529 fund for college savings.

[Leah/Banks]

I have a five year old son and want to start saving up for his college education. I can already tell he is very smart and college material. I'm looking into the 529 fund and want to hear what you recommend. I live in Alabama. One person suggested even with the tax deduction it may be better to invest in other states that have historically had higher yields and then transfer to Alabama when he's a junior in high school.

It a 529 fund a good idea to start with? It is worth looking at investing in other states?

Thank you for any input!!

[meadowrue]

Just my two cents as a 529 investor with one kid now a junior in HS and the other in MS … take the tax deduction if your state offers one and if their plan has low-cost decent funds to invest in. What I wished I had done differently is not chosen a target date fund because of the lack of flexibility and a glide path that doesn’t quite match my risk tolerance. But YMMV.

Best thing I did was funnel money in there whenever I could (including a lot in 2020 at the market lows). I am glad I have a pool of funds dedicated to college, even though it’s still modest compared to some on this forum. If you start at age 5, you’re ahead of the game. Good luck!

[cmr79]

529s are tricky and very personal, as whether to contribute at all and how much to contribute depends on personal circumstances and values and whether to use the in-state plan vs a different state plan is highly dependent on the rules for your specific state.

First, whether to contribute at all. 529s give tax advantaged growth assuming there is a very high likelihood of all (or under current rules, with $35k of all) of the contributions and gains ultimately being used for qualified educational expenses. If the money isn't used for a qualified expenses, the penalties and taxable treatment of gains (as ordinary income rather than capital gains) is far worse than having invested the money in a taxable account. It generally doesn't make sense to prioritize 529 savings either when other tax advantaged retirement accounts space is available, especially as 1) Roth contributions received far superior tax treatment and are similarly flexible for withdrawals for college expenses and 2) someone who can't max out retirement accounts space in many cases is better off saving for their own retirement first and figuring out how to pay for college later, as your child can always take out a loan for college while you cant do the same for retirement.

If you have disposable income that you want to earmark specifically cally for college savings, you are likely choosing to either invest in a 529 or taxable account. Given that you have a state tax advantage for using the Alabama 529 up to $5k/year ($10k if married) which effectively gives you a 5% discount, it makes a lot of sense for you to save up to that amount in a 529 up to whatever floor amount you are reasonably confident your child will spend on college, especially as the fees for the various fund options in Alabama's 529 are pretty reasonable with most around 0.22%. For me, I'm setting the target value at the sticker price of the most expensive state school in my state in ludong tuition, room/board and fees, and if we want to save more than that we will likely use taxable investments to preserve flexibility. We might also use multiple 529s per child as you can only make pro rata withdrawals from 529s...you can't selectively withdraw high gain shares first unless you make distinct accounts.

[Grt2bOutdoors]

I have a five year old son and want to start saving up for his college education. I can already tell he is very smart and college material. I'm looking into the 529 fund and want to hear what you recommend. I live in Alabama. One person suggested even with the tax deduction it may be better to invest in other states that have historically had higher yields and then transfer to Alabama when he's a junior in high school.

It a 529 fund a good idea to start with? It is worth looking at investing in other states?

Thank you for any input!!

Welcome to the forum!

The College Counts 529 Plan is the State of Alabama's Direct Plan, sold to individuals. The state offers a $5K/$10K deduction for single/married filing jointly taxpayers. Given the state tax rate varies between 2-5% based progressively on income earned, assuming you make the maximum deductible portion you could hypothetically save a few hundred dollars per year you are in the plan.

Given the time horizon, I would go with the age-based aggressive plan, which would migrate into an 80/20 diversified plan from age 6-8 before toning down the risk levels. https://www.collegecounts529.com/perfor ... -ages-3-5/
https://www.collegecounts529.com/perfor ... -ages-6-8/

The issue I take with advice about obtaining higher yields "is return is commensurate with risk, and sometimes you get what you didn't pay for". Very hard to time the market - had I waited until March 9, 2020 to fund my 529 plan, I could have made out like a bandit, then again, how am I supposed to know which fund and which date is the most opportune time to invest? I'd be curious as to what plan and fund does the advice giver indicate returns consistent higher yields with average risk? The age based plan will be diversified, may not offer the highest returns but will provide a more balanced ride through the investment horizon. If you are willing to shoulder the greatest risk, then 100% equity but it will be a rollercoaster.

You could look at other states, but you would be giving up the annual deduction. The majority of the funds offered in the plan are Vanguard's and the overall plan fee does not appear onerous. The key though is to buy the plan direct, don't go to an advisor sold plan which will likely come with additional expenses.

[rkhusky]

Max out retirement accounts before investing in a 529.

The age-based plans are easy to use. The aggressiveness of the choice depends on whether you plan to pay for college no matter what or whether the 529 is all your child will get. You can be more aggressive in the former case.

[Grt2bOutdoors]

Max out retirement accounts before investing in a 529.

Here's the issue with this, suggest the OP go to any local state university, input their data in the Net Price Calculator and see what it shows on a hypothetical basis. Even if you load up the retirement accounts, some schools will still require a contribution from the parent/student to pay for school. Contributing to a retirement plan, is not a get out of "not paying" card, imo. Especially if your income reaches a certain unknown threshold.

[rkhusky]

Max out retirement accounts before investing in a 529.

Here's the issue with this, suggest the OP go to any local state university, input their data in the Net Price Calculator and see what it shows on a hypothetical basis. Even if you load up the retirement accounts, some schools will still require a contribution from the parent/student to pay for school. Contributing to a retirement plan, is not a get out of "not paying" card, imo. Especially if your income reaches a certain unknown threshold.

You can get loans for college. It’s hard to get loans for retirement. And you may be able to pull funds from a retirement account to pay for college (401k loan, Roth IRA contributions). If you pull money out of a 529 for retirement, there’s a penalty.

[Harmanic]

It seems that the Alabama plan is priced reasonable and you get a good state tax deduction. In my state, the deduction was almost meaningless, so I never bothered, but with a 5-10k deduction, I would probably have done differently.

[lthenderson]

It a 529 fund a good idea to start with? It is worth looking at investing in other states?

I think investing in other states was a lot more common back when 529's were still fairly new and there weren't so many options. My state had only a handful of choices back then but now has a long list of options, many of which are quite decent and when I calculate average returns combined with the large tax deduction we get, it didn't make sense to go elsewhere. I have switched our investment funds within the 529 as the years have gone by and options got better. We just started the withdrawal stage of our 529 plans with our first starting college.

[hedge_hog88]

Jumping on a new thread.

Similar stage to OP. I don't know how much to save in 529. Or rather, how much college will be costing in 10 years. How do people project the cost of college so far from now? Using (3 or 5% inflation), I'm looking at 450 to 600K for an Ivy. That's insane! I'm currently planning to save enough for the cost of in-state flagship school, but DW or child may have other plans.

[Strayshot]

Time will tell how the secure act legislation plays out, but the new ability to roll $35K of lifetime total funds from a 529 to a Roth could be really interesting. Even if the 529 money is never used for education (remember that 529 funds can also now be used for private tuition costs in primary education years up to 10k/year) you could fund a 529 with 10k at birth of a child, let it sit for 20 years at 7% market growth, and have $40k when the child is 20. Spend years 20-25 doing rollovers into a Roth (at Roth annual contribution limits) and at age 25 the child now has 35k in the Roth regardless of their earned income. So essentially you can start a Roth at birth for kids. At 25, the child could then use $10k from the Roth funds tax and penalty free for a first home down payment, leaving them with 25k to grow tax free forever as well as 5k+ residual in the 529 to grow for education later or to pass to other qualified family members. That is all in addition to the traditional use of 529 funds (pay for education).

[lthenderson]

Jumping on a new thread.

Similar stage to OP. I don't know how much to save in 529. Or rather, how much college will be costing in 10 years. How do people project the cost of college so far from now? Using (3 or 5% inflation), I'm looking at 450 to 600K for an Ivy. That's insane! I'm currently planning to save enough for the cost of in-state flagship school, but DW or child may have other plans.

We put enough in to gather the maximum state tax deduction allowed by our state laws. The rest, if any, we plan on financing out of our taxable account. It had nothing to do with the cost of the actual college education.

[cbs2002]

+1 on maxing out retirement accounts first. This means fully fund tax-deferred 401Ks and Roth IRA contributions for both spouses, if you are married. That's about 32K total per spouse. If you have money left over after that, you can decide if the 529 is advantageous based on your state's tax arrangements.

Remember you can always withdraw Roth contributions as a tax-free source of funds to pay for college, and Roth earnings as a taxable source. This does affect your income on FAFSA though. You can also work while your child is in college.

You may want to read the wiki on prioritizing investments: https://www.bogleheads.org/wiki/Priorit ... nvestments

You may also want to do a simple projection of how you want to live while your child is in college, including major expenses, anticipated retirement savings, and how much/hard you want to be working, which can help you be realistic about the choices.

Basically, 529s can be great as a tax break for high income people but for most people, saving for retirement and personal wealth should be a higher priority. There are a wide variety of ways to pay for college. I would prefer to be well-off or even wealthy as a family with no 529 than have a "fully funded" 529 and face down more years to retirement.

If I had it to do over again, I would have put all the money we put into a 529s into our 100% equity retirement portfolio when we were younger instead. C'est la vie.

[Grt2bOutdoors]

Jumping on a new thread.

Similar stage to OP. I don't know how much to save in 529. Or rather, how much college will be costing in 10 years. How do people project the cost of college so far from now? Using (3 or 5% inflation), I'm looking at 450 to 600K for an Ivy. That's insane! I'm currently planning to save enough for the cost of in-state flagship school, but DW or child may have other plans.

Sit them both down and have a frank discussion, and do it well before the time comes to apply to schools. Use the Vanguard College Planner - input your numbers, generally the model uses a cost inflation factor of 5%, you can change the projected return figure. Alternatively, go to in-state flagship school and search for Net Price Calculator, enter your data as a guest, get an estimate based on today's cost but will give you a ballpark of what to expect when you finally apply for admission.

Be realistic, the admit rates to the Ivy's is not that high. But there are other private schools which have more relaxed admit rates and cost nearly as much as the Ivy's. If child has strong enough credentials, apply for merit scholarships at schools that offer it.

[cmr79]

Time will tell how the secure act legislation plays out, but the new ability to roll $35K of lifetime total funds from a 529 to a Roth could be really interesting. Even if the 529 money is never used for education (remember that 529 funds can also now be used for private tuition costs in primary education years up to 10k/year) you could fund a 529 with 10k at birth of a child, let it sit for 20 years at 7% market growth, and have $40k when the child is 20. Spend years 20-25 doing rollovers into a Roth (at Roth annual contribution limits) and at age 25 the child now has 35k in the Roth regardless of their earned income. So essentially you can start a Roth at birth for kids. At 25, the child could then use $10k from the Roth funds tax and penalty free for a first home down payment, leaving them with 25k to grow tax free forever as well as 5k+ residual in the 529 to grow for education later or to pass to other qualified family members. That is all in addition to the traditional use of 529 funds (pay for education).

Just to clarify, as you probably know this but readers of your post may misinterpret what was written:

For a child to roll 529 funds into a Roth IRA, the child has to qualify for making Roth contributions (i.e. they must have at least the amount of income that is being rolled into the Roth, up to applicable IRA limits for that year). The 529 rollover also counts as the IRA contribution, so the 529 rollover in no way increases available Roth space for the child.

The 529 rollover is a small perk that allows for some wiggle room with slightly overfunding a 529 for those that would not want to change the beneficiary to, say, grandchildren, but there really aren't any situations in which somebody should intentionally overfund a 529 just to take advantage of the ability to roll a small, not indexed for inflation amount into a Roth IRA. You could accomplish the same thing for a child just starting out who doesn't have enough to otherwise funding a Roth by just gifting them cash anyways.

[acegolfer]

Jumping on a new thread.

Similar stage to OP. I don't know how much to save in 529. Or rather, how much college will be costing in 10 years. How do people project the cost of college so far from now? Using (3 or 5% inflation), I'm looking at 450 to 600K for an Ivy. That's insane! I'm currently planning to save enough for the cost of in-state flagship school, but DW or child may have other plans.

We funded 529's just enough for in-state CoA (~$120k). About 6 months before her college applications, we sat down with the kid and explained all the financing options. After long thoughts, she decided not to apply to private that costs ~$100k/yr. Instead, she mostly applied to flagship state schools. Some would still cost $65k/yr, which we could afford without getting loans.

At the end, she committed to in-state that offered full-ride. She may use the 529 for her graduate studies.

[FreemanB]

Jumping on a new thread.

Similar stage to OP. I don't know how much to save in 529. Or rather, how much college will be costing in 10 years. How do people project the cost of college so far from now? Using (3 or 5% inflation), I'm looking at 450 to 600K for an Ivy. That's insane! I'm currently planning to save enough for the cost of in-state flagship school, but DW or child may have other plans.

I did the calculation for a top-tier, in-state, public school back when my daughter was young, and started saving to have enough to cover that by the time she graduates. With the market performance, we'll probably have about 125% or more of that goal by the time she actually graduates high school.(Still over 6 years to go) If for whatever reason it ends up costing more than what we have saved, we'll have plenty of other savings to pull from. My goal isn't to have enough in the 529 to cover every possible scenario(Since that would lock too much into the 529), but rather to have enough to soften the impact of college costs to the point where they won't significantly impact our financial goals. If the 529 ends up covering 100% of the costs, that's just a bonus.

[hunoraut]

Jumping on a new thread.

Similar stage to OP. I don't know how much to save in 529. Or rather, how much college will be costing in 10 years. How do people project the cost of college so far from now? Using (3 or 5% inflation), I'm looking at 450 to 600K for an Ivy. That's insane! I'm currently planning to save enough for the cost of in-state flagship school, but DW or child may have other plans.

What are you using as the cost basis now, their listed price? The reality is that net pricing after grants and aids is significantly less than sticker price, maybe even half.

Obv the level of aid will vary by institution, student, and family qualification…but national avg numbers are stark:

https://nces.ed.gov/programs/coe/indicator/cua

Also, purely personal hunch, but I assume there will be some sort of reform(s) by 2 decades from now to have driven down the car. This student loan forgiveness debacle (nonsense!) put a spotlight on cost and it will have to be reined in one way or another

[cmr79]

One of the noticeable things on Bogleheads regarding college costs is that we tend to fall into two camps...camp one, in which someone anticipating continuing to work in a high income field through college and this anticipates no financial aid whatsoever, and camp two, in which someone is specifically intending to FIRE and is trying to manage assets in such a way that they will get significant need-based financial aid. Both are probably valid paths, but they differ substantially based on values and goals that aren't always clarified when someone posts a question.

[986racer]

Jumping on a new thread.

Similar stage to OP. I don't know how much to save in 529. Or rather, how much college will be costing in 10 years. How do people project the cost of college so far from now? Using (3 or 5% inflation), I'm looking at 450 to 600K for an Ivy. That's insane! I'm currently planning to save enough for the cost of in-state flagship school, but DW or child may have other plans.

What are you using as the cost basis now, their listed price? The reality is that net pricing after grants and aids is significantly less than sticker price, maybe even half.

Obv the level of aid will vary by institution, student, and family qualification…but national avg numbers are stark:

https://nces.ed.gov/programs/coe/indicator/cua

Also, purely personal hunch, but I assume there will be some sort of reform(s) by 2 decades from now to have driven down the car. This student loan forgiveness debacle (nonsense!) put a spotlight on cost and it will have to be reined in one way or another

I'd highly recommend looking at the Common Data Set for the schools that you are considering. Yes, there are many schools where the "listed price" is almost never paid, but there are also many where over half the people are paying the full sticker price.

I generally go with the idea that if you have enough to fully fund retirement accounts and then have enough to save in a 529, you shouldn't be counting on getting need-based aid. Is it possible to get merit-based aid? Yes, but not if you apply to Ivies as they don't give out merit aid

I also don't see a reason that the top tier schools are going to drop their prices. If you can't afford to go those, there are plenty of other families who can afford it

[hunoraut]

I also don't see a reason that the top tier schools are going to drop their prices. If you can't afford to go those, there are plenty of other families who can afford it

this is tangential, political, and speculative: i think access to easy/cheap loans helped swell cost, much of it attributed to administration and non-core services.

theres fat available to trim if/when liquidity runs dry.

as to why some schools would drop their prices… everythings a market isnt it?

[986racer]

I also don't see a reason that the top tier schools are going to drop their prices. If you can't afford to go those, there are plenty of other families who can afford it

this is tangential, political, and speculative: i think access to easy/cheap loans helped swell cost, much of it attributed to administration and non-core services.

theres fat available to trim if/when liquidity runs dry.

as to why some schools would drop their prices… everythings a market isnt it?

What do you mean by "easy/cheap loans"? The federal loans cap out at 5500 on freshman year, 6500 on sophomore year, and 7500 for the remaining 2 (or 3) years. The size of the loans certainly aren't accounting for the increases in cost

The top tier schools have about a 5% admittance rate. I.e., they are getting 20x the numbers of applicants than they can accept. Given the extreme imbalance in demand compare to supply, I think we should be wondering why they have kept costs so low when they could clearly charge more.

Until the top tier schools start having acceptance rates in the 20-30% range, prices are going to keep going up

I don't view this as political at all, it's just basic Econ 101.

Now...if we are talking about the 2nd tier of schools (which are still very good schools), then I'd agree that there may be some wiggle room on prices. Even that will depend on how much endowment the school has. Like I said earlier, the Common Data Set can give you a bunch of guidance on how much you can expect a school to discount.