529 as part of overall portfolio

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How do you characterize your 529 plan?

Part of my overall portfolio
20
19%
Part of my overall portfolio
20
19%
Part of one overall 529 portfolio
5
5%
Separate 529 portfolios for each child
30
29%
Separate 529 portfolios for each child
30
29%
 
Total votes: 105

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woof755
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529 as part of overall portfolio

Post by woof755 » Tue May 27, 2008 7:21 pm

When I started my kids' 529 plans through Vanguard, I picked something moderate, and chose the plans that became more conservative as time went on. Last thing I want to do is get overly aggressive with my kids' money, right?

But now I'm wondering if I should take advantage of that tax-deferred space and include the 529s as part of my portfolio.

Can those of you who are doing one or the other add to my pros / cons list?

Pros:

1. More tax-deferred space might actually inspire me to invest more into the overall portfolio than I currently do. (my only taxable account is VFWIX--all world ex-US, and I contribute as much to that as my AA calls for)

2. It seems to make sense to consider all investments as part of one portfolio.

3. I'm planning on paying for my kids' college expenses, anyways. If they end up with lower overall returns because they are in short term bonds as part of my tax-deferred portfolio, it doesn't really matter, b/c I'll be covering shortfalls regardless.

Cons:

1. More accounts to keep track of as part of our total portfolio when time for rebalancing comes.

2. Fewer investment options (no REITS, basically total stock market, total international, total bond, mid-cap index and target retirement).

Any advice?
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

asset_chaos
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Post by asset_chaos » Tue May 27, 2008 8:32 pm

To my mind there's at least one giant and inescapable difference between 529 money and my investment portfolio money, and that's the intrinsically different time horizons over which the money is accumulated and spent. For the 529 there's nominally 18 years to accumulate and then a definite short-term schedule to write checks that will essentially deplete the account. Portfolio money, on the other hand, has been accumulating for around 20 years and will keep accumulating, I hope, for another 25 years, then will be spent gradually over, I hope, another 40 years or so. So because of the vast difference in time scales over which the 529 and portfolio accounts will grow and deplete, I consider them as separate entities with their own distinct asset allocations.
Regards, | | Guy

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woof755
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Post by woof755 » Tue May 27, 2008 8:43 pm

True, but when the money was needed, 529 funds could be switched to short term bonds or money market and the appropriate changes could be made in other retirement accounts so that the overall asset allocation remained unchanged, but the specific funds that are about to be spent are able to be sold without equity risk.

It wouldn't be buying and selling, just same asset allocation percentages in different locations.

At the time the 529 would be liquidated, it would cease being considered a part of the portfolio.

In the meantime, it could be used for increased tax-deferred growth.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

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LH2004
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Post by LH2004 » Tue May 27, 2008 8:58 pm

asset_chaos wrote:To my mind there's at least one giant and inescapable difference between 529 money and my investment portfolio money, and that's the intrinsically different time horizons over which the money is accumulated and spent. For the 529 there's nominally 18 years to accumulate and then a definite short-term schedule to write checks that will essentially deplete the account. Portfolio money, on the other hand, has been accumulating for around 20 years and will keep accumulating, I hope, for another 25 years, then will be spent gradually over, I hope, another 40 years or so. So because of the vast difference in time scales over which the 529 and portfolio accounts will grow and deplete, I consider them as separate entities with their own distinct asset allocations.
That's no different from any of the rest of your money.

I will use a little bit of my net worth to buy groceries tomorrow. I will use more to pay my rent next week. Some will probably be spent on a vacation in a few months. In a few decades, I'll probably pay for college for my as-yet-unborn children. A few decades later, I'll keep writing checks for food, shelter, clothing, entertainment and everything else.

To the extent that time horizon affects my asset allocation, I need to choose an appropriate allocation given all of those future demands on my assets, from tomorrow until the day I die (or later). I do NOT need to hold the assets for all of those different needs in different accounts. If there were different special "grocery savings accounts" and "rent savings accounts" with special tax benefits, the appropriate investments for each would be purely a tax question; it would be silly to ignore the fungibility of money and try to invest separately for each (to the extent it makes any difference, which it might not).

You do need to think a little bit about which assets go in each account, but only a little. The only risk to worry about with holding an odd (undiversified in isolation) set of assets in a 529 plan is the risk that you will end up with "too much" money in the 529 and "too little" outside, or vice versa. But that's absolutely no risk at all as long as the 529 is clearly going to be too little to pay for all eligible expenses you want to incur, which most people's 529's will always be. For them, a 529 plan is just another tax-advantaged account, period.

Again, this all may make no difference: thinking about the 529 in isolation might lead you to choose an all-fixed-income allocation, which would be a natural portion of your assets to locate there in any event. But to the extent it leads you to a different answer (holding more-tax-efficient assets while leaving less-tax-efficient ones in taxable accounts, for example), it is a costly mistake.

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Post by Tramper Al » Tue May 27, 2008 9:25 pm

xxx
Last edited by Tramper Al on Tue Apr 19, 2011 7:36 pm, edited 1 time in total.

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woof755
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Post by woof755 » Wed May 28, 2008 9:18 am

Tramper Al wrote:
My son's 529 may never hold stocks, yet his educational funds are mainly invested in equities.


I understand this concept. One question that comes to mind is, do you keep track of his educational funds?

Or do you just assume as LH2004 alludes to, that it's your money that will be paying for them at some point, and right now the money you set aside for that will be in equties, all enmeshed with your portfolio?
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

Rodc
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Post by Rodc » Wed May 28, 2008 9:45 am

One issue that seems to be missing in my quick scan is what if the 529 takes off and you have too much money? Or, your child decides not to go to college, or better yet, gets a full ride somewhere?

You can't just roll that extra money into your retirement account without paying penalties.

So I don't think you can think of it as exactly the same sort of tax deferred space.
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.

markcoop
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Post by markcoop » Wed May 28, 2008 10:02 am

There's nothing wrong with having multiple views of your portfolio. I use 2 views. My main view is to look at everything as a big portfolio. This is the view I try optimize. However, I also have a secondary view that breaks my portfolio into two smaller portfolios - I use kids money as one sub-goal and the rest as a second sub-goal. Although the bigger consideration when I make moves is the main view, I also look at the secondary view. For example, if my AA is 60% stock/40% bonds. If my main view shows 65% stock, I know I need to move 5%. I would then look at the secondary view to determine the best place to make the move.
Mark

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woof755
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Post by woof755 » Wed May 28, 2008 10:18 am

Rodc wrote:One issue that seems to be missing in my quick scan is what if the 529 takes off and you have too much money? Or, your child decides not to go to college, or better yet, gets a full ride somewhere?

You can't just roll that extra money into your retirement account without paying penalties.

So I don't think you can think of it as exactly the same sort of tax deferred space.



Seems like no penalties, just income taxes.


Some replies in the FAQ section of my NC 529 plan:

What if my Beneficiary receives a scholarship and doesn't need all the money in the Account to pay for college?

No problem! You won't lose access to your money. Simply request a Withdrawal from the Account in an amount equal to the scholarship or tuition waiver. The earnings portion of such withdrawals will be subject to federal and state income taxes. If a Withdrawal for a scholarship is requested from the Protected Stock Fund, a 5% surrender charge will apply.

What if, due to unforeseen circumstances, I need to use the money in my Account for something other than higher education purposes?

Unless money is withdrawn for payment of Qualified Higher Education Expenses for your Beneficiary or in the case of the Beneficiary's death, permanent disability or receipt of scholarship, the Withdrawal is considered a "Non-Qualified Withdrawal." A Participant making a Non-Qualified Withdrawal must pay federal and state income tax on the earnings portion of the Withdrawal plus a 10% penalty.

What if my Beneficiary receives a scholarship and doesn't need all the money in the Account to pay for college?

No problem! You won't lose access to your money. Simply request a Withdrawal from the Account in an amount equal to the scholarship or tuition waiver. The earnings portion of such withdrawals will be subject to federal and state income taxes. If a Withdrawal for a scholarship is requested from the Protected Stock Fund, a 5% surrender charge will apply.


And my favorite--if the kids don't need it, I'll use it myself!

I am an adult and am thinking of attending college. Can I open an Account for myself?

Yes! You may be both Participant and Beneficiary of an Account.
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

Rodc
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Post by Rodc » Wed May 28, 2008 10:29 am

What if, due to unforeseen circumstances, I need to use the money in my Account for something other than higher education purposes?

Unless money is withdrawn for payment of Qualified Higher Education Expenses for your Beneficiary or in the case of the Beneficiary's death, permanent disability or receipt of scholarship, the Withdrawal is considered a "Non-Qualified Withdrawal." A Participant making a Non-Qualified Withdrawal must pay federal and state income tax on the earnings portion of the Withdrawal plus a 10% penalty.


Looks fine if you don't need it because of scholarships, but you might get stuck if they just don't go, and you don't have someone else to switch it to.
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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woof755
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Post by woof755 » Wed May 28, 2008 10:45 am

True that.

Could probably leave it there for the next generation or use it yourself.

Or plug your nose and fork over the cash. :(
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing

PatrickS
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Re: 529 as part of overall portfolio

Post by PatrickS » Wed May 28, 2008 11:15 am

[quote="woof755"]

1. More tax-deferred space...

3. I'm planning on paying for my kids' college expenses anyway.


1 & 3 are what made it an easy decision for me. If you have the means to cover the education costs no matter how well the 529 does relative to the rest of your portfolio, it makes perfect sense to include it as part of an overall allocation, especially if you're short on tax-advantaged space.

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Random Musings
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Post by Random Musings » Wed May 28, 2008 11:44 am

All one portfolio.

529 plans are another tax-deferred shelter where I can stuff some more tax-inefficient funds (bonds, TIPS and REITs). In the end, you will either spend your savings or transfer it to benefactors.

RM

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Post by fedsocprof » Wed May 28, 2008 12:33 pm

I couldn't answer the poll because I'd have to vote "None of the Above."

I may be the only person in the world who doesn't consider 529 money to be any part of our "portfolio." The accounts were started long ago, whenever 529s became available, by our kids' grandparents. Money has gone in periodically over the years and I've always considered it to be money "spent" already. We paid full-freight for our first to go to college before the 529s came along. We figured that no matter how large the 529s grew, they would never be large enough to pay the total bill for the next two kids. The money goes in and the "Learning Quest" folks at American Century Investment Management work their magic. I know very little about how the money is invested, other than that the investments become more conservative as each child nears college age.

We withdrew our first 529 money this year as our second son began college.

Obviously, this is not a Boglehead approach to money management. :-)

Best,
fedsocprof

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Post by Kenster1 » Wed May 28, 2008 8:57 pm

Fredsocprof,

I also do not consider the 529 plan as part of our portfolio (although option 3 in the poll would fit how I characterize our 529 plan). I treat the 529 plan as a separate portfolio for a separate dedicated purpose and it's just easier for me to manage it that way.

Here's our 529 asset allocation for our baby daughter which I think is a very nice global value-tilted portfolio and is what I wanted:

20% DFA US Large
20% DFA US Large Value
20% DFA US Small Value
15% DFA US Microcap
10% DFA International Value
5% DFA International Small
5% DFA International Small Value
5% DFA Emerging Markets Value
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Gregory
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529's

Post by Gregory » Wed May 28, 2008 10:41 pm

I consider the two 529's as "separate, untouchable, for the kids" and most definitely not part of my personal portfolio. I bought the 529's right thru VG.

In looking at original intent of these plans, I can't see how anyone could construe them as "a place to put tax-inefficient funds like TIPS and REITS." They're primarily intended to be investing vehicles for children's education, aren't they?

I would love to see even more severe penalties for their use as "part of a parent's retirement fund" when it comes to withdrawals.
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

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woof755
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Post by woof755 » Thu May 29, 2008 2:26 pm

I don't know if that's how I'm going to eventually employ this asset, but I don't think that's necessary, either.

Still, it's true that some folks' intentions might now be as "pure" as those who have posted here.
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LH2004
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Re: 529's

Post by LH2004 » Thu May 29, 2008 4:42 pm

Gregory wrote:In looking at original intent of these plans, I can't see how anyone could construe them as "a place to put tax-inefficient funds like TIPS and REITS." They're primarily intended to be investing vehicles for children's education, aren't they?
Accounts don't have intents. People have intents. My intent when I opened a 529 plan was to use it for tax benefits for myself however I could.

Congress's intent when it passed sec. 529, and when it modified it over the years, isn't particularly important to me. Congress's intent when it approved the recent stimulus checks was for people to spend them; that doesn't make it wrong to save them.
I would love to see even more severe penalties for their use as "part of a parent's retirement fund" when it comes to withdrawals.
You're missing the point. I don't ever plan to owe a withdrawal penalty. Probably most of my 529 money will go to pay for my kids' education, and if there is any left over, then for other relatives (though I would use it in other ways if I needed to). That doesn't tell me how I should invest that money.

529 money belongs to the account owner, not the beneficiary. If you take money that rightfully belongs to your kids, put it into a 529 with yourself as owner, and then spend the money on yourself, then you have stolen from your kids -- not at the time of the withdrawal, but at the time you moved their money into your own account.

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Post by Tramper Al » Thu May 29, 2008 5:18 pm

xxx
Last edited by Tramper Al on Tue Apr 19, 2011 7:37 pm, edited 1 time in total.

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woof755
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Post by woof755 » Sun Apr 10, 2011 9:45 am

A little bump, because I mentioned this topic in a new one: http://www.bogleheads.org/forum/viewtopic.php?p=1015926#1015926

I think this definitely has some merit. I was considering going through with this at the time, then must have gotten busy with other things and never made the decision to go for it.
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Post by Angst » Mon Apr 11, 2011 12:13 am

I look at my 529 plan primarily as simply part of my overall portfolio. I am happy to have the opportunity to use DFA equity funds through the WV "Smart 529" plan and have them as part of my overall portfolio's equity allocation, and will leave the 529 fully invested in them until the time I need to withdraw funds. As I do withdraw funds in the future, I will simultaneously be shifting other funds of mine, not in the 529 and not necessarily in equal amounts, from fixed income to equity (if not DFA-managed equity) to help maintain my overall asset allocation plan. If education expenses were to represent a larger portion of my overall assets than they actually do for me, I'd probably allow my overall AA to shift slightly towards more fixed income as those education bills approached payment time.

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Post by staythecourse » Mon Apr 11, 2011 8:25 am

This depends really on how wealthy you are.

If you have just enough with proper planning to pay for the kids education and your own retirement then they should be treated as 2 different portfolios.

If you are wealthy and likely to have more then enough money to fund kids education AND your own retirement AND expect to give inheritances to heirs then I think the 529 plan is the ideal extra tax deffered vehichle for the following advantages:
1. They are completed gifts and out of your estate
2. You always have full control until you die
3. You know the money will be used for only education and not spent on something frivilous
4. Basically, you can treat a 529 plan as an educational trust for future generations (compounding like crazy), like your families personal endowment.

Good luck.
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Post by abuss368 » Mon Apr 11, 2011 12:03 pm

529's are not considered part of our retirement assets and will be used when a child attends school.

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Post by Beagler » Mon Apr 11, 2011 12:13 pm

Our 529's are for children's educational expenses, period. The spirit of the law was such, not as another tax-def'd space for investors. If someone dies and the kids' 529 plans are in REITs (e.g.,) they'll have to use other funds to pay expenses, I would imagine. Really, these plans are for the kids' benefit. Saying "I'm going to pay for their education anyway" seems to violate to spirit of the law.
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Post by ofcmetz » Mon Apr 11, 2011 9:20 pm

I use the Louisiana START saving 529 which is administered by Vanguard. This saving is above and beyond what my wife and I save for our retirement. I use the growth track option. It moves the kids through the Vanguard Lifestrategy funds as they age and then into the Louisiana Principle protection fund around age 14. Fees are between 0% and .22%. Louisiana also kicks in another 2% of my contributions at the end of the year.

This is lower priority saving than retirement in my budget. But because we have been blessed with steady jobs since the kids have been born we been able to fund it nicely.

Back to the original question, each child gets their own asset allocation which has nothing to do with the wife's and mines retirement portfolio allocation. I recommend people error on the side of being too conservative in their allocation with 529 plans.
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