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

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

Post by livesoft » Mon Sep 15, 2014 2:26 pm

ChosenGSR wrote:I'm a little confused regarding financial aid consideration. It seems to me the vast majority of people with 529s probably have enough income not to qualify for any financial aid to begin with? Maybe things have changed but middle class income basically rules out any financial aid.

Yes, that's the conclusion of the article and the GAO report: The wealthy are the ones with 529 plans and the wealthy are not going to qualify for financial aid to begin with. The middle class should save/invest in retirement plans to the maximum extent possible before they even think about 529 plans.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Mon Sep 15, 2014 2:34 pm

FS51 wrote:I posted the above question earlier but it didn't get any response so I thought I would try again on just the most specific question I have šŸ˜ƒ.

Wouldn't contributing to a 529 plan in a state that gives a tax deduction make more sense than a Roth IRA post taxes? Granted you have less control over the 529 but for the tax benefit alone wouldn't it make sense to go 529 over the Roth assuming 401ks were being maxed out?

Thanks!

That is a tough question. The Roth IRA is such a fantastic resource, it would be a real waste to waste it. Perhaps because the question is so difficult to answer, there have been no responses? Maybe start a separate thread on this?
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by FS51 » Mon Sep 15, 2014 5:15 pm

livesoft wrote:
FS51 wrote:I posted the above question earlier but it didn't get any response so I thought I would try again on just the most specific question I have šŸ˜ƒ.

Wouldn't contributing to a 529 plan in a state that gives a tax deduction make more sense than a Roth IRA post taxes? Granted you have less control over the 529 but for the tax benefit alone wouldn't it make sense to go 529 over the Roth assuming 401ks were being maxed out?

Thanks!

That is a tough question. The Roth IRA is such a fantastic resource, it would be a real waste to waste it. Perhaps because the question is so difficult to answer, there have been no responses? Maybe start a separate thread on this?


That's a good suggestion. Thank you! I will start a new thread and see if anyone has any strong opinions one way or another.

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

Post by opus360 » Mon Sep 15, 2014 8:15 pm

medinme wrote:General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.


How about a 529 versus paying down the mortgage? What are people's thoughts here?

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

Post by ChosenGSR » Tue Sep 16, 2014 5:57 am

livesoft wrote:
ChosenGSR wrote:I'm a little confused regarding financial aid consideration. It seems to me the vast majority of people with 529s probably have enough income not to qualify for any financial aid to begin with? Maybe things have changed but middle class income basically rules out any financial aid.

Yes, that's the conclusion of the article and the GAO report: The wealthy are the ones with 529 plans and the wealthy are not going to qualify for financial aid to begin with. The middle class should save/invest in retirement plans to the maximum extent possible before they even think about 529 plans.


Right but unless things have changed only low income families qualify for financial aid, at least when it comes to your average state university. It's been too long for me at this point but you didn't have to be "wealthy" to be turned down for aid, your average two income family making average wages doesn't not get any help.

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

Post by livesoft » Tue Sep 16, 2014 6:13 am

But the average state university is relatively inexpensive, so the middle class could always send at least the first kid to college without any financial aid. Perhaps, the news media has been harping on this so long while only mentioning the cost of the most expensive universities that we have been fooled into thinking one needs financial aid to go to college? I believe the cost of a good degree at a public state-supported university is affordable.

But also check this out, Middle Class Scholarships: http://www.latimes.com/local/la-me-midd ... story.html
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by thx1138 » Tue Sep 16, 2014 7:17 am

opus360 wrote:
medinme wrote:General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.


How about a 529 versus paying down the mortgage? What are people's thoughts here?


This can be an important question if you are on the edge of financial age. The home you live in is typically not treated as an asset for financial aid. For that reason it is sometimes recommended to pay down the mortgage with taxable accounts a bit before the first year used for financial aid calculations.

So in that sense it may make sense to pay down a bit rather than overfund a 529. But in the end you need to be prepared to pay something and a 529 is the most tax efficient place to pay college expenses.

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

Post by hiddensee » Tue Sep 16, 2014 8:18 am

I think parents should not pay for adult childrens' education. Is that at all a common sentiment in the US?

livesoft wrote:
ChosenGSR wrote:I'm a little confused regarding financial aid consideration. It seems to me the vast majority of people with 529s probably have enough income not to qualify for any financial aid to begin with? Maybe things have changed but middle class income basically rules out any financial aid.

Yes, that's the conclusion of the article and the GAO report: The wealthy are the ones with 529 plans and the wealthy are not going to qualify for financial aid to begin with. The middle class should save/invest in retirement plans to the maximum extent possible before they even think about 529 plans.

Why? If you are earning, say, $40k, why should you invest to retire on more on than that? The limits the state sets on contributions don't have any obvious connection to personal retirement targets to me, unless of course that target is higher than the limits. Are the withdrawal penalties such that you're better off investing money in a retirement plan and then taking it out to pay for colleges?

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

Post by Rodc » Tue Sep 16, 2014 8:44 am

livesoft wrote:But the average state university is relatively inexpensive, so the middle class could always send at least the first kid to college without any financial aid. Perhaps, the news media has been harping on this so long while only mentioning the cost of the most expensive universities that we have been fooled into thinking one needs financial aid to go to college? I believe the cost of a good degree at a public state-supported university is affordable.

But also check this out, Middle Class Scholarships: http://www.latimes.com/local/la-me-midd ... story.html


Agreed. Add in going to community college for two years then transferring to State U (my understanding is this is straightforward in many states). One can even go to a middling private school for state school money if you are willing to go out of state to a school looking for geographic diversity.

If one has champagne tastes on a beer budget there will always be trouble.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Rodc » Tue Sep 16, 2014 8:54 am

opus360 wrote:
medinme wrote:General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.


How about a 529 versus paying down the mortgage? What are people's thoughts here?


Dogma should always be examined.

One does not need to "max out retirement" or anything else before saving for college, IMHO. But one should have a realistic and reasonably robust plan for balancing needs and meeting the most critical needs with high likelihood. That is many can save a reasonable but not maximal amount for retirement, save some for emergencies, save some for college, and take the occasional vacation or whatever simultaneously.

You can't know for sure you have retirement covered until well along towards retirement age, while most folks will send kids to college well before that. But as long as you are on a decent path towards retirement it is reasonable to divert cash flow towards college savings (whether explicitly by using 529 or implicitly by building up taxable savings or whatever.) One does not have to be maxing out retirement savings plans to be on a decent path towards retirement. Similarly for paying down a house. One approach that will work for some is to pay off the house by the time the first kid goes to college which will free up cash flow for college (or anything else should there be an income disruption or other emergency).
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Tue Sep 16, 2014 9:11 am

But a Roth IRA is a pretty decent way to save for college expenses. Why wouldn't one do that before putting money in a 529 plan?
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by MathWizard » Thu Jan 05, 2017 5:42 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?


My plan was to use Roth IRA contributions, but back then, IRA maximums were $2K ($4k/married couple),
so I also saved in taxable. As the IRA max was raised, I raised Roth contributions and stopped taxable contributions.

By the time college rolled around, I just stopped making ROTH contributions, used the taxable and found I could
cash-flow what I needed. I did put a small amount in 529 in the fall of 2007 invested aggressively as my my wife wanted. Five years later, it had finally made money, at which time I cashed it out. I did get the state tax saving in 2007, so I came out ahead. My wife has not been very high on 529 plans since.



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

Post by Atilla » Thu Jan 05, 2017 6:12 pm

Only have 1 son who entered an in-state college last fall. 10 years ago I started putting some money every month into a 529.

By the time it came to start spending the money, 40% of it was tax free gains I didn't have to work for.

Easy peasy - I'll take it. I like having the separate bucket of college investment funds - once it's gone he's on his own apart from whatever monthly grocery/rent money I care to give him. Ain't no way a cent of my Roth money is going to his schooling.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Rodc » Thu Jan 05, 2017 7:09 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.


No one has to pay upwards of $100,000 a year for college. You can go full ride to the local state U for about $25K - $30K.

Even at very high priced private schools most kids get scholarships, often very generous scholarships.

Like so many items the "list price" is often not the real price.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Rodc » Thu Jan 05, 2017 7:10 pm

livesoft wrote:But a Roth IRA is a pretty decent way to save for college expenses. Why wouldn't one do that before putting money in a 529 plan?


That was my original plan. But I found out I made too much money to contribute to a Roth.

Now if I were smarter and harder working I might be able to find a backdoor way to do this, but I don't have much outside of my 401K to play with.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by GreatOdinsRaven » Sat Jan 07, 2017 1:54 pm

Rodc wrote:
livesoft wrote:But a Roth IRA is a pretty decent way to save for college expenses. Why wouldn't one do that before putting money in a 529 plan?


That was my original plan. But I found out I made too much money to contribute to a Roth.

Now if I were smarter and harder working I might be able to find a backdoor way to do this, but I don't have much outside of my 401K to play with.



Rodc,

Have you considered the backdoor Roth strategy? (I can understand if this doesn't make sense for you, such as having significant outstanding traditional and/or Rollover IRA assets and not wanting to have to convert them all.) I bit the bullet a while back and converted all of mine to Roth. The tax bill was a wee bit painful.

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

Post by oragne lovre » Sat Jan 07, 2017 11:35 pm

This resurrected thread made me look at my Vanguard 529 plans. My current ROI is 45%; it's not bad at all.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Sat Jan 07, 2017 11:56 pm

oragne lovre wrote:This resurrected thread made me look at my Vanguard 529 plans. My current ROI is 45%; it's not bad at all.

LOL! Without a ime frame, 45% could be terrible or could be "not bad at all." But since it's a Vanguard 529 plan, it must be the latter. ;)
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by White Coat Investor » Sun Jan 08, 2017 1:20 am

oragne lovre wrote:This resurrected thread made me look at my Vanguard 529 plans. My current ROI is 45%; it's not bad at all.


Hmmm....2007 to present my XIRR for my eldest is 5.34% per year. Might be 45% cumulative though. 2008 was pretty rough.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Dendritic Tree » Sun Jan 08, 2017 3:48 am

One minor side benefit of 529 plans is that it's very easy to get gift contributions from family through the Ugift website, which many 529 plans participate in. We typically ask for Ugift contributions from family members for our kids' 529 accounts for their birthdays and Christmas, and it's an extremely easy process for friends and family. This has added up to a significant contribution over the years, kind of like an employer match. Of course we also max out our 403(b) accounts and do backdoor Roth contributions every year as well.

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

Post by GreatOdinsRaven » Sun Jan 08, 2017 6:42 am

White Coat Investor wrote:
oragne lovre wrote:This resurrected thread made me look at my Vanguard 529 plans. My current ROI is 45%; it's not bad at all.


Hmmm....2007 to present my XIRR for my eldest is 5.34% per year. Might be 45% cumulative though. 2008 was pretty rough.


That's comparable to both of our Vanguard 529 Nevada plan returns since 2012 (partial year) (as of 12/31/2016). For the majority of that time they've been invested 50/50 in age-based aggressive and moderate funds. We invest the same amount every month automatically (taking the human emotional factor out). For a few months the assets were invested in just the S&P500 and small cap indices and then we decided to completely simplify into the 529 equivalent of target risk & target date funds.

Combined Accounts internal rate of return (AKA Trailing investor return (money-weighted return, internal rate of return) = 5.4%

Trailing portfolio return (time-weighted return, comparable return):
2013 9.3%
2014 7.9%
2015 -2.9%
2016 12.5%


I'm always surprised at the difference between IRR and time weighted returns even though I shouldn't be...

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

Post by likegarden » Sun Jan 08, 2017 10:34 am

We do not have 529s under our names for grandchildren, because we are retired, and in case we ever need long term care and our LTC insurance is no longer able to pay all of the costs, then Medicaid will be able to take that 529 money. But grandparents can give their money to children to fund 529s for their grandchildren to protect against Medicaid.

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

Post by Texas Radio » Sun Jan 08, 2017 10:43 am

I stopped aggressively contributing because it destroys FAFSA scores. I'm self employed and have enough tax deductions that my kids actually might get a little financial aid.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by welldone » Sun Jan 08, 2017 10:50 am

Texas Radio wrote:I stopped aggressively contributing because it destroys FAFSA scores. I'm self employed and have enough tax deductions that my kids actually might get a little financial aid.


Just a small word of warning to anyone planning this strategy. Lots of deductions that are fine on your IRS forms are not considered deductions for college financial aid. Self employed people and small business owners are often rudely shocked to find out that most of their deductions are added back in to their income when calculating FAFSA and CSS forms.

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

Post by oragne lovre » Sun Jan 08, 2017 5:07 pm

livesoft wrote:
oragne lovre wrote:This resurrected thread made me look at my Vanguard 529 plans. My current ROI is 45%; it's not bad at all.

LOL! Without a ime frame, 45% could be terrible or could be "not bad at all." But since it's a Vanguard 529 plan, it must be the latter. ;)

My bad since I forgot to specify a time frame. I started 529s when my kids were born in 2005, thus a 11.5-year time frame. In rough years of 2008, 2009, I kept going and actually did increase a bit monthly contribution.
It's a cumulative earning.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by RudyS » Sun Jan 08, 2017 9:49 pm

Didn't see it mentioned, but "financial aid" is often in the form of student loans, rather than (or in addition to) scholarships. But let's not get this thread locked by discussion of student loans.

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

Post by Texas Radio » Mon Jan 09, 2017 12:40 am

welldone wrote:
Texas Radio wrote:I stopped aggressively contributing because it destroys FAFSA scores. I'm self employed and have enough tax deductions that my kids actually might get a little financial aid.


Just a small word of warning to anyone planning this strategy. Lots of deductions that are fine on your IRS forms are not considered deductions for college financial aid. Self employed people and small business owners are often rudely shocked to find out that most of their deductions are added back in to their income when calculating FAFSA and CSS forms.


not if the deductions are taken at the corporate level before they hit the individual return
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by 523HRR » Mon Jan 09, 2017 6:08 pm

We limit our annual 529 contribution to $10,000 as this is the amount that receives a state tax deduction in CT.

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

Post by ThankYouJack » Mon Jan 09, 2017 6:11 pm

http://www.reuters.com/article/us-column-taylor-bogle-idUSBRE88A0LI20120911 wrote:Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

Jack Bogle: I don't really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I'm not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It's about 60 percent stocks, 40 percent bonds, and it's been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.


I agree with Mr. Bogle on this. I think each person should run the numbers for their own situation and find the estimated tax savings. It may be a lot and worth it or a little and not worth it depending on one's net worth.

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

Post by livesoft » Mon Jan 09, 2017 6:16 pm

If I sell shares in our taxable account at a gain, then we don't have to pay any capital gains tax because our income in engineered to be low and because of previous tax-loss harvesting. That's almost the same as cashing in shares held in a 529 plan. Neither one would have gains taxed, but there is less hassle with the taxable account than with the 529 plan. Also, paying from selling shares held in the taxable account let's us use the American Opportunity Tax Credit.

OK, now that I've written that, it should be even more obvious that 529 plans are a tax break for the wealthy. :)
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Rodc » Mon Jan 09, 2017 8:37 pm

GreatOdinsRaven wrote:
Rodc wrote:
livesoft wrote:But a Roth IRA is a pretty decent way to save for college expenses. Why wouldn't one do that before putting money in a 529 plan?


That was my original plan. But I found out I made too much money to contribute to a Roth.

Now if I were smarter and harder working I might be able to find a backdoor way to do this, but I don't have much outside of my 401K to play with.



Rodc,

Have you considered the backdoor Roth strategy? (I can understand if this doesn't make sense for you, such as having significant outstanding traditional and/or Rollover IRA assets and not wanting to have to convert them all.) I bit the bullet a while back and converted all of mine to Roth. The tax bill was a wee bit painful.

GOR


GOR,

Thanks for the prodding. I had not really looked into this. It turns out to be not really useful to me, but at least I read up on the details and learned something.

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

Post by Jack FFR1846 » Mon Jan 09, 2017 9:29 pm

Rodc wrote:Even at very high priced private schools most kids get scholarships, often very generous scholarships.

Like so many items the "list price" is often not the real price.


Oh, that's nice.

We get zip. We do get to pay list price.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Pdxnative » Mon Jan 09, 2017 9:40 pm

Texas Radio wrote:
welldone wrote:
Texas Radio wrote:I stopped aggressively contributing because it destroys FAFSA scores. I'm self employed and have enough tax deductions that my kids actually might get a little financial aid.


Just a small word of warning to anyone planning this strategy. Lots of deductions that are fine on your IRS forms are not considered deductions for college financial aid. Self employed people and small business owners are often rudely shocked to find out that most of their deductions are added back in to their income when calculating FAFSA and CSS forms.


not if the deductions are taken at the corporate level before they hit the individual return


Texas Radio, do you have personal experience with this issue?

Most of the info I've seen, and discussions with other business owners, suggests that colleges add back many of the deductions that appear on the corporate return. Depreciation, travel, phone, retirement, etc. Have you not found that to be the case?

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

Post by Big Dog » Mon Jan 09, 2017 10:00 pm

The home you live in is typically not treated as an asset for financial aid.


That is only true for FAFSA. Some/many private colleges use CSS-Profile which does, in fact, include home equity as part of the parental assets. (Parental assets are counted ~5.6% in the FinAid formula.)

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

Post by ThankYouJack » Tue Jan 10, 2017 10:01 pm

livesoft wrote:If I sell shares in our taxable account at a gain, then we don't have to pay any capital gains tax because our income in engineered to be low and because of previous tax-loss harvesting. That's almost the same as cashing in shares held in a 529 plan. Neither one would have gains taxed, but there is less hassle with the taxable account than with the 529 plan. Also, paying from selling shares held in the taxable account let's us use the American Opportunity Tax Credit.

OK, now that I've written that, it should be even more obvious that 529 plans are a tax break for the wealthy. :)


What sort of "income engineering"? The majority of my portfolio is going in tax-free but I plan to have a solid strategy for minimizing taxes on withdrawals.

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

Post by livesoft » Tue Jan 10, 2017 10:13 pm

ThankYouJack wrote:What sort of "income engineering"? The majority of my portfolio is going in tax-free but I plan to have a solid strategy for minimizing taxes on withdrawals.

The usual stuff:
viewtopic.php?t=87471
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by ThankYouJack » Wed Jan 11, 2017 9:50 am

livesoft wrote:
ThankYouJack wrote:What sort of "income engineering"? The majority of my portfolio is going in tax-free but I plan to have a solid strategy for minimizing taxes on withdrawals.

The usual stuff:
viewtopic.php?t=87471



Ok thanks. Some good info in those threads.

My goal will be to be in the 15% bracket on years that I withdrawal from the taxable account and pay $0 in capital gains. I'd like to be debt free, have 2-3 kids, withdrawal up to $100k annually. Even with a portfolio that is heavy in pre-tax (say 80% tax-deferred, 10% roth, 10% taxable), I think that'll still be possible, especially if I "engineer" the taxable withdrawals. I would also drawdown the taxable before my kids enter college if financial aide is a possibility.

So my reasons at this time for not funding a 529 include:
- I'm not getting a state tax deduction from the 529 (that's a big one)
- I would lose flexibility if the money is "tied" up. Granted I could always access
- I would be paying a higher ER
- I would not be getting some of tax credits for the college payments if the 529 is fully funded
- It could negatively affect financial aide
- I would not be tax loss harvesting or donating shares with the biggest gains


The downside for me with funding a taxable account instead of a 529 is dividend taxes, but everything considered, the difference would be minimal. Also, there's a chance the tax laws could change, or I change my retirement plans and the LTCG get taxed at more than $0.

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

Post by Rodc » Wed Jan 11, 2017 11:59 am

opus360 wrote:
medinme wrote:General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.


How about a 529 versus paying down the mortgage? What are people's thoughts here?


If you can pay off the mortgage before college it frees up cash flow that can go towards college. But otherwise if you do not have the funds on hand to pay for college you end up either taking out student loans, or a home equity loan (which is moving backwards).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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

Post by Rodc » Wed Jan 11, 2017 12:05 pm

livesoft wrote:
ChosenGSR wrote:I'm a little confused regarding financial aid consideration. It seems to me the vast majority of people with 529s probably have enough income not to qualify for any financial aid to begin with? Maybe things have changed but middle class income basically rules out any financial aid.

Yes, that's the conclusion of the article and the GAO report: The wealthy are the ones with 529 plans and the wealthy are not going to qualify for financial aid to begin with. The middle class should save/invest in retirement plans to the maximum extent possible before they even think about 529 plans.


Depends a little on what "wealthy" means. And it depends on how many kids you have in college at the same time.

If for example you have twins, and your family expected contribution is $60K (the associated income/savings is considered wealthy by some and upper middle class by others, and I have seen it hotly debated), that is $30K each. So no aid if going to State U, but you may get some aid if you go to a private school.

Seems like an odd loophole since the total cost of college is the same for twins vs two kids 4+ years apart. But in one case you are expected to pay $240K and in the other $480K.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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

Post by ThankYouJack » Wed Jan 11, 2017 12:31 pm

Rodc wrote:
opus360 wrote:
medinme wrote:General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.


How about a 529 versus paying down the mortgage? What are people's thoughts here?


If you can pay off the mortgage before college it frees up cash flow that can go towards college. But otherwise if you do not have the funds on hand to pay for college you end up either taking out student loans, or a home equity loan (which is moving backwards).


With no state tax deduction, my recommendation is to get debt free before funding a 529. Even with low interest rates, being debt free is still a good thing ;)

sc9182
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by sc9182 » Wed Jan 11, 2017 12:40 pm

We all know the "limited but obvious" reasons for contributing to the 529 plan(s).

Many reasons for NOT funding a 529 include (these are NOT necessarily universally applicable, depends on income brackets, life-stages;
These reasons mostly appeal to medium/middle/upper-middle/low income families:
(*including a few reasons listed by 'ThankYouJack')

- Not getting a state tax deduction from the 529 (this is a big reason! In states with NO income tax, means no tax deduction is applicable!)
- Nobody talks about this, though may sound silly: there is NO matching-contributions made by employers, Feds, States or other entities. Hence, these is NO additional incentive/motivation towards 529 contributions (or at least let govt contribute: American opportunity tax credit or something to sweeten 529-deal)
- would lose flexibility if the money is "tied" up ONLY for education reasons - Granted we could always give this money away to other college kids
- would be paying a considerably higher ExpenseRatio/ER in limited funds offered in 529 plans (some 529 plan high ER is 1.13% !; where as typical Vanguard ETFs carry 0.09%)
- would not be getting some of tax credits for the college payments if the 529 is overly/fully funded
- It could negatively affect financial aide for the kids (and it could affect FAFSA loans, loan-rates too!)
- would NOT be able to tax loss harvesting or donating shares which had large-gains
- the 529 withdrawls NEGATIVELY affect other tax credits (Earned income tax credit, American Opportunity Tax Credit etc)
http://blogs.wsj.com/totalreturn/2015/0 ... ax-credit/
- Low/medium income household better benefit from American Opportunity Tax Credit,
Deduction using Lifetime Learning Tax Credit (LLTC).
The LLTC allows greater benefit due to reduction in AGI
(reduced AGI could lead to other tax benefits -
Child Tax credit, Eeaned Income Tax Credit, allowing IRA-contribution
or allowing other passive-income/depreciation deductions etc)
Ref: https://www.edvisors.com/education-tax- ... -benefits/

- what if the amount grow too much (due to contributions and market growth), and if your kid(s)
got scholarships ? You will end-up with 'excess' 529 monies - you have to give to somebody else ?
Unfortunately - you can't tax-deduct the 'given-away' monies (if left in regular brokerage accounts,
Giving Stocks to charity is an amazing thing - you don't pay tax on growth, let alone fully tax-deduct the donation !!)
- What if kids do NOT go to college - or do not get admissions to good colleges, instead end-up in local County college - which doesn't cost much to begin with !?
- You can't get some lower-tax-bracket dividend income (tax-advantage, unless you are making over 400K/year!)
if the money is stuck/tied-up in 529 (insted of brokerage)
- What if there are higher priorities in life such as "life-and-death or medical-help" instead of future-college costs?
How do you withdraw 529 monies ?
- Most importantly - have you already maximized your "tax-sheltered/deffered" accounts to maximum: 401k, IRA, roth-IRA, back-door Roth conversion,
your spouse's 401k, IRA, roth-IRA yada-yada-yada ..
- What if new regulations/proposals comes into effect such as - "proposal for a federal-state partnership to provide tuition-free access to community college students" -- or study "two-years at community college" then move to "UT Austin or other reputed state college which allows upto 2-years of credits from in-state Community colleges! (Every kid is smart, but not all of them will invariably land in Ivy-leagues! Otherwise - community colleges be vacant/dead by now!). May be community college is the reason why you atleast allow your baby-kid to grow with you 2-or-more years at home, without needing to send them farther way (excessive bullying, partying, self-control or the lack of, drugs - among many other vices; not that you can fully stop those vices, at very least you are 'more' aware of those and plan future life events better if kid stays home or locally !?)
- If state goes bankrupt (we know cities/munis do! San Bernandino, Detroit, Jefferson/Alabama etc ..) -- what would happen to 529 funds, let alone access to those funds while your kids then in college ??
- States do NOT offer backstop/protection if 529 funds get mis-appropriated/lost/defrauded
where as SIPC, FINRA offers $500K protection at individual brokerage level ?
(Search: "Utah's 529 plan settles fraud case - InvestmentNews"
and "Illinois college savings plan is $560 million short")
- How do you plan to "Handling 529 Plan College Money in a Divorce or Separation or re-marriage" ?
- Creditor protection is limited to only about half the states offer such protection, that too on "limited amounts" !
- Lets say, at the time of "withdrawals" the market tanked (anybody remember 2008-2009?), and you actually
lose significant chunk of invested monies in your 529 plan. You can NOT take tax-loss, or tax-loss-harvest those losses!!
- Worse yet, if you withdraw any monies for non-education purpose, you may be dinged with 10% penalty plus TAX on grown set of stocks/funds which are sold! Guessing there is "tax" on the grown stocks/funds (which have been withdrawn), where as you can't deduct "lost" stocks (withdrawls) Someone welcome to clarify .. ?
- Isn't it better to be FREE from mortgage/student-loan/credit-card-balance/debt, before thinking about 529 contributions ?

- Would it be better to fully pay-off the house prior your first-kid high-school junior-year -- since primary residence is not considered part of FAFSA ?

BTW - anybody can "directly" pay to educational institution or Medical-bills without incurring TAX or gift-tax, so its not like a rich uncle or grandparent can not contribute to your education without 529 setup !!

If you still decide a strong case (and very high income :-) for 529 plan -
this article is not complete without Kitches suggestions regarding correctly planning your 529 strategy:
https://www.kitces.com/blog/grandparent ... ncial-aid/

** Please note that some of the points may appear overlapping , but elaborated nonetheless: for clarifying some not-so-obvious scenarios. NOT a tax expert here, nor fully comprehend some IRS publications; do seek CPA/TAX-advisers assistance at times. References have been attributed to the extent possible. Comments/improvements are welcome !

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

Post by Rodc » Wed Jan 11, 2017 12:58 pm

ThankYouJack wrote:
Rodc wrote:
opus360 wrote:
medinme wrote:General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.


How about a 529 versus paying down the mortgage? What are people's thoughts here?


If you can pay off the mortgage before college it frees up cash flow that can go towards college. But otherwise if you do not have the funds on hand to pay for college you end up either taking out student loans, or a home equity loan (which is moving backwards).


With no state tax deduction, my recommendation is to get debt free before funding a 529. Even with low interest rates, being debt free is still a good thing ;)


Debt free is a good thing.

But you also have to consider cash flow and savings. Being debt free but left unable to send your kid to college may not be the outcome one wants. Or having to turn around and take out a higher interest HELOC. Being on the path to debt free, but not getting there in time to free up cash flow for college may not be too helpful.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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

Post by Rodc » Wed Jan 11, 2017 1:06 pm

sc9182 wrote:
If you still decide a strong case (and very high income :-) for 529 plan -
this article is not complete without Kitches suggestions regarding correctly planning your 529 strategy:
https://www.kitces.com/blog/grandparent ... ncial-aid/



From the linked article:

Yet the challenge is that if not done carefully, using a grandparent-owned 529 plan or gifting assets from a grandparent to grandchild for college can adversely impact the grandchildā€™s own ability to qualify for financial aid, implicitly diminishing the value of the gift.


That is not limited to 529 plans. Grandparents can screw this up in other ways, and worse ways. Leaving a trust for example in the child's name is treated as the child's own money, just like it was in their own savings account and over 4 years subject to approximately 50% use as expected child contribution. If it is in the parent's name it is subject to approximately 20% use as expected parental contribution. So if grandma is hoping this money will be available for graduate school, home down payment, kid to start their own business, they need to be careful.

I am sure there are other ways to mess this up.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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

Post by ThankYouJack » Wed Jan 11, 2017 1:20 pm

Rodc wrote:
ThankYouJack wrote:
Rodc wrote:
opus360 wrote:
medinme wrote:General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.


How about a 529 versus paying down the mortgage? What are people's thoughts here?


If you can pay off the mortgage before college it frees up cash flow that can go towards college. But otherwise if you do not have the funds on hand to pay for college you end up either taking out student loans, or a home equity loan (which is moving backwards).


With no state tax deduction, my recommendation is to get debt free before funding a 529. Even with low interest rates, being debt free is still a good thing ;)


Debt free is a good thing.

But you also have to consider cash flow and savings. Being debt free but left unable to send your kid to college may not be the outcome one wants. Or having to turn around and take out a higher interest HELOC. Being on the path to debt free, but not getting there in time to free up cash flow for college may not be too helpful.


Kids can go to great colleges without significant help from their parents. My wife and I both went to a very expensive private university with pretty much no help from our parents. We received a good amount of aid (grants, work-study, loans) and also had summer internships. We never sweated the loans because our educations lead us to good enough jobs to easily pay off the debt.

We do plan to pay for our children's education but it's pretty far down on our list (after our own retirement, becoming debt free, helping parents financially in later years of life, spending on our current family situation, having savings to help children down the road - post college if needed - like wedding, down payments for first home, first car).

I realize this often isn't the case, but it's my strong belief that a college education should enable graduates to get jobs to pay for their education.

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

Post by bigred77 » Wed Jan 11, 2017 1:36 pm

I'm really shocked at how controversial 529 plan seem to be on this board. To me, as Livesoft points out, it's mainly a tax break for the wealthy. They can still be a great tool for high income parents. They offer the most benefit if you can contribute to them early.

If paying for your kids college education is something you want and plan to do, AND you have a high enough income early in their lives (post maxing out retirement space, buying a house if that's a goal of yours, and generally meeting all of your other financial goals/obligations) then of course 529 plans make sense. They can grow for a decade or two tax free and be withdrawn tax free. If your state offers an income tax deduction then that's just icing on the cake. That would impact my decision on which state's 529 plan to use and how to time my contributions, not tip the scales on whether or not to invest in one in the first place.

I have absolutely 0 worries about the account growing "too large". Please give me some of those problems in my life. If you have too much you can simply withdraw the money and pay some penalties and tax on the gains. Or you can spend it on another kid. Or you can earmark it for a grandchild. Or the same child can use it for grad school. It will be fine. You can always optimize the use of excess funds in the future should that occur.

97% of people don't use 529s because your income has to be in pretty darn high, early in your career, for them to make sense. Plus you need to be pretty on top of things financially (saving early and often, having kids after your already established in your career, paying off your own education debts, buying the house you may want, etc). There are a number of 30+ yr old bogleheads who are becoming first time parents where 529 plan will absolutely make sense. That 3% of the population is going to be VERY over represented on this board.
Last edited by bigred77 on Wed Jan 11, 2017 1:37 pm, edited 1 time in total.

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

Post by Rodc » Wed Jan 11, 2017 1:37 pm

ThankYouJack wrote:
Rodc wrote:
ThankYouJack wrote:
Rodc wrote:
opus360 wrote:
How about a 529 versus paying down the mortgage? What are people's thoughts here?


If you can pay off the mortgage before college it frees up cash flow that can go towards college. But otherwise if you do not have the funds on hand to pay for college you end up either taking out student loans, or a home equity loan (which is moving backwards).


With no state tax deduction, my recommendation is to get debt free before funding a 529. Even with low interest rates, being debt free is still a good thing ;)


Debt free is a good thing.

But you also have to consider cash flow and savings. Being debt free but left unable to send your kid to college may not be the outcome one wants. Or having to turn around and take out a higher interest HELOC. Being on the path to debt free, but not getting there in time to free up cash flow for college may not be too helpful.


Kids can go to great colleges without significant help from their parents. My wife and I both went to a very expensive private university with pretty much no help from our parents. We received a good amount of aid (grants, work-study, loans) and also had summer internships. We never sweated the loans because our educations lead us to good enough jobs to easily pay off the debt.

We do plan to pay for our children's education but it's pretty far down on our list (after our own retirement, becoming debt free, helping parents financially in later years of life, spending on our current family situation, having savings to help children down the road - post college if needed - like wedding, down payments for first home, first car).

I realize this often isn't the case, but it's my strong belief that a college education should enable graduates to get jobs to pay for their education.


To each their own. My priorities are different.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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

Post by nash031 » Wed Jan 11, 2017 3:11 pm

Interesting thread; wish I'd found it before opening mine a few months ago after baby girl was born. My thoughts/situation:

- We max IRAs and 403(b)s with some left to go into taxable investment accounts each year.
- The state in which I file income tax does have deductible 529 contributions.
- Only a portion of my earnings are taxable in said state, leading to a relatively small tax burden each year.

Thus, it made sense to me to fund the 529 up to the point where I would pay $0 in state taxes each year, or up to the deductible limit, whichever is lower. I doubt I will ever contribute to the 529 up to the maximum annual limit, nor will we approach the overall limit as they are very high relative to our contributions.

I viewed the problem as this, relative to debt and other investments:

- State tax rate was 3.4%.
- Auto loan was 2.99%
- Mortgage is 2.7%
- Student loan is under 1%.

I contribute to the 529 to eliminate my personal state tax burden. Then we pay the auto loan off, then we let the rest of it ride long term and invest in taxable accounts as needed after 403(b) and IRA contributions are maxed. So it really became kind of a "debt payoff" mindset as pertained to the 529, except in this case, the "debt" being serviced is the following year's expected state tax burden.

Plus, the state plans include low-fee indexing options, so really the 529 - for us - seemed like a no-brainer. We're just not going to go bananas contributing to it. As others have said, it'll help take a nice dent out of college costs in 18 years, but probably won't fund the whole kit and caboodle. We plan to tell our daughter we're willing to fund up to four years in-state tuition, and anything above that will require scholarships, loans, and part-time work. This was basically the plan under which both of us earned our degrees while minimizing the impact on our parents financial security.

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

Post by ThankYouJack » Wed Jan 11, 2017 4:09 pm

nash031 wrote:
- We max IRAs and 403(b)s with some left to go into taxable investment accounts each year.


I'm guessing you don't have a 457 available or you already looked into it and it's not a good option? Just wanted to mention it, incase it helps with some additional tax savings.


Rodc wrote:
ThankYouJack wrote:
Rodc wrote:
ThankYouJack wrote:
Rodc wrote:
If you can pay off the mortgage before college it frees up cash flow that can go towards college. But otherwise if you do not have the funds on hand to pay for college you end up either taking out student loans, or a home equity loan (which is moving backwards).


With no state tax deduction, my recommendation is to get debt free before funding a 529. Even with low interest rates, being debt free is still a good thing ;)


Debt free is a good thing.

But you also have to consider cash flow and savings. Being debt free but left unable to send your kid to college may not be the outcome one wants. Or having to turn around and take out a higher interest HELOC. Being on the path to debt free, but not getting there in time to free up cash flow for college may not be too helpful.


Kids can go to great colleges without significant help from their parents. My wife and I both went to a very expensive private university with pretty much no help from our parents. We received a good amount of aid (grants, work-study, loans) and also had summer internships. We never sweated the loans because our educations lead us to good enough jobs to easily pay off the debt.

We do plan to pay for our children's education but it's pretty far down on our list (after our own retirement, becoming debt free, helping parents financially in later years of life, spending on our current family situation, having savings to help children down the road - post college if needed - like wedding, down payments for first home, first car).

I realize this often isn't the case, but it's my strong belief that a college education should enable graduates to get jobs to pay for their education.


To each their own. My priorities are different.


Yep, I guess that's why it's "personal" finance :D Everyone's situation and preferences will be difference including funding a 529. I have a feeling both yours and my kids will be in pretty good shape when the time comes :sharebeer

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

Post by Rodc » Wed Jan 11, 2017 4:18 pm

ThankYouJack wrote:

To each their own. My priorities are different.


Yep, I guess that's why it's "personal" finance :D Everyone's situation and preferences will be difference including funding a 529. I have a feeling both yours and my kids will be in pretty good shape when the time comes :sharebeer


I sure hope so! :sharebeer
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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

Post by kingsnake » Thu Jan 12, 2017 3:27 pm

I felt Wisconsin's plan had too high costs to make the deduction worthwhile. I have 5 and 7 year olds and each has 55k in the Nevada (Vanguard) age based aggressive 529. I stopped contributing in 2015 since I don't know how much money to put in there. Tax loss harvesting in taxable may be the better route to fund the rest of their education down the road? who knows. :confused

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