What 529 plan are TX residents using?

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new2bogle
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What 529 plan are TX residents using?

Post by new2bogle »

I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
Bondman
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Re: What 529 plan are TX residents using?

Post by Bondman »

I am a resident of Texas. I use Nevada 529 plan in order to get access to Vanguard funds. If you are interested in Texas public universities, have you considered Texas Promise Fund?
EHEngineer
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Re: What 529 plan are TX residents using?

Post by EHEngineer »

Nevada. Low cost and didn't require another login. I considered Utah, but the extra login wasn't worth it to me.
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Raymond
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Re: What 529 plan are TX residents using?

Post by Raymond »

I use the Utah plan.
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SurferLife
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Re: What 529 plan are TX residents using?

Post by SurferLife »

We are using Utah.
KlangFool
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Re: What 529 plan are TX residents using?

Post by KlangFool »

new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
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CppCoder
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Re: What 529 plan are TX residents using?

Post by CppCoder »

I use the New York plan, also Vanguard underlying funds.
homerj15
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Re: What 529 plan are TX residents using?

Post by homerj15 »

Texas resident here.

+1 for Utah plan.

One of the least expensive plans out there for me.
livesoft
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Re: What 529 plan are TX residents using?

Post by livesoft »

Utah and Ohio plans.
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Hub
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Re: What 529 plan are TX residents using?

Post by Hub »

I don't use one. Potential tax savings on this don't really motivate me to mess with it since it's only on gains. Would rather just have it in my own taxable account.
NightFall
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Re: What 529 plan are TX residents using?

Post by NightFall »

new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
There are contribution limits to the 529. Make sure you are aware of them since it sounds like you may get close to exceeding them.
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Re: What 529 plan are TX residents using?

Post by goodenyou »

Utah 529
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dcabler
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Re: What 529 plan are TX residents using?

Post by dcabler »

My father in law set one up one using the one from New Hampshire. For us, we bought a 5 year contract in the Texas Guaranteed Tuition Plan. when our daughter was less than a year old. It's closed for new enrollment , but they've opened another one since then.
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Re: What 529 plan are TX residents using?

Post by TOJ »

New York
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Re: What 529 plan are TX residents using?

Post by hmw »

New York
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Re: What 529 plan are TX residents using?

Post by High Income Parent »

We use the one through TD Ameritrade which I think is Nebraska.
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Ethelred
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Re: What 529 plan are TX residents using?

Post by Ethelred »

We use Vanguard/Nevada.

That said, the value of a 529 in any state without a state income tax benefit for 529s is not large. If you contribute when the child is young, the growth is potentially large but uncertain, so the benefit of the 529 could be significant, but there is also significant risk that you will overfill the account and have to pay income tax plus the 10% penalty on the gain when you take the money. Conversely, this risk is reduced if you contribute when the child is older, but the gain will be correspondingly smaller.
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Re: What 529 plan are TX residents using?

Post by Wagnerjb »

Utah 529
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new2bogle
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Re: What 529 plan are TX residents using?

Post by new2bogle »

KlangFool wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
1) Yes
2) 37
3) Can you explain why I would be paying more tax?

Thanks.
Topic Author
new2bogle
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Re: What 529 plan are TX residents using?

Post by new2bogle »

NightFall wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
There are contribution limits to the 529. Make sure you are aware of them since it sounds like you may get close to exceeding them.
Ok, thanks. I am just starting to read about 529's and I thought one could seed it without hitting the limits. Looks like I need to read (and re-read) further.
miamivice
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Re: What 529 plan are TX residents using?

Post by miamivice »

new2bogle wrote:
KlangFool wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
1) Yes
2) 37
3) Can you explain why I would be paying more tax?

Thanks.
If you don't know KlangFool, please know that he is anti-529. He has a 200 post thread a few years back asking about 529s where he shot down every argument (in his mind) for using a 529. His story on how he is currently paying for his kids college changes all the time. Sometimes he saved up a lot, sometimes he is cashflowing it. Sometimes he is employed, sometimes he is unemployed. He is not consistent in his recommendations or suggestions for college savings.

He ignores future tax liability in his discussions, he looks at everything today. I've corrected him before (and he has acknowledged the correction) but he still makes the same mistake. If you ignore future tax liability, putting pretax dollars in a 401k always outweighs putting posttax dollars in a 529. However, you pay taxes when you withdraw from the 401k while you never pay taxes again on money you put into a 529, so your total tax liability (corrected for inflation) is the same in either case.
cusetownusa
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Re: What 529 plan are TX residents using?

Post by cusetownusa »

miamivice wrote:
new2bogle wrote:
KlangFool wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
1) Yes
2) 37
3) Can you explain why I would be paying more tax?

Thanks.
If you don't know KlangFool, please know that he is anti-529. He has a 200 post thread a few years back asking about 529s where he shot down every argument (in his mind) for using a 529. His story on how he is currently paying for his kids college changes all the time. Sometimes he saved up a lot, sometimes he is cashflowing it. Sometimes he is employed, sometimes he is unemployed. He is not consistent in his recommendations or suggestions for college savings.

He ignores future tax liability in his discussions, he looks at everything today. I've corrected him before (and he has acknowledged the correction) but he still makes the same mistake. If you ignore future tax liability, putting pretax dollars in a 401k always outweighs putting posttax dollars in a 529. However, you pay taxes when you withdraw from the 401k while you never pay taxes again on money you put into a 529, so your total tax liability (corrected for inflation) is the same in either case.
In KlangFools defense, I don't believe he is anti-529...he has just pointed out that you are better off maxing out better tax-advantage accounts first.

Also, your last statement is false for most people...including me. Many people have tried to explain that to you but for some reason you keep ignoring it. For example, my Marginal tax rate is 28%...so all money saved in my pre-tax accounts saves me 28% off the top. When I withdraw the money sometime in the future the pre-tax savings will be taxed at my effective tax rate which will be well below 28%...For many years it will be close to 0%.

Not sure why you assume everyones total tax liability would be the same for a trad 401k and a 529 plan...for me it won't be even close.
miamivice
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Re: What 529 plan are TX residents using?

Post by miamivice »

cusetownusa wrote:
miamivice wrote:
new2bogle wrote:
KlangFool wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
1) Yes
2) 37
3) Can you explain why I would be paying more tax?

Thanks.
If you don't know KlangFool, please know that he is anti-529. He has a 200 post thread a few years back asking about 529s where he shot down every argument (in his mind) for using a 529. His story on how he is currently paying for his kids college changes all the time. Sometimes he saved up a lot, sometimes he is cashflowing it. Sometimes he is employed, sometimes he is unemployed. He is not consistent in his recommendations or suggestions for college savings.

He ignores future tax liability in his discussions, he looks at everything today. I've corrected him before (and he has acknowledged the correction) but he still makes the same mistake. If you ignore future tax liability, putting pretax dollars in a 401k always outweighs putting posttax dollars in a 529. However, you pay taxes when you withdraw from the 401k while you never pay taxes again on money you put into a 529, so your total tax liability (corrected for inflation) is the same in either case.
In KlangFools defense, I don't believe he is anti-529...he has just pointed out that you are better off maxing out better tax-advantage accounts first.

Also, your last statement is false for most people...including me. Many people have tried to explain that to you but for some reason you keep ignoring it. For example, my Marginal tax rate is 28%...so all money saved in my pre-tax accounts saves me 28% off the top. When I withdraw the money sometime in the future the pre-tax savings will be taxed at my effective tax rate which will be well below 28%...For many years it will be close to 0%.

Not sure why you assume everyones total tax liability would be the same for a trad 401k and a 529 plan...for me it won't be even close.
I have no idea what the tax laws will be when I retire, as that is 20 years from now. And I have no idea what my baseline income will be (my social security + spousal social security + my pension + her pension + RMDs), so I really don't know what tax rate I will pay on optional 401k withdrawals during retirement. It won't be zero % for me.

Regardless, college will be paid pre-retirement. I cannot use 401k dollars to pay for college, so it's a moot point to compare tax rate of 529 versus retirement. Each of those events is at a different point of my life.

I will pay ordinary income tax on every dollar that is paid to the school. Either I pay ordinary income tax on a small amount when kids are little, or I pay ordinary income tax on a much larger amount when my kids are in college. From a tax standpoint, I pay less income tax on a college education by saving up a small amount now and letting it grow than by cash flowing college.
miamivice
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Re: What 529 plan are TX residents using?

Post by miamivice »

The other thing I'll say is I object to the concept that one needs to max out retirement accounts before saving for college.

I think one needs to save adequately for retirement before saving for college. I don't see the need to oversave for retirement just because you can.

What do I mean by oversave? Well, KlangFool has $23,500 of retirement space available because he is 1 income. I have $47,000 of retirement space because I am part of a two income family. Using the adage of maxing out retirement account space before saving for college would mean that I would need to sock away almost $50,000 a year in retirement. Figure doing that for 30 years of my career, I'd have way more in retirement than I'd ever need. KlangFool would have half of what I had because his tax advantaged retirement space is half. Yet in retirement there would be no reason why my family would need twice the resources of KlangFool's family.

So, I recommend that folks save an annual amount that will provide for an ample sized retirement, and then save for college afterwards. Whether this amount of money is less than, equal to, or greater than the amount of tax advantaged retirement space depends on a lot of personal factors.

I do advocate forgoing new cars and fancy trips and using the money to save for college.
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Re: What 529 plan are TX residents using?

Post by KlangFool »

new2bogle wrote:
KlangFool wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
1) Yes
2) 37
3) Can you explain why I would be paying more tax?

Thanks.
new2bogle,

1) Then, you are not sacrificing Trad. 401K space for 529. This is a good thing. Some people on thread put 529 ahead of maxing Trad. 401K. They like paying more taxes.

2) 37. What will be your age when your kid goes to college? Some of my peers are old enough that they are 59 1/2 when their kids go to college. So, essentially, they could use retirement accounts to fund college education without penalty.

3) In your case, it will be a trade off between 529, Roth IRA and taxable account. 529 has less flexibility. For people like me with zero job security, I prefer not to put any money into 529.

4) Do you save 30K or more every year? If yes, why do you need to save for college education? You could use your annual savings to fund the college education.

5) How safe and stable your income will be over the next 10 to 15 years? That is the question that you need to answer.

KlangFool
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Re: What 529 plan are TX residents using?

Post by KlangFool »

cusetownusa wrote: In KlangFools defense, I don't believe he is anti-529...he has just pointed out that you are better off maxing out better tax-advantage accounts first.

Also, your last statement is false for most people...including me. Many people have tried to explain that to you but for some reason you keep ignoring it. For example, my Marginal tax rate is 28%...so all money saved in my pre-tax accounts saves me 28% off the top. When I withdraw the money sometime in the future the pre-tax savings will be taxed at my effective tax rate which will be well below 28%...For many years it will be close to 0%.

Not sure why you assume everyones total tax liability would be the same for a trad 401k and a 529 plan...for me it won't be even close.
cusetownusa,

His fundamental assumption is that his income will be high and stable over the next 20 years. So, there is no reason for him to over-save for retirement. I wish him best of luck.

I know that I am not that lucky. So, I have to plan for a more realistic scenario.

KlangFool
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Topic Author
new2bogle
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Re: What 529 plan are TX residents using?

Post by new2bogle »

KlangFool wrote:
new2bogle wrote:
KlangFool wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
1) Yes
2) 37
3) Can you explain why I would be paying more tax?

Thanks.
new2bogle,

1) Then, you are not sacrificing Trad. 401K space for 529. This is a good thing. Some people on thread put 529 ahead of maxing Trad. 401K. They like paying more taxes.

2) 37. What will be your age when your kid goes to college? Some of my peers are old enough that they are 59 1/2 when their kids go to college. So, essentially, they could use retirement accounts to fund college education without penalty.

3) In your case, it will be a trade off between 529, Roth IRA and taxable account. 529 has less flexibility. For people like me with zero job security, I prefer not to put any money into 529.

4) Do you save 30K or more every year? If yes, why do you need to save for college education? You could use your annual savings to fund the college education.

5) How safe and stable your income will be over the next 10 to 15 years? That is the question that you need to answer.

KlangFool
2) 49

3) My income fluctuates significantly around the Roth cutoff point due to unknown bonus amounts. Last year I made the full Roth contributions. Previous few years before that I was ineligible for roth. This year looks as if I may be able to do a phased out Roth.

4) Outside of 401k, I save closer to $20-25k per year (again dependent on bonuses, etc per #3). Yes, currently my mindset is to use my taxable account (plus roth IRA if needed and my 401k looks to be on track). However, 529 will provide tax free growth that won't happen in my taxable account.

5) That is a good question.
Topic Author
new2bogle
Posts: 1779
Joined: Fri Sep 11, 2009 2:05 pm

Re: What 529 plan are TX residents using?

Post by new2bogle »

miamivice wrote:
new2bogle wrote:
KlangFool wrote:
new2bogle wrote:I've been late at this but need to get college savings started for my little ones. For residents of TX, what plan are you using for the 529? Oldest is still in elementary. I will likely seed with ~$40-50k and then make monthly payments (at an undetermined value as of yet).
new2bogle,

1) Do you max up your Trad. 401K contribution?

2) How old are you?

3) Why would you want to pay more tax by contributing to 529 plan?

KlangFool
1) Yes
2) 37
3) Can you explain why I would be paying more tax?

Thanks.
If you don't know KlangFool, please know that he is anti-529. He has a 200 post thread a few years back asking about 529s where he shot down every argument (in his mind) for using a 529. His story on how he is currently paying for his kids college changes all the time. Sometimes he saved up a lot, sometimes he is cashflowing it. Sometimes he is employed, sometimes he is unemployed. He is not consistent in his recommendations or suggestions for college savings.

He ignores future tax liability in his discussions, he looks at everything today. I've corrected him before (and he has acknowledged the correction) but he still makes the same mistake. If you ignore future tax liability, putting pretax dollars in a 401k always outweighs putting posttax dollars in a 529. However, you pay taxes when you withdraw from the 401k while you never pay taxes again on money you put into a 529, so your total tax liability (corrected for inflation) is the same in either case.

Thanks for the heads up. I like knowing all opinions, yours, his and hers. In the end, I'll have to read up on 529s some more. Thanks.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: What 529 plan are TX residents using?

Post by KlangFool »

miamivice wrote: What do I mean by oversave? Well, KlangFool has $23,500 of retirement space available because he is 1 income. I have $47,000 of retirement space because I am part of a two income family. Using the adage of maxing out retirement account space before saving for college would mean that I would need to sock away almost $50,000 a year in retirement. Figure doing that for 30 years of my career, I'd have way more in retirement than I'd ever need. KlangFool would have half of what I had because his tax advantaged retirement space is half. Yet in retirement there would be no reason why my family would need twice the resources of KlangFool's family.
miamivice,

Please do not insult me by saying that I only save up to the tax advantaged account's amount. If I did that, 45% of my portfolio would not be in the taxable account.

<<Figure doing that for 30 years of my career, I'd have way more in retirement than I'd ever need.>>

Your choice and your life. You choose to pay more tax by contributing to 529 instead of Trad. 401K. You did that because you believe you will have 20 more years of career. I wish you best of luck. Some of us choose to be a little bit more conservative in our planning. So, we could early retire if we need to.

KlangFool
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Topic Author
new2bogle
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Re: What 529 plan are TX residents using?

Post by new2bogle »

miamivice wrote:I do advocate forgoing new cars and fancy trips and using the money to save for college.

I agree! I always wonder how some people can have expensive SUVs (the GMC Denali is very nice but there is no way I could afford that...) and expensive houses!
KlangFool
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Re: What 529 plan are TX residents using?

Post by KlangFool »

new2bogle wrote:
2) 49

3) My income fluctuates significantly around the Roth cutoff point due to unknown bonus amounts. Last year I made the full Roth contributions. Previous few years before that I was ineligible for roth. This year looks as if I may be able to do a phased out Roth.

4) Outside of 401k, I save closer to $20-25k per year (again dependent on bonuses, etc per #3). Yes, currently my mindset is to use my taxable account (plus roth IRA if needed and my 401k looks to be on track). However, 529 will provide tax-free growth that won't happen in my taxable account.

5) That is a good question.
new2bogle,

<<However, 529 will provide tax-free growth that won't happen in my taxable account.>>

1) That is not necessarily true. I get tax-free growth in my taxable account by doing tax loss harvesting and tax gain harvesting. And, my taxable account is big enough to provide supplemental "cash flow" for college education too. Please note that with a sizable taxable and Roth accounts, you could do Roth conversion at 0% while spending from those 2 accounts.

If you contribute enough to Trad. 401K and drop yourself into 15% tax bracket, qualified dividend, and long-term capital gain is taxed at 0%.

2) Your annual savings is exceeding 30K. Why do you need to save for college education? Your annual savings is big enough to cover college education costs.

KlangFool
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bigred77
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Re: What 529 plan are TX residents using?

Post by bigred77 »

cusetownusa wrote: In KlangFools defense, I don't believe he is anti-529...he has just pointed out that you are better off maxing out better tax-advantage accounts first.

Also, your last statement is false for most people...including me. Many people have tried to explain that to you but for some reason you keep ignoring it. For example, my Marginal tax rate is 28%...so all money saved in my pre-tax accounts saves me 28% off the top. When I withdraw the money sometime in the future the pre-tax savings will be taxed at my effective tax rate which will be well below 28%...For many years it will be close to 0%.

Not sure why you assume everyones total tax liability would be the same for a trad 401k and a 529 plan...for me it won't be even close.
I don't know if that's the right way to look at the situation... If you are still working when your kids go to college, your withdrawals from those pre-tax retirement accounts to pay for college are going to be taxed on top of your income. So if your income puts you in the 28% tax bracket in the future, your going to pay at least 28 cents on the dollar in taxes to withdraw that money to pay for college expenses. I think the marginal bracket during withdrawal is the correct way to look at using traditional pre-tax retirement accounts as the vehicle for college savings.

That being said, I agree with the side it probably makes the most sense to max out all tax-advantaged space available to you first before you consider using 529s. After you maxed all your retirement accounts, I can see arguments for putting additional funds into 529s, taxable brokerage accounts, or even prepaying the mortgage.

529s are best utilized (IMO) by parents who have substantial assets/income during the time where there kids are born. If you are going to be able to max out all tax advantaged accounts from current income for the foreseeable future AND have the ability to get a big chunk (lets say 50k) into a 529 before your kids start Kindergarten, then I think you benefit the most from this strategy. Smaller, monthly contributions to a 529 over time from current income (after maxing out retirement accounts) is also a perfectly valid strategy but I think parents lucky enough to be in the first scenario are more likely to see substantial investment gains, and thus benefit more from the 529 tax rules.
cusetownusa
Posts: 515
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Re: What 529 plan are TX residents using?

Post by cusetownusa »

bigred77 wrote:
I don't know if that's the right way to look at the situation... If you are still working when your kids go to college, your withdrawals from those pre-tax retirement accounts to pay for college are going to be taxed on top of your income. So if your income puts you in the 28% tax bracket in the future, your going to pay at least 28 cents on the dollar in taxes to withdraw that money to pay for college expenses. I think the marginal bracket during withdrawal is the correct way to look at using traditional pre-tax retirement accounts as the vehicle for college savings.

That being said, I agree with the side it probably makes the most sense to max out all tax-advantaged space available to you first before you consider using 529s. After you maxed all your retirement accounts, I can see arguments for putting additional funds into 529s, taxable brokerage accounts, or even prepaying the mortgage.

529s are best utilized (IMO) by parents who have substantial assets/income during the time where there kids are born. If you are going to be able to max out all tax advantaged accounts from current income for the foreseeable future AND have the ability to get a big chunk (lets say 50k) into a 529 before your kids start Kindergarten, then I think you benefit the most from this strategy. Smaller, monthly contributions to a 529 over time from current income (after maxing out retirement accounts) is also a perfectly valid strategy but I think parents lucky enough to be in the first scenario are more likely to see substantial investment gains, and thus benefit more from the 529 tax rules.
If I am still working when my kids go to college I will not be withdrawing from my Pre-Tax accounts so I won't have to worry about it being taxed at 28%. Plus I am not sure you can even do that without getting hit with the 10% penalty. If I am still working I will just cash flow it.

I don't plan on touching my pre-tax accounts until after I retire...at that point I will use all of the strategies (Roth conversions, etc.) discussed on this forum to keep my tax rate as close to 0% as possible while maintaining my desired lifestyle.
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Re: What 529 plan are TX residents using?

Post by KlangFool »

bigred77 wrote:
cusetownusa wrote: In KlangFools defense, I don't believe he is anti-529...he has just pointed out that you are better off maxing out better tax-advantage accounts first.

Also, your last statement is false for most people...including me. Many people have tried to explain that to you but for some reason you keep ignoring it. For example, my Marginal tax rate is 28%...so all money saved in my pre-tax accounts saves me 28% off the top. When I withdraw the money sometime in the future the pre-tax savings will be taxed at my effective tax rate which will be well below 28%...For many years it will be close to 0%.

Not sure why you assume everyones total tax liability would be the same for a trad 401k and a 529 plan...for me it won't be even close.
I don't know if that's the right way to look at the situation... If you are still working when your kids go to college, your withdrawals from those pre-tax retirement accounts to pay for college are going to be taxed on top of your income. So if your income puts you in the 28% tax bracket in the future, your going to pay at least 28 cents on the dollar in taxes to withdraw that money to pay for college expenses. I think the marginal bracket during withdrawal is the correct way to look at using traditional pre-tax retirement accounts as the vehicle for college savings.
bigred77,

If OP is still working while the kids go to college, he could fund the college education through his annual saving, taxable account, Roth IRA contribution. Why would he need to withdraw from Trad. 401K?

If OP is not working, he could spend from the taxable account and Roth IRA's contribution before Trad. 401K. Even if OP withdraw from Trad. 401K, it will not be in the 28% bracket.

Your scenario does not apply in OP's case.

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miamivice
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Re: What 529 plan are TX residents using?

Post by miamivice »

KlangFool wrote:
bigred77 wrote:
cusetownusa wrote: In KlangFools defense, I don't believe he is anti-529...he has just pointed out that you are better off maxing out better tax-advantage accounts first.

Also, your last statement is false for most people...including me. Many people have tried to explain that to you but for some reason you keep ignoring it. For example, my Marginal tax rate is 28%...so all money saved in my pre-tax accounts saves me 28% off the top. When I withdraw the money sometime in the future the pre-tax savings will be taxed at my effective tax rate which will be well below 28%...For many years it will be close to 0%.

Not sure why you assume everyones total tax liability would be the same for a trad 401k and a 529 plan...for me it won't be even close.
I don't know if that's the right way to look at the situation... If you are still working when your kids go to college, your withdrawals from those pre-tax retirement accounts to pay for college are going to be taxed on top of your income. So if your income puts you in the 28% tax bracket in the future, your going to pay at least 28 cents on the dollar in taxes to withdraw that money to pay for college expenses. I think the marginal bracket during withdrawal is the correct way to look at using traditional pre-tax retirement accounts as the vehicle for college savings.
bigred77,

If OP is still working while the kids go to college, he could fund the college education through his annual saving, taxable account, Roth IRA contribution. Why would he need to withdraw from Trad. 401K?

If OP is not working, he could spend from the taxable account and Roth IRA's contribution before Trad. 401K. Even if OP withdraw from Trad. 401K, it will not be in the 28% bracket.

Your scenario does not apply in OP's case.

KlangFool
This is where I lose KlangFool's logic.

Why would I save up for college in a taxable account in lieu of saving in a 529? The only situation that would make sense if I felt the chance of needing the money for college was low. Saving for college in a taxable account makes no sense otherwise.
Last edited by miamivice on Tue Nov 08, 2016 3:05 pm, edited 2 times in total.
KlangFool
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Re: What 529 plan are TX residents using?

Post by KlangFool »

Folks,

For those that do not know me, this is not theoretical for me. I "cash flow" my 2 kids' college education with my annual savings now. My plan of contributing to Trad. 401K, Roth IRA, and taxable worked for me. No 529 is required.

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cusetownusa
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Re: What 529 plan are TX residents using?

Post by cusetownusa »

miamivice wrote:
This is where I lose KlangFool's logic.

Why would I save up for college in a taxable account in lieu of saving in a 529? The only situation that would make sense if I felt the chance of needing the money for college was low. Saving for college in a taxable account makes no sense otherwise.
Its simple, consider contributing to a 529 after maxing out all of your other tax advantaged accounts, otherwise, you will pay way more taxes then you have too. For some however, once they reach this point, might find that the benefits of the 529 don't outweigh the trade offs...especially if you live in a State where you don't receive any State tax benefits.
Topic Author
new2bogle
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Re: What 529 plan are TX residents using?

Post by new2bogle »

KlangFool wrote:
2) Your annual savings is exceeding 30K. Why do you need to save for college education? Your annual savings is big enough to cover college education costs.

KlangFool
I don't think the bolded is the case. In my OP I mentioned "little ones" plural but did not put a number on it. It is 3. I don't think $360k in 12 years is enough for 3 kids (maybe 1.5) if they end up going to an Ivy or similar school. My colleague's son goes to MIT and they're shelling out $70k per year (they are dual high earners with one kid, so no aid for them). That's my worst case nightmare... though if all three of my kids can actually get into MIT or similar school it's one nightmare that I would be welcome.

Also thanks for giving your inputs, helps me in deciding what to do.
bigred77
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Re: What 529 plan are TX residents using?

Post by bigred77 »

cusetownusa wrote:
bigred77 wrote:
I don't know if that's the right way to look at the situation... If you are still working when your kids go to college, your withdrawals from those pre-tax retirement accounts to pay for college are going to be taxed on top of your income. So if your income puts you in the 28% tax bracket in the future, your going to pay at least 28 cents on the dollar in taxes to withdraw that money to pay for college expenses. I think the marginal bracket during withdrawal is the correct way to look at using traditional pre-tax retirement accounts as the vehicle for college savings.

That being said, I agree with the side it probably makes the most sense to max out all tax-advantaged space available to you first before you consider using 529s. After you maxed all your retirement accounts, I can see arguments for putting additional funds into 529s, taxable brokerage accounts, or even prepaying the mortgage.

529s are best utilized (IMO) by parents who have substantial assets/income during the time where there kids are born. If you are going to be able to max out all tax advantaged accounts from current income for the foreseeable future AND have the ability to get a big chunk (lets say 50k) into a 529 before your kids start Kindergarten, then I think you benefit the most from this strategy. Smaller, monthly contributions to a 529 over time from current income (after maxing out retirement accounts) is also a perfectly valid strategy but I think parents lucky enough to be in the first scenario are more likely to see substantial investment gains, and thus benefit more from the 529 tax rules.
If I am still working when my kids go to college I will not be withdrawing from my Pre-Tax accounts so I won't have to worry about it being taxed at 28%. Plus I am not sure you can even do that without getting hit with the 10% penalty. If I am still working I will just cash flow it.

I don't plan on touching my pre-tax accounts until after I retire...at that point I will use all of the strategies (Roth conversions, etc.) discussed on this forum to keep my tax rate as close to 0% as possible while maintaining my desired lifestyle.
You can use traditional IRA balances to pay for college expenses prior to 59 1/2 with no penalty. Just pay the normal taxes on it. 10% penalty does apply to 401k withdrawals though.

My comment was meant strictly in terms of using pre-tax retirement dollars as the savings vehicle for college expenses (and using those dollars to actually pay for college). The taxes owed on those funds are still going to be calculated at one's marginal tax rate during the years the college costs are incurred. If one has retired prior to this, its possible that marginal rate WILL be very low during those years, but I still think the best way to look at the tax situation is marginal rate in the year of tax deferrel vs (estimated) marginal rate during the year of college expenses.
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Re: What 529 plan are TX residents using?

Post by KlangFool »

new2bogle wrote:
KlangFool wrote:
2) Your annual savings is exceeding 30K. Why do you need to save for college education? Your annual savings is big enough to cover college education costs.

KlangFool
I don't think the bolded is the case. In my OP I mentioned "little ones" plural but did not put a number on it. It is 3. I don't think $360k in 12 years is enough for 3 kids (maybe 1.5) if they end up going to an Ivy or similar school. My colleague's son goes to MIT and they're shelling out $70k per year (they are dual high earners with one kid, so no aid for them). That's my worst case nightmare... though if all three of my kids can actually get into MIT or similar school it's one nightmare that I would be welcome.

Also thanks for giving your inputs, helps me in deciding what to do.
new2bogle,

<<It is 3. >>

A) You do not pay that amount in one year. What are their ages? It is spread across multiple years.

B) I have 2 kids. The amount is 240K spread across 6 years: 30K, 60K, 60K, 60K, 30K. So, it is at most 60K per year. Small enough to be funded via "cash flow".

<< I don't think $360k in 12 years is enough for 3 kids (maybe 1.5) >>

C) If you do not have multiple times of that in your other investment, what makes you think you can afford to pay 360K?

D) If you spent 360K in college education but have nothing else to support yourself, how does that help your children? You will be a burden to your children.

KlangFool
Last edited by KlangFool on Tue Nov 08, 2016 3:28 pm, edited 1 time in total.
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Re: What 529 plan are TX residents using?

Post by bigred77 »

miamivice wrote:
KlangFool wrote:
bigred77 wrote:
cusetownusa wrote: In KlangFools defense, I don't believe he is anti-529...he has just pointed out that you are better off maxing out better tax-advantage accounts first.

Also, your last statement is false for most people...including me. Many people have tried to explain that to you but for some reason you keep ignoring it. For example, my Marginal tax rate is 28%...so all money saved in my pre-tax accounts saves me 28% off the top. When I withdraw the money sometime in the future the pre-tax savings will be taxed at my effective tax rate which will be well below 28%...For many years it will be close to 0%.

Not sure why you assume everyones total tax liability would be the same for a trad 401k and a 529 plan...for me it won't be even close.
I don't know if that's the right way to look at the situation... If you are still working when your kids go to college, your withdrawals from those pre-tax retirement accounts to pay for college are going to be taxed on top of your income. So if your income puts you in the 28% tax bracket in the future, your going to pay at least 28 cents on the dollar in taxes to withdraw that money to pay for college expenses. I think the marginal bracket during withdrawal is the correct way to look at using traditional pre-tax retirement accounts as the vehicle for college savings.
bigred77,

If OP is still working while the kids go to college, he could fund the college education through his annual saving, taxable account, Roth IRA contribution. Why would he need to withdraw from Trad. 401K?

If OP is not working, he could spend from the taxable account and Roth IRA's contribution before Trad. 401K. Even if OP withdraw from Trad. 401K, it will not be in the 28% bracket.

Your scenario does not apply in OP's case.

KlangFool
This is where I lose KlangFool's logic.

Why would I save up for college in a taxable account in lieu of saving in a 529? The only situation that would make sense if I felt the chance of needing the money for college was low. Saving for college in a taxable account makes no sense otherwise.
Klangfool I agree with Miamivice on this one.

Assuming I have maxed out my retirement accounts through out, I will be better paying college expenses out of investments I've held inside of a 529 account vs a taxable brokerage account.

If the OP is still working, he'd be better off having a 529 balance to draw on (and a lower taxable brokerage account) and continue maxing out his retirement accounts while he pays for school.

If the OP is retired, he'd be better off having a 529 balance to draw on (and a lower taxable brokerage account) and have additional room for more money to be included in his Roth conversion strategy.
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Re: What 529 plan are TX residents using?

Post by KlangFool »

bigred77 wrote:
Klangfool I agree with Miamivice on this one.

Assuming I have maxed out my retirement accounts through out, I will be better paying college expenses out of investments I've held inside of a 529 account vs a taxable brokerage account.

If the OP is still working, he'd be better off having a 529 balance to draw on (and a lower taxable brokerage account) and continue maxing out his retirement accounts while he pays for school.

If the OP is retired, he'd be better off having a 529 balance to draw on (and a lower taxable brokerage account) and have additional room for more money to be included in his Roth conversion strategy.
bigred77,

How would OP know that he will be fully employed for the next 10+ years?

<< I will be better paying college expenses out of investments I've held inside of a 529 account vs a taxable brokerage account.>>

Why would that be so if you can get tax-free growth in the taxable brokerage account too?

<<If the OP is still working, he'd be better off having a 529 balance to draw on (and a lower taxable brokerage account) and continue maxing out his retirement accounts while he pays for school.>>

You can do that too with a taxable account too. So, there is no difference.

<<If the OP is retired, he'd be better off having a 529 balance to draw on (and a lower taxable brokerage account) and have additional room for more money to be included in his Roth conversion strategy.>>

How is that so if OP is forced to retire early before his kid enter the college? He cannot spend the money from 529 for his living expense without paying penalty. In this case, the taxable account is better.

In summary, if a person knows how to invest in their taxable account efficiently, they can enjoy tax-free growth too without all the associated restriction with 529.

KlangFool
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Re: What 529 plan are TX residents using?

Post by miamivice »

I'm honestly not nearly smart enough. I'm not intelligent enough to know how I can get tax free growth inside a taxable account.

However, I'm in full agreement that getting tax free growth inside a taxable account is preferable to a 529, since there are no spending restrictions on a taxable account.
KlangFool
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Re: What 529 plan are TX residents using?

Post by KlangFool »

Folks

viewtopic.php?t=188491

The above contain the spreadsheet created by our forum moderator on the tax burden of taxable investing. With tax loss harvesting and tax gain harvesting, the number could go down to zero.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

The above thread is highly educational too.

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TxAg
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Re: What 529 plan are TX residents using?

Post by TxAg »

Most of our investments are through Fidelity. They have a plan through Deleware, which is what I used. Low cost and market indexed.
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Re: What 529 plan are TX residents using?

Post by EHEngineer »

Image
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius
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Re: What 529 plan are TX residents using?

Post by shainy »

We live in TX and use Utah/ Nevada and Texas Tuition Promise Fund.

If your kid intend to go to UT Austin, or any other public university in Texas, take a look at prepaid plan TTPF.
To cover the full four years, you need 400 type 1 units at the most expensive public university in Texas.We bought 300 units of Type 1, in case the kid get any scholarship. Again it covers only the tuition expenses.

For boarding and other educational expenses, we have set up 529 accounts with Utah and Nevada. We plan to use these plans if the kids get admission to any out of state university.

Analyze what is best for your situation depending on the kid's target schools.
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