"Why 97% of People Don't Use 529 College Savings Plans."

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Taylor Larimore
Advisory Board
Posts: 25120
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

"Why 97% of People Don't Use 529 College Savings Plans."

Postby Taylor Larimore » Tue Sep 09, 2014 3:19 pm

Bogleheads:

Bloomberg is featuring an article about College Savings Plans. Two important quotes from the article are these:
"Focusing on fees is crucial."

"Vanguard Group, the lowest-cost of the major 529 providers, just dropped the total expenses on its age-based funds to 0.19 percent from 0.21 percent."

Why-97-of-people-don-t-use-529-college-savings-plans.html

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

livesoft
Posts: 52522
Joined: Thu Mar 01, 2007 8:00 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby livesoft » Tue Sep 09, 2014 3:21 pm

I just read this article which has a tidbit about the GAO report on these plans.

Basically, the answer to the question posed in the title is simple: 97% of people are not wealthy enough.

Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.
This signature message sponsored by sscritic: Learn to fish.

111
Posts: 200
Joined: Sat Mar 03, 2012 5:20 am

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby 111 » Tue Sep 09, 2014 3:43 pm

My reasoning, and someone please tell me if I'm wrong:

529 counts against me on FAFSA and can only be withdrawn without penalty for educational expenses.
Retirement accounts aren't counted against me on FAFSA and withdrawals for qualified educational expenses aren't penalized.

Therefore I am better off maxing out retirement accounts before considering a 529.

*edited to add: "Doh! I didn't see the last line of Livesoft's post until after I submitted my reply. :oops:

HawkeyeJD
Posts: 75
Joined: Mon Sep 01, 2014 6:03 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby HawkeyeJD » Tue Sep 09, 2014 3:46 pm

Part of the confusion with 529s is the inconsistency in information about the plans:

1. The top Google hit I got when searching for "529 early withdrawal penalty"
http://wiki.fool.com/Penalty_for_Early_ ... _529_Plans
"The IRS assesses a 10 percent penalty on the entire withdrawal, including your original contribution, if you take the money out early or if you do not match the withdrawal up against a qualified higher-education expense.

2. Referenced article in OP
http://www.bloomberg.com/news/2014-09-0 ... plans.html
"Withdrawing money for non-educational reasons means paying taxes and a 10 percent penalty. But the tax and the penalty only apply to any investment gain. Whatever amount was put into the 529 comes back tax- and penalty-free"

3. IRS publication 970 (page 59)
"The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. This is a return of the investment in the plan" and "generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income"


So, the IRS makes it clear that you can withdraw your contributions from a 529 plan tax and penalty free but not your earnings. This makes sense and is consistent with the guidance for ROTH IRA plans. However, some websites have misleading, outdated, or just wrong information. It does not help that some appear to use contributions and earnings interchangeably. Even worse are website articles that are not dated, so you don't know if you are getting out of date information!





All of that aside, I think the lack of adoption is a combination of lack of knowledge of the plans, the lack of ability for many families to set aside yet another pot of money for things, and concern as to whether the children will or will not go to college. Many on this board are optimistic and just say that in that case the money can go to the next generation or whatever, but that is a lot easier to say if you are relatively wealthy.

letsgobobby
Posts: 9829
Joined: Fri Sep 18, 2009 1:10 am

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby letsgobobby » Tue Sep 09, 2014 3:54 pm

HawkeyeJD wrote:Part of the confusion with 529s is the inconsistency in information about the plans:

1. The top Google hit I got when searching for "529 early withdrawal penalty"
http://wiki.fool.com/Penalty_for_Early_ ... _529_Plans
"The IRS assesses a 10 percent penalty on the entire withdrawal, including your original contribution, if you take the money out early or if you do not match the withdrawal up against a qualified higher-education expense.

2. Referenced article in OP
http://www.bloomberg.com/news/2014-09-0 ... plans.html
"Withdrawing money for non-educational reasons means paying taxes and a 10 percent penalty. But the tax and the penalty only apply to any investment gain. Whatever amount was put into the 529 comes back tax- and penalty-free"

3. IRS publication 970 (page 59)
"The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. This is a return of the investment in the plan" and "generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income"


So, the IRS makes it clear that you can withdraw your contributions from a 529 plan tax and penalty free but not your earnings. This makes sense and is consistent with the guidance for ROTH IRA plans. However, some websites have misleading, outdated, or just wrong information. It does not help that some appear to use contributions and earnings interchangeably. Even worse are website articles that are not dated, so you don't know if you are getting out of date information!





All of that aside, I think the lack of adoption is a combination of lack of knowledge of the plans, the lack of ability for many families to set aside yet another pot of money for things, and concern as to whether the children will or will not go to college. Many on this board are optimistic and just say that in that case the money can go to the next generation or whatever, but that is a lot easier to say if you are relatively wealthy.

The penalty is only on the earnings, but unlike a Roth IRA you are not able to pull out just your contributions. Each withdrawal is pro-rated between contributions and earnings, therefore each non-qualified withdrawal will have taxes and penalties associated.

I am with livesoft on this one. 529s are for the rich. If you are not maxing out all retirement accounts and in at least the 25% tax bracket, and planning to invest heavily or exclusively in stocks in the 529, they are typically not worthwhile.

User avatar
Go Blue 99
Posts: 713
Joined: Thu Oct 09, 2008 3:42 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Go Blue 99 » Tue Sep 09, 2014 4:17 pm

General question- If you want to pay for your kids' college, and your first kid will be in college before you are old enough to take penalty-free retirement distributions, how will you pay for it? Do you just plan to cash flow it out of taxable accounts? What if you don't have enough in taxable accounts? Would you then just take out loans, and pay them back when you are eligible to withdraw from your 401k/IRA?

flyingbison
Posts: 1236
Joined: Wed Mar 12, 2014 8:52 am

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby flyingbison » Tue Sep 09, 2014 4:20 pm

livesoft wrote:I just read this article which has a tidbit about the GAO report on these plans.

Basically, the answer to the question posed in the title is simple: 97% of people are not wealthy enough.

Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.


Yep. That's why I don't have a 529.

Lysander
Posts: 23
Joined: Sun Aug 24, 2014 10:42 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Lysander » Tue Sep 09, 2014 4:28 pm

I myself am anticipating a major shakeup in higher education that cuts costs. At some point it makes more sense to give your children a duplex that they can live in and get a sinecure from than pay for $300,000-$400,000 worth of college.

freddie
Posts: 920
Joined: Sat Feb 08, 2014 11:06 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby freddie » Tue Sep 09, 2014 4:42 pm

Go Blue 99 wrote:General question- If you want to pay for your kids' college, and your first kid will be in college before you are old enough to take penalty-free retirement distributions, how will you pay for it? Do you just plan to cash flow it out of taxable accounts? What if you don't have enough in taxable accounts? Would you then just take out loans, and pay them back when you are eligible to withdraw from your 401k/IRA?


Well if you don't have anything in taxable, odds are you will get a good amount of financial aid (i.e. loans). Take them and pay it back in a couple of years. Or do a HELOC. Or cash flow it (stopping your 401(k) payments for a year or two before and during college will pay for most schools). Throw in things like AOTC and paying for 20k or so of college (i.e. most public universities) is doable. The other thing about 529s is that you need to be rich when the kid is young. 18 years of 7% growth is a nice tax savings. 5 years of 7% growth, not so much.

User avatar
White Coat Investor
Posts: 12372
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby White Coat Investor » Tue Sep 09, 2014 4:52 pm

529s are a tax break for the rich. The poor get grants and need-based scholarships. The middle class gets some tax credits/deductions. That's why 97% of people don't use a 529. Only the 3% who are rich or plan to become that way use them. If you're not putting away >$2K per year for your kids to go to college, might as well not bother with a 529. You could use an ESA with lower costs. Most states don't give you a tax deduction or credit for your 529 contribution anyway.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

livesoft
Posts: 52522
Joined: Thu Mar 01, 2007 8:00 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby livesoft » Tue Sep 09, 2014 4:53 pm

Go Blue 99 wrote:General question- If you want to pay for your kids' college, and your first kid will be in college before you are old enough to take penalty-free retirement distributions, how will you pay for it? Do you just plan to cash flow it out of taxable accounts? What if you don't have enough in taxable accounts? Would you then just take out loans, and pay them back when you are eligible to withdraw from your 401k/IRA?

First, check out this NYTimes article today about paying for college. It is getting easier for lower income people to go to college:
http://www.nytimes.com/2014/09/09/upsho ... -poor.html

I have two kids in college now. I am retired early before age 59.5. The way we pay for college is
1. Income from jobs coupled with LBYM (i.e. normal cash flow).
2. Taxable accounts dividends and selling taxable account shares.
3. 529 plan withdrawals (part of 529 plan contributions were actually a loan from a 401(k) plan).
4. Tax breaks worth thousands of dollars each year.
5. Going to a relative inexpensive public state institution (OK, that's only for one child, the other went to one of the most expensive universities in the US.)
6. Pay tuition with 2% cash-back credit card.

Absent from the list above was financial aid.
This signature message sponsored by sscritic: Learn to fish.

FinancialDave
Posts: 1487
Joined: Thu May 26, 2011 9:36 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby FinancialDave » Tue Sep 09, 2014 4:53 pm

I think the conclusion is also important to pay attention too:

So while 529 plans have flaws, a low-fee plan is a better option than leaving money in a low-interest bank account that can be raided for frivolous purchases. With college costs up 1,225 percent since 1978, parents need all the help they can get.


The other key is to start early when a smaller amount will have more effect.

I put in a modest lump sum near my grandkids birth, which I have every reason to believe will at least triple by the time they are in college, which should at least match the gain in college tuition over the same time frame.

Like the article says every little bit helps!

I disagree however, that anyone needs to be maxing out their retirement funds to contribute and it's not an all or nothing proposition. Certainly the kids should be expected to contribute something, otherwise the "life lesson" on where money comes from is lost!

fd
I love simulated data. It turns the impossible into the possible!

User avatar
JonnyDVM
Posts: 1395
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby JonnyDVM » Tue Sep 09, 2014 4:55 pm

Lysander wrote:I myself am anticipating a major shakeup in higher education that cuts costs. At some point it makes more sense to give your children a duplex that they can live in and get a sinecure from than pay for $300,000-$400,000 worth of college.


I second that. Surely the model needs a major overhaul. You can't keep burdening all these kids with hundreds in thousands in federal loans that they won't ever be able to pay back. Step one is for the government to stop the lending insane amounts to 18 year old kids that don't comprehend what kind of debt that is. If the schools can't get federal loan money, tuition costs will have to drop.

Regardless, I do plan to start investing in a 529 as soon as we have kids. Thought about starting one now in my wife's name and could transfer it later but decided that was a little silly. It's a nice state tax break after retirement is maxed out.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

User avatar
SpringMan
Posts: 5211
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby SpringMan » Tue Sep 09, 2014 4:56 pm

Adam Bold of "the mutual fund store" and host of a weekly radio show advises against 529 plans in favor of taxable investments earmarked for the child. He gives many reasons but none in my opinion are the real reason, his firm gets paid a percentage of assets under management and he would lose the revenue generated by 529 plan participation.
Best Wishes, SpringMan

livesoft
Posts: 52522
Joined: Thu Mar 01, 2007 8:00 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby livesoft » Tue Sep 09, 2014 4:57 pm

@JonnyDVM, It is relatively rare to have hundreds of thousands of dollars of loans for an undergraduate degree, but perhaps you meant in aggregrate. My son's college education (4 year degree) will not cost 6-figures.
This signature message sponsored by sscritic: Learn to fish.

User avatar
Kevin M
Posts: 8041
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Kevin M » Tue Sep 09, 2014 5:31 pm

One reason to use a 529 is to get access to investment options that aren't available elsewhere. An example is the Colorado Stable Value fund, earning 2.64% in 2014. Hard to beat for safe, potentially tax-free fixed income.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

thx1138
Posts: 530
Joined: Fri Jul 12, 2013 2:14 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby thx1138 » Tue Sep 09, 2014 6:50 pm

Whether it is useful also varies a lot by state. If your state gives a tax deduction on contributions then that is a useful incentive to be sure. Ideally your state should be low cost or allow transfers to lower cost state plans at a later date without clawing back the tax break.

Interesting point on access to a stable value fund, hadn't seen that one before. Early next year we will have enough in our 529 that it is probably worth transferring to a lower cost plan. Was initially assuming that would be Vanguard, and probably it still will be, but I'll give a look for any unique funds that might be useful in our larger portfolio (we treat all accounts as a single portfolio).

dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby dhodson » Tue Sep 09, 2014 7:01 pm

As mentioned above, most people just don't have the extra cash to do this to begin with. Even those that have some extra cash, it may or may not be the best choice for them. The 3% number is probably near appropriate.

raspino
Posts: 140
Joined: Fri Aug 15, 2014 6:34 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby raspino » Tue Sep 09, 2014 7:31 pm

I contribute to a 529 plan but I am not rich by any means. I do get tax deductions from my state so I thought it was a no brainer when I learned about it. I have since contributed the maximum allowable for tax deduction and God willing, I will continue to contribute until my kids are in college. I completely understand that this may work against their FAFSA application, but the alternative is not great either. Many of the financial aids that students will get are not grants so will need to be paid back anyways. If your children are lucky to get scholarships or grants where they don't have to pay back the money, that is great. But how can one plan with that kind of model?

bhsince87
Posts: 1299
Joined: Thu Oct 03, 2013 1:08 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby bhsince87 » Tue Sep 09, 2014 8:05 pm

And there's the fact that a lot of people don't have children....

Or if they do, they might be past college age.
BH87

freddie
Posts: 920
Joined: Sat Feb 08, 2014 11:06 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby freddie » Tue Sep 09, 2014 9:38 pm

raspino wrote:I contribute to a 529 plan but I am not rich by any means. I do get tax deductions from my state so I thought it was a no brainer when I learned about it. I have since contributed the maximum allowable for tax deduction and God willing, I will continue to contribute until my kids are in college. I completely understand that this may work against their FAFSA application, but the alternative is not great either. Many of the financial aids that students will get are not grants so will need to be paid back anyways. If your children are lucky to get scholarships or grants where they don't have to pay back the money, that is great. But how can one plan with that kind of model?


If your maxing out your retirement accounts they are fine. But only about 5% of americans do that. That pretty much matches the amount that are contributing to 529s. GIven the choice between 401(k) and 529, I go 401(k) all day long. Max that out and have the choice between a 529 and shoving money in taxable, you could make a good argument for a 529 (you might save a bit on taxes but you give up flexibility).

raspino
Posts: 140
Joined: Fri Aug 15, 2014 6:34 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby raspino » Tue Sep 09, 2014 9:52 pm

freddie wrote:
raspino wrote:I contribute to a 529 plan but I am not rich by any means. I do get tax deductions from my state so I thought it was a no brainer when I learned about it. I have since contributed the maximum allowable for tax deduction and God willing, I will continue to contribute until my kids are in college. I completely understand that this may work against their FAFSA application, but the alternative is not great either. Many of the financial aids that students will get are not grants so will need to be paid back anyways. If your children are lucky to get scholarships or grants where they don't have to pay back the money, that is great. But how can one plan with that kind of model?


If your maxing out your retirement accounts they are fine. But only about 5% of americans do that. That pretty much matches the amount that are contributing to 529s. GIven the choice between 401(k) and 529, I go 401(k) all day long. Max that out and have the choice between a 529 and shoving money in taxable, you could make a good argument for a 529 (you might save a bit on taxes but you give up flexibility).



I am maxing out now. But even when I was not maxing out, I was contributing to get company match and then contributing to the max allowable for deductions in my state, which is not much anyways ($2500).

freddie
Posts: 920
Joined: Sat Feb 08, 2014 11:06 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby freddie » Tue Sep 09, 2014 10:00 pm

raspino wrote:I am maxing out now. But even when I was not maxing out, I was contributing to get company match and then contributing to the max allowable for deductions in my state, which is not much anyways ($2500).


I think getting a federal and state deduction (401k) is a better deal than just getting a state one.:) Obviously predicting exact financial and tax situation 18 years out is beyond impossible so you make some guesses and hope things work out.

User avatar
haban01
Posts: 627
Joined: Thu Mar 01, 2007 9:55 pm
Location: Wisconsin

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby haban01 » Tue Sep 09, 2014 10:26 pm

EmergDoc wrote:529s are a tax break for the rich. The poor get grants and need-based scholarships. The middle class gets some tax credits/deductions. That's why 97% of people don't use a 529. Only the 3% who are rich or plan to become that way use them. If you're not putting away >$2K per year for your kids to go to college, might as well not bother with a 529. You could use an ESA with lower costs. Most states don't give you a tax deduction or credit for your 529 contribution anyway.


Wisconsin along with many other states give you a tax deduction! I have to disagree as to say that these vehicles combined in low costs funds are another way to stash cash from kids birthdays, holidays, etc. and provided another "leg of the stool" to contribute to moderate the financial hit of college. I know of individuals who have set up 529's for nieces and nephews because the don't have a parents (or a single mother) that will be able to provide anything for their college.

Consumer Advocate "Clark Howard" has preached that one should NOT contribute a dime to their kids college fund unless they are fully funding married couples IRA's, 401K's. I don't believe that entirely and feel that most would benefit from starting a small account early and contributing over a long haul will be better than never doing so.

I can see another title as "Why 97% of Americans don't contribute to Roth IRA's and many of the reasons would be the same to match the title on this one.
Eric Haban | | "Stay the Course" | "Press on Regardless" | | Wisconsin Bogleheads Chapter Coordinator

travellight
Posts: 2531
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby travellight » Tue Sep 09, 2014 10:31 pm

Don't you get charged a 2% fee for paying tuition with a credit card, livesoft? So the math works out neutral? It is not clear to me what the benefit is.

MathWizard
Posts: 2405
Joined: Tue Jul 26, 2011 1:35 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby MathWizard » Wed Sep 10, 2014 12:42 am

Go Blue 99 wrote:General question- If you want to pay for your kids' college, and your first kid will be in college before you are old enough to take penalty-free retirement distributions, how will you pay for it? Do you just plan to cash flow it out of taxable accounts? What if you don't have enough in taxable accounts? Would you then just take out loans, and pay them back when you are eligible to withdraw from your 401k/IRA?


I am paying out of normal cash flow.
Max the Roths for my wife and I
was 10k then 12k after 50 and now
13k. Suspend Roth contributions while
kids are in college and throw in
2500 amer op tax credit and you are
most of the way to the cost of attendance at
a state school. A little bit of scholarship
money and maybe small loans or summer
work and you get to the total needed.
I put away about 20k in taxable because
I had 2 kids in at the same time.
Never out of the 15% tax bracket

livesoft
Posts: 52522
Joined: Thu Mar 01, 2007 8:00 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby livesoft » Wed Sep 10, 2014 6:05 am

travellight wrote:Don't you get charged a 2% fee for paying tuition with a credit card, livesoft? So the math works out neutral? It is not clear to me what the benefit is.

In our case, surprisingly no, we did not get charged any extra fees for using a credit card. We called the university business office, checked the web site, and confirmed there were no extra fees. Then we did it and also confirmed there were no extra fees. Already have the 2% cashback deposited into our checking account, too.
This signature message sponsored by sscritic: Learn to fish.

User avatar
HardKnocker
Posts: 2063
Joined: Mon Oct 06, 2008 11:55 am
Location: New Jersey USA

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby HardKnocker » Wed Sep 10, 2014 6:25 am

Lysander wrote:I myself am anticipating a major shakeup in higher education that cuts costs. At some point it makes more sense to give your children a duplex that they can live in and get a sinecure from than pay for $300,000-$400,000 worth of college.


Indeed.

I sent my kid to public U. and then made Roth IRA contributions for him, He will soon graduate with close to $40k in his Roth. Not bad.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

User avatar
riptide
Posts: 652
Joined: Thu Jul 17, 2014 2:38 pm
Location: Coastal, South Carolina

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby riptide » Wed Sep 10, 2014 7:26 am

I use the 529 plans that clark howard recommended for my state, started when my daughter was 1 year old, started when my son was six months old.
Brokerage account 65/35 | VG total Market 35% | VG total Intl 12% | VG small cap value 12% | VG Reit index 6% | VG Total Bond 35% | TSP Account 75/25 | C Fund 45%, S 15%, I 15%, G 25% | EE Bonds = Emergency Fund

JustinR
Posts: 348
Joined: Tue Apr 27, 2010 11:43 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby JustinR » Wed Sep 10, 2014 7:36 am

I'm in California. I haven't read very much about 529 plans, is it worth pursuing if you've maxed out all your other retirement funds?

niceguy7376
Posts: 1698
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby niceguy7376 » Wed Sep 10, 2014 7:44 am

Justin, CA does not offer any state tax benefit for 529 plans. Thus, you can open a 529 in any other state plan. As for, "is it worth it?", thats an open topic

Grt2bOutdoors
Posts: 15422
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Grt2bOutdoors » Wed Sep 10, 2014 8:23 am

JustinR wrote:I'm in California. I haven't read very much about 529 plans, is it worth pursuing if you've maxed out all your other retirement funds?


Do you have a child now? If not, I'd wait unless you believe you will use the savings yourself down the road should you not have a family.
Otherwise, is a 529 plan a good idea? Well, if you know you will have some liability down the road in 10-20 years why wouldn't one want to reduce the cost now by tucking some money away as you go along if you had the funds to do so? Especially since the federal and state governments are making it tax advantageous to do so? There will be some that argue that you aren't saving much at all if you are in the lower tax brackets, my retort to that is: keeping 115% of something (principal + tax savings) is better than only keeping 85%, is it not? Whether you save $1 or you save $20,000 in taxes, that is still $1 or $20,000 or somewhere in between that you won't have to fork over from other sources including your income or have to take out in loans. The sooner folks understand this the better for their pocketbook. I don't buy the argument that you can simply cashflow college costs from income, simply because I've seen colleagues get axed just around the age when their kids would either be starting or in the middle of school - if you have no income, that method of payment goes right out the window. Borrowing from a 401k or Roth is not an option unless you are on your deathbed, especially if you have a job loss.

On the point of asset allocation within such a plan - IMO, you can hold a high equity allocation up until the beneficiary is about 8-10 years from needing the funds, after that it pays to become more conservative with your investments, lest you suffer a severe loss just as you need the money. Ask those who were banking on home equity loans how that turned out for them when the real estate market crashed in 2008-2009 and the banks cut the limits down to the bone, they were forced to take out less advantageous student loans or private loans to fund college.
"Luck is not a strategy" Asking Portfolio Questions

Grt2bOutdoors
Posts: 15422
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Grt2bOutdoors » Wed Sep 10, 2014 8:26 am

haban01 wrote:
EmergDoc wrote:529s are a tax break for the rich. The poor get grants and need-based scholarships. The middle class gets some tax credits/deductions. That's why 97% of people don't use a 529. Only the 3% who are rich or plan to become that way use them. If you're not putting away >$2K per year for your kids to go to college, might as well not bother with a 529. You could use an ESA with lower costs. Most states don't give you a tax deduction or credit for your 529 contribution anyway.


Wisconsin along with many other states give you a tax deduction! I have to disagree as to say that these vehicles combined in low costs funds are another way to stash cash from kids birthdays, holidays, etc. and provided another "leg of the stool" to contribute to moderate the financial hit of college. I know of individuals who have set up 529's for nieces and nephews because the don't have a parents (or a single mother) that will be able to provide anything for their college.

Consumer Advocate "Clark Howard" has preached that one should NOT contribute a dime to their kids college fund unless they are fully funding married couples IRA's, 401K's. I don't believe that entirely and feel that most would benefit from starting a small account early and contributing over a long haul will be better than never doing so.

I can see another title as "Why 97% of Americans don't contribute to Roth IRA's and many of the reasons would be the same to match the title on this one.


+1
"Luck is not a strategy" Asking Portfolio Questions

BogleBoogie
Posts: 390
Joined: Tue May 13, 2014 11:15 am
Location: AK

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby BogleBoogie » Wed Sep 10, 2014 8:54 am

Maxed out 401k so I'm contributing 50/mo for each young child's 529 through Vanguard. I don't want to hope that there are scholarships or assistance in 12 years. I won't save enough to cover all of college, but certainly will put a dent in the cost...

User avatar
kenyan
Posts: 2843
Joined: Thu Jan 13, 2011 12:16 am

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby kenyan » Wed Sep 10, 2014 9:25 am

California does not offer a state tax benefit. However, due to state taxes our (long-term) capital gains tax rate for those in the 25% federal bracket is more on the order of 23-25% than the 15% many others pay.
Retirement investing is a marathon.

munemaker
Posts: 1302
Joined: Sat Jan 18, 2014 6:14 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby munemaker » Wed Sep 10, 2014 9:35 am

When our two children were born, we estimated what it would cost for them to attend college and put together a plan to contribute enough each year to have it covered when the time came. We started out with custodian accounts but switched to a 529 plan when they became available. We live in PA, and the state has two options for their 529 plan: one is a variable plan where the value moves up and down with the investments you select. The other is a fixed plan where you purchase credits at today's rate and you are essentially protected from tuition inflation. We went with the fixed plan that is indexed to tuition. Also, the earnings of the 529 are not subject to PA state income tax if used for education. This worked out beautifully for us. We had just the right amount to cover each child's college costs and were protected from tuition inflation.

We are very proud that both of our children (ages 25 and 28) are fully employed in their chosen fields with good salaries, have bought homes and require no subsidies from us.

Several friends suggested we fill out the FASFA, saying "You might be surprised." I expected this would be a waste of time, but I did the first year for the older son. I was not surprised, it was a waste of time and I never did it again. One of my kids did receive a small academic scholarship for a couple years through the school from some private company, but since it was purely academic, did not require a FASFA.

We are not rich, and the 529 plan worked well for us.
Last edited by munemaker on Wed Sep 10, 2014 9:45 am, edited 1 time in total.

User avatar
Leesbro63
Posts: 4635
Joined: Mon Nov 08, 2010 4:36 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Leesbro63 » Wed Sep 10, 2014 9:37 am

EmergDoc wrote:529s are a tax break for the rich. The poor get grants and need-based scholarships. The middle class gets some tax credits/deductions. That's why 97% of people don't use a 529. Only the 3% who are rich or plan to become that way use them. If you're not putting away >$2K per year for your kids to go to college, might as well not bother with a 529. You could use an ESA with lower costs. Most states don't give you a tax deduction or credit for your 529 contribution anyway.


As a huge winner in the 529 game, I have also concluded this. (I funded two prepaid accounts over a few years, in the early 2000s, that have more than doubled, tax-free. The same PA prepaid plan that "Munemaker" talked about in the post just above). But I would say it's more of a tax break for the upper middle class than for the truly rich. But that's splitting hairs with regard to EmergDoc's comment, which is basically right.

User avatar
Leesbro63
Posts: 4635
Joined: Mon Nov 08, 2010 4:36 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Leesbro63 » Wed Sep 10, 2014 9:42 am

munemaker wrote: Several friends suggested we fill out the FASFA, saying "You might be surprised." I expected this would be a waste of time, but I did the first year for the older son. I was not surprised, it was a waste of time and I never did it again. One of my kids did receive a small academic scholarship for a couple years through the school from some private company, but since it was purely academic, did not require a FASFA.


+1. Ditto. Waste of time and unnecessary disclosure of stuff that's none of their business.

sls239
Posts: 865
Joined: Thu Oct 23, 2008 4:04 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby sls239 » Wed Sep 10, 2014 9:45 am

If you withdraw from retirement accounts to pay for college, it will count as income on the following year's fafsa.

We don't have a 529 yet, but we might soon. And we aren't in the 25% tax bracket and aren't totally maxing out 401(k) contributions either. We are saving adequately for retirement, and will not be retirement age when DS goes to college.

Our state does have a practically flat 7% income tax, for which you get to deduct 529 contributions to their state plan only. It is very common for a family to not be in the higher federal tax brackets but still be in the highest state bracket.

The 529 will be a good place to put bonds, while the ESA will still be in the market for the most part. It will be basically a get in, get the deduction, get out approach. Dual enrollment in HS is likely for DS so the turn around time could be really quick.

This money will be in addition to expenses we will cash flow and get the federal tax credits for.

LongerPrimer
Posts: 903
Joined: Thu Jun 05, 2014 10:01 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby LongerPrimer » Wed Sep 10, 2014 10:05 am

In our time, 2001-2006, we used 529 only to capture the tax benefit.
1. Our first two years, 2001-2002, the 529 lost money in the most conservative investment choice which was 20/80 with the 80% mostly in corporate issues. I got mad and talked to our State Treasurer. We soon got another trustee and a MM option.
2. Fund Selection was poor and limited.
3. Rules of 529 stink. One move/reallocation per year is very limiting.
4. After GWB's economic stimulus (http://en.wikipedia.org/wiki/Economic_G ... ct_of_2001), 529 tax advantages was greatly reduced.

User avatar
Kevin M
Posts: 8041
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Kevin M » Wed Sep 10, 2014 3:29 pm

JustinR wrote:I'm in California. I haven't read very much about 529 plans, is it worth pursuing if you've maxed out all your other retirement funds?

Also a CA resident, and as mentioned above, I use the Colorado 529 just to get access to the stable value fund earning 2.64% in 2014 (was earning 3% in 2013 when I started). If you have maxed out retirement plans and have a child or anyone else whose educational expenses you'd like to help fund, why not? Where else can you earn a safe 2.64% tax free?

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Beliavsky
Posts: 674
Joined: Sun Jun 29, 2014 10:21 am

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Beliavsky » Wed Sep 10, 2014 3:48 pm

Kevin M wrote:
JustinR wrote:I'm in California. I haven't read very much about 529 plans, is it worth pursuing if you've maxed out all your other retirement funds?

Also a CA resident, and as mentioned above, I use the Colorado 529 just to get access to the stable value fund earning 2.64% in 2014 (was earning 3% in 2013 when I started). If you have maxed out retirement plans and have a child or anyone else whose educational expenses you'd like to help fund, why not? Where else can you earn a safe 2.64% tax free?

Kevin

I have never understood how stable value funds can offer liquidity, a stable NAV, and yields much higher than money market funds. But if I can have those three attributes together, I will take them :). When in a few years short term rates have risen above the yield offered by the stable value fund, can you transfer the money from the stable value fund to the Direct Portfolio?

User avatar
Kevin M
Posts: 8041
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Kevin M » Wed Sep 10, 2014 5:15 pm

Beliavsky wrote:I have never understood how stable value funds can offer liquidity, a stable NAV, and yields much higher than money market funds.

Because the insurance companies offering the SV funds take much of the risk; i.e., they invest in riskier assets, like longer-term bonds, expecting higher returns in the long term, and willing to fund the difference if they lose short-term. Also, most SV funds do limit liquidity, especially inside 401k/403b plans. In 401k/403b plans, they typically do not allow direct exchanges to/from competing products like money-market funds. There also typically are terms that may restrict withdrawals in the event of company-specific events that would result in mass withdrawals. So there are some risks.

I think the limited liquidity and expectations that most people won't do lots of withdrawals in 401k/403b plans is why SV funds aren't offered outside of retirement plans (and 529 plans).

Beliavsky wrote:When in a few years short term rates have risen above the yield offered by the stable value fund, can you transfer the money from the stable value fund to the Direct Portfolio?

Sure. You can change your investment options (or plans) once per year. This is answered in detail in the FAQ page of the CollegeInvest web site: What is a 529 Plan? College Savings FAQ | CollegeInvest.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Leesbro63
Posts: 4635
Joined: Mon Nov 08, 2010 4:36 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Leesbro63 » Wed Sep 10, 2014 6:29 pm

LongerPrimer wrote:4. After GWB's economic stimulus (http://en.wikipedia.org/wiki/Economic_G ... ct_of_2001), 529 tax advantages was greatly reduced.


My memory is the complete opposite. It was the 2001 act, allowing tax-free withdrawals if used for qualified education, that was the dealmaker for me. Under the prior law, you paid tax (at ordinary income tax rates, I believe) on the earnings when withdrawn even if for college. Which, for me, made an old fashioned taxable brokerage account, with much of the earnings at capgains rates, the better deal. 2001 was a big winner, tax wise. What are you referring to?

letsgobobby
Posts: 9829
Joined: Fri Sep 18, 2009 1:10 am

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby letsgobobby » Wed Sep 10, 2014 7:37 pm

Leesbro63 wrote:
LongerPrimer wrote:4. After GWB's economic stimulus (http://en.wikipedia.org/wiki/Economic_G ... ct_of_2001), 529 tax advantages was greatly reduced.


My memory is the complete opposite. It was the 2001 act, allowing tax-free withdrawals if used for qualified education, that was the dealmaker for me. Under the prior law, you paid tax (at ordinary income tax rates, I believe) on the earnings when withdrawn even if for college. Which, for me, made an old fashioned taxable brokerage account, with much of the earnings at capgains rates, the better deal. 2001 was a big winner, tax wise. What are you referring to?

presumably the lower tax rates for long term capital gains, but for those in higher tax brackets the rates are often still 25%+state = 30-35%, not much of a deal.

User avatar
Leesbro63
Posts: 4635
Joined: Mon Nov 08, 2010 4:36 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Leesbro63 » Wed Sep 10, 2014 7:41 pm

letsgobobby wrote:
Leesbro63 wrote:
LongerPrimer wrote:4. After GWB's economic stimulus (http://en.wikipedia.org/wiki/Economic_G ... ct_of_2001), 529 tax advantages was greatly reduced.


My memory is the complete opposite. It was the 2001 act, allowing tax-free withdrawals if used for qualified education, that was the dealmaker for me. Under the prior law, you paid tax (at ordinary income tax rates, I believe) on the earnings when withdrawn even if for college. Which, for me, made an old fashioned taxable brokerage account, with much of the earnings at capgains rates, the better deal. 2001 was a big winner, tax wise. What are you referring to?

presumably the lower tax rates for long term capital gains, but for those in higher tax brackets the rates are often still 25%+state = 30-35%, not much of a deal.


I don't understand. The 2001 act made 529 withdrawals for qualified education expenses tax FREE. That HAS to be a better deal than even lower capital gains rates (at the time...they've come back up for many since then). How does making 529s free for college, even with other taxes reduced, equate to "529 tax advantages greatly reduced"? The differential still moved in favor of 529, despite the also lowered (non-529) cap gains rates.
Last edited by Leesbro63 on Wed Sep 10, 2014 8:08 pm, edited 1 time in total.

Luv2savmoney
Posts: 74
Joined: Tue May 06, 2014 7:35 am

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby Luv2savmoney » Wed Sep 10, 2014 7:51 pm

I started this year and contributing the maximum allowed for state deduction (contribution is approx 3.5K). I don't anticipate it will cover full college costs and plan to send to public univ. I plan to stop contributing when the kid hits 16 (12 more years to go) and will help contribute to her Roth afterward.

bsteiner
Posts: 2328
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby bsteiner » Wed Sep 10, 2014 10:01 pm

529 plans don't work well for people who expect to pay estate tax. They use up the annual exclusion. If you have a taxable estate, you can give the student $14,000 a year ($28,000 for a married couple with gift-splitting) and also pay for college (or pay for tuition for a grandchild).

trueblueky
Posts: 1069
Joined: Tue May 27, 2014 3:50 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby trueblueky » Wed Sep 10, 2014 10:48 pm

raspino wrote:I contribute to a 529 plan but I am not rich by any means. I do get tax deductions from my state so I thought it was a no brainer when I learned about it. I have since contributed the maximum allowable for tax deduction and God willing, I will continue to contribute until my kids are in college. I completely understand that this may work against their FAFSA application, but the alternative is not great either. Many of the financial aids that students will get are not grants so will need to be paid back anyways. If your children are lucky to get scholarships or grants where they don't have to pay back the money, that is great. But how can one plan with that kind of model?

+1
Depending on your state, funding 529 up to the max state tax credit can make a lot of sense. In our state at that time, we could put the money in one year and take it out the next to pay tuition. You need to look closely at the rules for your state. You're going to be spending the money anyway, so may as well save taxes.

A few thousand dollars in 529 won't kill you on the FAFSA.

cheesepep
Posts: 676
Joined: Wed Feb 17, 2010 10:58 pm

Re: "Why 97% of People Don't Use 529 College Savings Plans."

Postby cheesepep » Wed Sep 10, 2014 11:24 pm

I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.


Return to “Investing - Theory, News & General”

Who is online

Users browsing this forum: Baidu [Spider], chw, Curtailment, CyclingDuo, ff4930, inspector00, jmndu99, JPH, linenfort, Quark, rob, Sheepdog, TxAg and 66 guests