into 2026 or 2027, so given the amount the market has pulled back, I can see an argument for shifting some of our equity allocation into the 529 plan in hopes that equities will come back over those next few years. That would provide additional tax-free growth. But that would be a calculated risk. Right now, our plans' basis is around 40%, meaning that we aren't paying taxes on the other 60% from growth. If we shift to more equities in 529 and equities fall more, then we'd effectively lose some of that tax savings. Whereas if equities fall in taxable we can harvest the loss, and if they fall in our traditional IRAs or 401k we reduce the final tax bill.

Hmm. I guess, put another way, at least for us the use case for the 529 plans is here right now, so I'm inclined to just nail things down and let them play out, and shift my long-term planning to other accounts which still have long-term horizons. But I still manage the 529 plan as part of our overall AA.
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meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

Thanks, shess. Yes, we have an almost 14 year old (incoming freshman) so we have 4 years until college tuition begins but a total horizon of 4-7 years. And we have a 9 year old. This conversation thread has helped me see the 529 differently. Growth would be great but I admit I was chasing it … and failed! Viewing it more as a tax savings vehicle makes me see its value in a different way. In our state, we get a sizable tax deduction on contributions plus the tax free growth. Taking additional risk now could reduce that tax benefit, as you explained so well. Thank you!
BernardShakey
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Re: 529 age-based plan dilemma

Post by BernardShakey »

deikel wrote: Tue Jun 21, 2022 10:09 am - her plan is not an aggressive plan, aggressive plans are 100% stocks
- these age adjusting plans make zero sense to me. the investment horizon is much too small (depending when you start saving for college and how old the kid is when hitting college, somewhere between 18 years and down - I would guess some statistical average around 10-12 years)
- the change of 10% will probably make little difference in the overall outcome, no need to sweat it
- these plans should all be much more conservative and simply benefit from the tax advantage IMO, trying to make up funding by hoping for a stock rally inside a 529 with the kids college future to play with and nothing to balance it against is a fools errand - its a completely wrong time horizon in this single account
Yeah, but if you stick the money in ultra-safe money market type investment for the full 18 years (plus some of it also during the 4 additional years the kid is in school), the tax advantage is minimized. Tiny growth, tiny tax advantage. Better approach is to save money in 529 very aggressively when child is very young and have decent exposure to stock along the way. That gives the money time to grow and maximize the 529 tax advantages.
An important key to investing is having a well-calibrated sense of your future regret.
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meadowrue
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Re: 529 age-based plan dilemma

Post by meadowrue »

BernardShakey wrote: Wed Jun 22, 2022 11:58 am
deikel wrote: Tue Jun 21, 2022 10:09 am - her plan is not an aggressive plan, aggressive plans are 100% stocks
- these age adjusting plans make zero sense to me. the investment horizon is much too small (depending when you start saving for college and how old the kid is when hitting college, somewhere between 18 years and down - I would guess some statistical average around 10-12 years)
- the change of 10% will probably make little difference in the overall outcome, no need to sweat it
- these plans should all be much more conservative and simply benefit from the tax advantage IMO, trying to make up funding by hoping for a stock rally inside a 529 with the kids college future to play with and nothing to balance it against is a fools errand - its a completely wrong time horizon in this single account
Yeah, but if you stick the money in ultra-safe money market type investment for the full 18 years (plus some of it also during the 4 additional years the kid is in school), the tax advantage is minimized. Tiny growth, tiny tax advantage. Better approach is to save money in 529 very aggressively when child is very young and have decent exposure to stock along the way. That gives the money time to grow and maximize the 529 tax advantages.
These were my thoughts exactly when I signed up for the plan. I have given it a lot of thought and I think I am going to “stay the course” with my current investment and then use new investments to shore up the fixed/money market side of the portfolio as needed. Knowing myself and my risk tolerance, I might purchase a small % equities to take advantage of the down market, understanding that this “bucket” could be used for years 3-4 of college, or even grad school. But I need to make sure I have enough “safe” funds to cover at least the first two years of college. I tend to favor risk over safety and I’m trying to mitigate that somewhat as I get older and priorities shift. This forum is helping! Love your signature btw :D
BernardShakey
Posts: 851
Joined: Tue Jun 25, 2019 10:52 pm

Re: 529 age-based plan dilemma

Post by BernardShakey »

meadowrue wrote: Wed Jun 22, 2022 1:04 pm
BernardShakey wrote: Wed Jun 22, 2022 11:58 am
deikel wrote: Tue Jun 21, 2022 10:09 am - her plan is not an aggressive plan, aggressive plans are 100% stocks
- these age adjusting plans make zero sense to me. the investment horizon is much too small (depending when you start saving for college and how old the kid is when hitting college, somewhere between 18 years and down - I would guess some statistical average around 10-12 years)
- the change of 10% will probably make little difference in the overall outcome, no need to sweat it
- these plans should all be much more conservative and simply benefit from the tax advantage IMO, trying to make up funding by hoping for a stock rally inside a 529 with the kids college future to play with and nothing to balance it against is a fools errand - its a completely wrong time horizon in this single account
Yeah, but if you stick the money in ultra-safe money market type investment for the full 18 years (plus some of it also during the 4 additional years the kid is in school), the tax advantage is minimized. Tiny growth, tiny tax advantage. Better approach is to save money in 529 very aggressively when child is very young and have decent exposure to stock along the way. That gives the money time to grow and maximize the 529 tax advantages.
These were my thoughts exactly when I signed up for the plan. I have given it a lot of thought and I think I am going to “stay the course” with my current investment and then use new investments to shore up the fixed/money market side of the portfolio as needed. Knowing myself and my risk tolerance, I might purchase a small % equities to take advantage of the down market, understanding that this “bucket” could be used for years 3-4 of college, or even grad school. But I need to make sure I have enough “safe” funds to cover at least the first two years of college. I tend to favor risk over safety and I’m trying to mitigate that somewhat as I get older and priorities shift. This forum is helping! Love your signature btw :D
Just be sure your spouse (if married) is on the same page and aware of how you are investing the 529 money. My spouse would have strangled me if I had put the kids' college funds in jeopardy and the worst happened. You look like you're thinking about this comprehensively. Best of luck!
An important key to investing is having a well-calibrated sense of your future regret.
deikel
Posts: 1385
Joined: Sat Jan 25, 2014 7:13 pm

Re: 529 age-based plan dilemma

Post by deikel »

meadowrue wrote: Wed Jun 22, 2022 1:04 pm
BernardShakey wrote: Wed Jun 22, 2022 11:58 am
deikel wrote: Tue Jun 21, 2022 10:09 am - her plan is not an aggressive plan, aggressive plans are 100% stocks
- these age adjusting plans make zero sense to me. the investment horizon is much too small (depending when you start saving for college and how old the kid is when hitting college, somewhere between 18 years and down - I would guess some statistical average around 10-12 years)
- the change of 10% will probably make little difference in the overall outcome, no need to sweat it
- these plans should all be much more conservative and simply benefit from the tax advantage IMO, trying to make up funding by hoping for a stock rally inside a 529 with the kids college future to play with and nothing to balance it against is a fools errand - its a completely wrong time horizon in this single account
Yeah, but if you stick the money in ultra-safe money market type investment for the full 18 years (plus some of it also during the 4 additional years the kid is in school), the tax advantage is minimized. Tiny growth, tiny tax advantage. Better approach is to save money in 529 very aggressively when child is very young and have decent exposure to stock along the way. That gives the money time to grow and maximize the 529 tax advantages.
These were my thoughts exactly when I signed up for the plan. I have given it a lot of thought and I think I am going to “stay the course” with my current investment and then use new investments to shore up the fixed/money market side of the portfolio as needed. Knowing myself and my risk tolerance, I might purchase a small % equities to take advantage of the down market, understanding that this “bucket” could be used for years 3-4 of college, or even grad school. But I need to make sure I have enough “safe” funds to cover at least the first two years of college. I tend to favor risk over safety and I’m trying to mitigate that somewhat as I get older and priorities shift. This forum is helping! Love your signature btw :D
But its the same dilemma you have with a 401k and the sequence of return problem there. The time horizon for a 529 is too short to play that game. If you are super aggressive early on, then a) there is not much invested yet (if you go by the 10k tax free per year say) and you only have a small number of years to play (say 10), the closer you get to the time to withdraw you need to be super conservative anyway - or else you risk success with no time to make up for it.

You can make up for it with other funds of course.

In retirement you can spent less, you have 30+ years to compensate some - for the 529, you have 4 years of draw and little wiggle room on the expenses, plus a hard definition of what success means....its lose-lose-lose for being agressive.

I maintain the 529 is misleading in that regard, folks underestimate the 'risk' significantly - it is nothing like a 410k at all.
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