"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
tadamsmar
Posts: 7780
Joined: Mon May 07, 2007 12:33 pm

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

Post by tadamsmar » Tue May 22, 2018 7:17 am

finite_difference wrote:
Mon May 21, 2018 9:03 pm
tadamsmar wrote:
Mon May 21, 2018 8:38 pm
Could someone channel college expenses through a 529 to avoid state income taxes? In most states, contributions can reduce income taxes.

The strategy would be to have money in it for short time so it does not effect federal student aid. But maybe that would not work?
Yes, I think in most(?) states this actually works. So you can channel funds through and reap the state income tax benefit, and then just apply the funds for qualified expenses. So in theory you could have it in taxable funds, sell them, then channel through a 529 to get the state income tax deduction, and then use it to pay for college.

Some states I think have a waiting period before funds can be used, though might only be a year or two. So you want to verify this strategy can be used for your situation.
Also, there seem to be strategies involving grandparent 529s where the withdrawals are made for the later college years to avoid impact on federal aid, in impact being that withdrawals from granny-529s are treated and student income on the aid forms if they are done in a certain relative time-frame. Granny-529s are never treated as assets. There are also some 529 transfer strategies to avoid aid impact, I think, the shell game.

So, perhaps there are some strategies where the non-rich can get a net gain from avoiding some taxes.

User avatar
tadamsmar
Posts: 7780
Joined: Mon May 07, 2007 12:33 pm

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

Post by tadamsmar » Tue May 22, 2018 7:24 am


User avatar
tadamsmar
Posts: 7780
Joined: Mon May 07, 2007 12:33 pm

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

Post by tadamsmar » Tue May 22, 2018 7:32 am

Also, the title of this thread is "529 College Saving Plans". They are not just college savings plans. Seems I recall they cover tuition from whatever qualifies, from golf school to beauty school. I did quick search here:

https://fafsa.ed.gov/FAFSA/app/schoolSearch

And find that I can get some massage training nearby.

wrongfunds
Posts: 1819
Joined: Tue Dec 21, 2010 3:55 pm

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

Post by wrongfunds » Tue May 22, 2018 11:04 am

tadamsmar wrote:
Tue May 22, 2018 7:32 am
Also, the title of this thread is "529 College Saving Plans". They are not just college savings plans. Seems I recall they cover tuition from whatever qualifies, from golf school to beauty school. I did quick search here:

https://fafsa.ed.gov/FAFSA/app/schoolSearch

And find that I can get some massage training nearby.
Is there some wink wink nudge nudge there?

CnC
Posts: 537
Joined: Thu May 11, 2017 12:41 pm

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

Post by CnC » Tue May 22, 2018 12:41 pm

Realistically though just how many people make enough to fund one? I just see very very little use in doing one.

You are talking about needing a minimum saving amount of 48,000 before it makes sense to save in one.

On top of that many people who are able to save 48,000 per year may have after tax 401k options that will bump it into the 70,000 a year range HSA's also will move that needle up.

Then there is always the need for money in a taxable account to help balance taxes in retirement and help fund a early separation from your employer.


Perhaps after that full ±100,000 is saved per year then and only then would a 529 make sense.

User avatar
DaftInvestor
Posts: 4057
Joined: Wed Feb 19, 2014 10:11 am

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

Post by DaftInvestor » Tue May 22, 2018 12:57 pm

CnC wrote:
Tue May 22, 2018 12:41 pm
Realistically though just how many people make enough to fund one? I just see very very little use in doing one.

You are talking about needing a minimum saving amount of 48,000 before it makes sense to save in one.

On top of that many people who are able to save 48,000 per year may have after tax 401k options that will bump it into the 70,000 a year range HSA's also will move that needle up.

Then there is always the need for money in a taxable account to help balance taxes in retirement and help fund a early separation from your employer.


Perhaps after that full ±100,000 is saved per year then and only then would a 529 make sense.
How do you calculate needing a minimum save of 48,000?
Futhermore - how do you figure only after saving $100,000 a year does it make sense?
Are their some additional tax advantaged savings I'm not familiar with?

For me - my total tax advantaged savings:
$18,500 401K + $5,500 Roth-backdoor IRA + $10,000 ibonds (yes - realize I could get another $5K in iBonds if I over-pay taxes). And many don't think the low rate of iBonds are worth the trouble so are left with only the first two.
I also worked at a company for a period of time that had NO 401K account - so my tax-advantaged space was even lower.
Are you assuming everyone is married with working spouses or that everyone has access to an HSA or is there something else I am missing?
I don't have an HSA available to me unless I don't want to give up my low-deductible corporate paid benefits (which are really good). It would cost me many thousands in insurance to get a little HSA space so I don't bother.

I couldn't help but notice that you started one thread talking about "why people think they will be in a lower tax bracket when in retirement" then in a post above you stated that you hope to retire before college and pay less taxes and thus the 529 won't matter to you. Seems like you are changing your circumstances to make your arguments.

CnC
Posts: 537
Joined: Thu May 11, 2017 12:41 pm

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

Post by CnC » Tue May 22, 2018 1:36 pm

DaftInvestor wrote:
Tue May 22, 2018 12:57 pm
CnC wrote:
Tue May 22, 2018 12:41 pm
Realistically though just how many people make enough to fund one? I just see very very little use in doing one.

You are talking about needing a minimum saving amount of 48,000 before it makes sense to save in one.

On top of that many people who are able to save 48,000 per year may have after tax 401k options that will bump it into the 70,000 a year range HSA's also will move that needle up.

Then there is always the need for money in a taxable account to help balance taxes in retirement and help fund a early separation from your employer.


Perhaps after that full ±100,000 is saved per year then and only then would a 529 make sense.
How do you calculate needing a minimum save of 48,000?
Futhermore - how do you figure only after saving $100,000 a year does it make sense?
Are their some additional tax advantaged savings I'm not familiar with?

For me - my total tax advantaged savings:
$18,500 401K + $5,500 Roth-backdoor IRA + $10,000 ibonds (yes - realize I could get another $5K in iBonds if I over-pay taxes). And many don't think the low rate of iBonds are worth the trouble so are left with only the first two.
I also worked at a company for a period of time that had NO 401K account - so my tax-advantaged space was even lower.
Are you assuming everyone is married with working spouses or that everyone has access to an HSA or is there something else I am missing?
I don't have an HSA available to me unless I don't want to give up my low-deductible corporate paid benefits (which are really good). It would cost me many thousands in insurance to get a little HSA space so I don't bother.

I couldn't help but notice that you started one thread talking about "why people think they will be in a lower tax bracket when in retirement" then in a post above you stated that you hope to retire before college and pay less taxes and thus the 529 won't matter to you. Seems like you are changing your circumstances to make your arguments.
Well yes I am using my situation as an example and assuming that if you have children and you are saving for college you are married and both working.
That is 18,500 x2 + 5500 x 2 that is where I get the number. It certainly could be different but I am not familiar with many single parents who have the 24,000 retirement bucket filled each year and have money to spare. Untill everyone is filling their own retirement buckets there is no reason to put money in a 529. Buckets may vary but generally if you make enough money to fill yours you won't have a ton left over to invest in hope and chance.


Our personal situation is that we have a total of over 70k of tax advantaged space. We can not yet hit that number but we are actively trying. Once we hit that number we will try to save a reasonable number in our brokerage account in case our fortunes turn sour.

If we manage to save 70k+ a year we will be looking very seriously at retiring early when our kids are still in college rather than run into the tax issues I was referring to in the other thread.

Hopefully early enough that we will be able to fund our kids college expenses out of our taxable account for a relatively modest sum. If I choose to do this I likely won't do any Roth conversions for those years.

I have wondered what having no taxable income would do to financial aid prospects.

Or the world markets may melt down for the next 100 years and none of it will matter.

Please show one single example of where or how I contradicted myself before attempting to accuse me of something.

I was simply using my situation as an example of why we would need to make a whole lot more money before we would even consider a 529.

In case you were actually asking and didn't know all the tax advantaged space and not trying to make a point. Tax advantaged space DW 55k for 401k 5.5k for IRA, DH 18.5k for 457, 5.5k IRA, 7k VAC, 4k pension all adds up to 95.5k we can't fill this full amount yet but even after we do we will need to put a reasonable amount into brokerage incase we run into some issue while we are young.

smitcat
Posts: 1868
Joined: Mon Nov 07, 2016 10:51 am

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

Post by smitcat » Tue May 22, 2018 1:45 pm

CnC wrote:
Tue May 22, 2018 1:36 pm
DaftInvestor wrote:
Tue May 22, 2018 12:57 pm
CnC wrote:
Tue May 22, 2018 12:41 pm
Realistically though just how many people make enough to fund one? I just see very very little use in doing one.

You are talking about needing a minimum saving amount of 48,000 before it makes sense to save in one.

On top of that many people who are able to save 48,000 per year may have after tax 401k options that will bump it into the 70,000 a year range HSA's also will move that needle up.

Then there is always the need for money in a taxable account to help balance taxes in retirement and help fund a early separation from your employer.


Perhaps after that full ±100,000 is saved per year then and only then would a 529 make sense.
How do you calculate needing a minimum save of 48,000?
Futhermore - how do you figure only after saving $100,000 a year does it make sense?
Are their some additional tax advantaged savings I'm not familiar with?

For me - my total tax advantaged savings:
$18,500 401K + $5,500 Roth-backdoor IRA + $10,000 ibonds (yes - realize I could get another $5K in iBonds if I over-pay taxes). And many don't think the low rate of iBonds are worth the trouble so are left with only the first two.
I also worked at a company for a period of time that had NO 401K account - so my tax-advantaged space was even lower.
Are you assuming everyone is married with working spouses or that everyone has access to an HSA or is there something else I am missing?
I don't have an HSA available to me unless I don't want to give up my low-deductible corporate paid benefits (which are really good). It would cost me many thousands in insurance to get a little HSA space so I don't bother.

I couldn't help but notice that you started one thread talking about "why people think they will be in a lower tax bracket when in retirement" then in a post above you stated that you hope to retire before college and pay less taxes and thus the 529 won't matter to you. Seems like you are changing your circumstances to make your arguments.
Well yes I am using my situation as an example and assuming that if you have children and you are saving for college you are married and both working.
That is 18,500 x2 + 5500 x 2 that is where I get the number. It certainly could be different but I am not familiar with many single parents who have the 24,000 retirement bucket filled each year and have money to spare. Untill everyone is filling their own retirement buckets there is no reason to put money in a 529. Buckets may vary but generally if you make enough money to fill yours you won't have a ton left over to invest in hope and chance.


Our personal situation is that we have a total of over 70k of tax advantaged space. We can not yet hit that number but we are actively trying. Once we hit that number we will try to save a reasonable number in our brokerage account in case our fortunes turn sour.

If we manage to save 70k+ a year we will be looking very seriously at retiring early when our kids are still in college rather than run into the tax issues I was referring to in the other thread.

Hopefully early enough that we will be able to fund our kids college expenses out of our taxable account for a relatively modest sum. If I choose to do this I likely won't do any Roth conversions for those years.

I have wondered what having no taxable income would do to financial aid prospects.

Or the world markets may melt down for the next 100 years and none of it will matter.

Please show one single example of where or how I contradicted myself before attempting to accuse me of something.

I was simply using my situation as an example of why we would need to make a whole lot more money before we would even consider a 529.
Curious question -
If you have not yet been able to fill the tax advantage space to then fill over that amount in brokerage....
"Our personal situation is that we have a total of over 70k of tax advantaged space. We can not yet hit that number but we are actively trying. Once we hit that number we will try to save a reasonable number in our brokerage account in case our fortunes turn sour."

Then how will you have enough to fund college out of that same taxable account?.....
"Hopefully early enough that we will be able to fund our kids college expenses out of our taxable account for a relatively modest sum."

CnC
Posts: 537
Joined: Thu May 11, 2017 12:41 pm

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

Post by CnC » Tue May 22, 2018 4:13 pm

smitcat wrote:
Tue May 22, 2018 1:45 pm
CnC wrote:
Tue May 22, 2018 1:36 pm
DaftInvestor wrote:
Tue May 22, 2018 12:57 pm
CnC wrote:
Tue May 22, 2018 12:41 pm
Realistically though just how many people make enough to fund one? I just see very very little use in doing one.

You are talking about needing a minimum saving amount of 48,000 before it makes sense to save in one.

On top of that many people who are able to save 48,000 per year may have after tax 401k options that will bump it into the 70,000 a year range HSA's also will move that needle up.

Then there is always the need for money in a taxable account to help balance taxes in retirement and help fund a early separation from your employer.


Perhaps after that full ±100,000 is saved per year then and only then would a 529 make sense.
How do you calculate needing a minimum save of 48,000?
Futhermore - how do you figure only after saving $100,000 a year does it make sense?
Are their some additional tax advantaged savings I'm not familiar with?

For me - my total tax advantaged savings:
$18,500 401K + $5,500 Roth-backdoor IRA + $10,000 ibonds (yes - realize I could get another $5K in iBonds if I over-pay taxes). And many don't think the low rate of iBonds are worth the trouble so are left with only the first two.
I also worked at a company for a period of time that had NO 401K account - so my tax-advantaged space was even lower.
Are you assuming everyone is married with working spouses or that everyone has access to an HSA or is there something else I am missing?
I don't have an HSA available to me unless I don't want to give up my low-deductible corporate paid benefits (which are really good). It would cost me many thousands in insurance to get a little HSA space so I don't bother.

I couldn't help but notice that you started one thread talking about "why people think they will be in a lower tax bracket when in retirement" then in a post above you stated that you hope to retire before college and pay less taxes and thus the 529 won't matter to you. Seems like you are changing your circumstances to make your arguments.
Well yes I am using my situation as an example and assuming that if you have children and you are saving for college you are married and both working.
That is 18,500 x2 + 5500 x 2 that is where I get the number. It certainly could be different but I am not familiar with many single parents who have the 24,000 retirement bucket filled each year and have money to spare. Untill everyone is filling their own retirement buckets there is no reason to put money in a 529. Buckets may vary but generally if you make enough money to fill yours you won't have a ton left over to invest in hope and chance.


Our personal situation is that we have a total of over 70k of tax advantaged space. We can not yet hit that number but we are actively trying. Once we hit that number we will try to save a reasonable number in our brokerage account in case our fortunes turn sour.

If we manage to save 70k+ a year we will be looking very seriously at retiring early when our kids are still in college rather than run into the tax issues I was referring to in the other thread.

Hopefully early enough that we will be able to fund our kids college expenses out of our taxable account for a relatively modest sum. If I choose to do this I likely won't do any Roth conversions for those years.

I have wondered what having no taxable income would do to financial aid prospects.

Or the world markets may melt down for the next 100 years and none of it will matter.

Please show one single example of where or how I contradicted myself before attempting to accuse me of something.

I was simply using my situation as an example of why we would need to make a whole lot more money before we would even consider a 529.
Curious question -
If you have not yet been able to fill the tax advantage space to then fill over that amount in brokerage....
"Our personal situation is that we have a total of over 70k of tax advantaged space. We can not yet hit that number but we are actively trying. Once we hit that number we will try to save a reasonable number in our brokerage account in case our fortunes turn sour."

Then how will you have enough to fund college out of that same taxable account?.....
"Hopefully early enough that we will be able to fund our kids college expenses out of our taxable account for a relatively modest sum."

Easy I'm a dumb kid. :mrgreen:

I graduated in 2008 and everything I heard about was how awful stocks were I had a pension and my wife did the minimum for a company match.

I had no intention in throwing any money in that stock market scam. We paid off our house and began just saving money in CD's with the intention of buying some farm ground as our man investments. Well it turned out we didn't have nearly enough to compete with the big boys in patched overalls driving 30 year old trucks.

Funny story, doctors and lawyers have nothing on the net worth of farm families.

Anyway long story short we have nearly 2 years salary saved in brokerage accounts now and even if we don't touch them, they should grow quite a bit in the next 15 -20 years.

I know logically we could run ourselves at a deficit for a few years maxing out the entirety of our tax deferred space but my wife refuses to spend more than we make so that's my story. We end up positive ±$10k a year because 1k a month in the green is all the closer I am allowed to cut our finances. So once a year we put that 10k into our brokerage account and move on.

The goal is in a few years our raises will allow us to fill the entirety of our tax advanged space and then we will find something else to do with the extra. Maybe rental houses or a new home.

keith6014
Posts: 183
Joined: Thu Jan 02, 2014 11:58 pm

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

Post by keith6014 » Tue May 22, 2018 5:44 pm

If your state doesn't offer a tax benefit is it worth putting money in a 529?
I live in a state (NJ) where I get no state income tax benefit, I have been setting aside 27k per year for my 2 children aged 4 and 2. After reading this thread it makes me wonder if its worth it

randomguy
Posts: 6295
Joined: Wed Sep 17, 2014 9:00 am

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

Post by randomguy » Tue May 22, 2018 5:48 pm

keith6014 wrote:
Tue May 22, 2018 5:44 pm
If your state doesn't offer a tax benefit is it worth putting money in a 529?
I live in a state (NJ) where I get no state income tax benefit, I have been setting aside 27k per year for my 2 children aged 4 and 2. After reading this thread it makes me wonder if its worth it
Why wouldn't it be worth it? You are looking at saving something on the order of 100k of federal taxes. Obviously this assumes that you spend the money on college.

529s are great if you are saving for college. Not many people should be saving for college since they haven't saved for retirement first. There are a lot of bogleheads in the minority that should be using 529s.

keith6014
Posts: 183
Joined: Thu Jan 02, 2014 11:58 pm

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

Post by keith6014 » Tue May 22, 2018 5:55 pm

randomguy wrote:
Tue May 22, 2018 5:48 pm
keith6014 wrote:
Tue May 22, 2018 5:44 pm
If your state doesn't offer a tax benefit is it worth putting money in a 529?
I live in a state (NJ) where I get no state income tax benefit, I have been setting aside 27k per year for my 2 children aged 4 and 2. After reading this thread it makes me wonder if its worth it
Why wouldn't it be worth it? You are looking at saving something on the order of 100k of federal taxes. Obviously this assumes that you spend the money on college.

529s are great if you are saving for college. Not many people should be saving for college since they haven't saved for retirement first. There are a lot of bogleheads in the minority that should be using 529s.
thanks for the confirmation.
Yea, i max out 401k & T-IRA (backdoor to RothIRA).

Bacchus01
Posts: 1832
Joined: Mon Dec 24, 2012 9:35 pm

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

Post by Bacchus01 » Tue May 22, 2018 6:02 pm

CnC wrote:
Tue May 22, 2018 12:41 pm
Realistically though just how many people make enough to fund one? I just see very very little use in doing one.

You are talking about needing a minimum saving amount of 48,000 before it makes sense to save in one.

On top of that many people who are able to save 48,000 per year may have after tax 401k options that will bump it into the 70,000 a year range HSA's also will move that needle up.

Then there is always the need for money in a taxable account to help balance taxes in retirement and help fund a early separation from your employer.


Perhaps after that full ±100,000 is saved per year then and only then would a 529 make sense.
Im not sure I agree. Fully funding retirement savings is not the same as funding every possible tax advantages space. Some people simply don’t need that much in retirement.

We put $15K a year in 529s

Post Reply