529 Plans - Criteria to Save

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cpep27
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Joined: Sun Mar 04, 2012 8:55 am

529 Plans - Criteria to Save

Post by cpep27 »

I want to hear what people on this site think about this advice I give to my friends and colleagues about saving for their children's future education.

I am a true believer in 529 plans; however, I only recommend saving for college if two criteria are met first:
1) Both parents are maxing out thier 401(k) plans (or combination 401k and Roth/Traditional IRA) to the full $17,000 each year
2) They have an 8 month emergency fund in liquid savings

My main reasoning behind this is you can borrow for school, but you can't for retirement. Unfortunately, I get lots of pushback with this advice. Any thoughts of other ways to to explain this or to broaden my thought process would be appreciated.

~Chris
winterescape
Posts: 265
Joined: Sun Apr 15, 2007 2:53 pm
Location: Upstate NY

Re: 529 Plans - Criteria to Save

Post by winterescape »

I generally agree with your logic however some 401K plans are bad (No match, very high expenses) and some 529 plans, like nysaves.org, are run by vanguard and offer very low expenses, great investments, and a tax deduction in NY state for contributions…

Sooo... it is hard to have one size fits all advice
livesoft
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Re: 529 Plans - Criteria to Save

Post by livesoft »

I think families should do BOTH 401(k) AND Roth to the maxes before thinking of a 529.

A high-fee 401(k) is no impediment to this rule. My spouse has the most craptacular 401(k) ever reported on this forum. But she borrows the max from it and puts the borrowed money in a low-fee 529 plan. This preserves tax-deferred space, stiffs the plan provider of fees, and gives a better return on investments.
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letsgobobby
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Re: 529 Plans - Criteria to Save

Post by letsgobobby »

It's a personal and cultural decision. My wife's immigrant parents were not able to save a ton for retirement but they sent 4 children to college and have lived frugally enough to be ok. They could have saved more for retirement, but didn't, and wouldn't have dreamed of doing so at the expense of their children's educations. They both qualify for SS, one has a modest government pension, and they have maybe $75,000 in retirement. They'll be fine, and of course their 4 college-educated children can and will help out as necessary.
umfundi
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Re: 529 Plans - Criteria to Save

Post by umfundi »

livesoft wrote:I think families should do BOTH 401(k) AND Roth to the maxes before thinking of a 529.

A high-fee 401(k) is no impediment to this rule. My spouse has the most craptacular 401(k) ever reported on this forum. But she borrows the max from it and puts the borrowed money in a low-fee 529 plan. This preserves tax-deferred space, stiffs the plan provider of fees, and gives a better return on investments.
Really? What happens when the 401(k) loans become due?

Keith
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livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: 529 Plans - Criteria to Save

Post by livesoft »

Yes, really. Her loan has netted us a couple thousand dollars already over not having the loan with more to come.

One makes a loan payment with every paycheck over the life of the loan until paid off. One can pay in full at any time. We have assets to pay the loan off at any time, but since the cost to borrow is negative why would we want to do that? In other words if you could borrow at an effective rate of -2% would you do it? It really is a free lunch -- many of them.
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umfundi
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Re: 529 Plans - Criteria to Save

Post by umfundi »

livesoft wrote:Yes, really. Her loan has netted us a couple thousand dollars already over not having the loan with more to come.

One makes a loan payment with every paycheck over the life of the loan until paid off. One can pay in full at any time. We have assets to pay the loan off at any time, but since the cost to borrow is negative why would we want to do that? In other words if you could borrow at an effective rate of -2% would you do it? It really is a free lunch -- many of them.
You're making my head spin ...

Keith
Déjà Vu is not a prediction
hq38sq43
Posts: 425
Joined: Tue Sep 06, 2011 5:25 pm
Location: Bradenton FL

Re: 529 Plans - Criteria to Save

Post by hq38sq43 »

cpep27 wrote:I want to hear what people on this site think about this advice I give to my friends and colleagues about saving for their children's future education.

I am a true believer in 529 plans; however, I only recommend saving for college if two criteria are met first:
1) Both parents are maxing out thier 401(k) plans (or combination 401k and Roth/Traditional IRA) to the full $17,000 each year
2) They have an 8 month emergency fund in liquid savings

My main reasoning behind this is you can borrow for school, but you can't for retirement. Unfortunately, I get lots of pushback with this advice. Any thoughts of other ways to to explain this or to broaden my thought process would be appreciated.

~Chris
IMHO, your reasoning is compelling. There are so many alternatives to 529 plans for funding children's education and so many potential pitfalls with such plans that giving primacy to retirement plans seems virtually a no-brainer, unless the only available retirement plan is very mismanaged. Of course, some are, but hopefully not many, or at least not many so badly as to warrant primacy over providing for retirement. As you and many others have well said, you can borrow for education, but not for retirement.
Harry at Bradenton
Topic Author
cpep27
Posts: 5
Joined: Sun Mar 04, 2012 8:55 am

Re: 529 Plans - Criteria to Save

Post by cpep27 »

Thanks for all the great responses. I really appreciate them. I have more good information to research and advice on.

~Chris
Userdc
Posts: 273
Joined: Tue Jun 21, 2011 9:30 am

Re: 529 Plans - Criteria to Save

Post by Userdc »

529s are great. It shelters taxes as well as a Roth, and New York State kicks in 6% (via tax break) on day one. The downside is obvious - it can only be used for limited circumstances, but if I don't over-contribute its the best tax shelter I have.
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