Should I stop 529 Contributions

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
raamakoti
Posts: 119
Joined: Mon Jul 31, 2017 10:20 am

Should I stop 529 Contributions

Post by raamakoti » Sat Jan 20, 2018 5:27 am

We are maxing our tax advantage accounts all of them. Our 529 stands at $62k
Age of the kid is 5 years. We contribute $510 each month earlier we used to do 1000 a month.
I am trying to avoid over funding. I was of the opinion I would rather contribute sooner and let compounding take charge of growth than do catch up in the later years.
I can comfortably still contribute $510 but curious to know if should go towards retirement
Thanks a lot for your help

Mr. Benedictine
Posts: 20
Joined: Tue May 12, 2015 9:50 pm

Re: Should I stop 529 Contributions

Post by Mr. Benedictine » Sat Jan 20, 2018 6:33 am

I like your idea of saving early and letting compounding take over. We have a child in college and one heading there next year. Each school has a total cost per year of just under $30k. We saved $120k for each child so the math worked out. Also, check out the American Opportunity Tax credit (AOTC) and see if you qualify . We pay $2000 per year toward tuition from cash flow (not from 529 ) and get that right back as a tax credit when we file our federal taxes. That’s like having an extra $8k per child for the 4 years.

TheOscarGuy
Posts: 599
Joined: Sat Oct 06, 2012 1:10 pm
Location: Where I wanna be.

Re: Should I stop 529 Contributions

Post by TheOscarGuy » Sat Jan 20, 2018 6:55 am

raamakoti wrote:
Sat Jan 20, 2018 5:27 am
We are maxing our tax advantage accounts all of them. Our 529 stands at $62k
Age of the kid is 5 years. We contribute $510 each month earlier we used to do 1000 a month.
I am trying to avoid over funding. I was of the opinion I would rather contribute sooner and let compounding take charge of growth than do catch up in the later years.
I can comfortably still contribute $510 but curious to know if should go towards retirement
Thanks a lot for your help
Without contributing anything assuming a 13 year time horizon and with a 6% interest your 529 plan balance would be 132K. That money is in 13 years, so inflation and cost of education would have increased. Contributing $510 per month would make that balance $252K, to me that seems high -- education might cost that much in 13 years, but I would be uncomfortable keeping that much in my 529.

User avatar
DaftInvestor
Posts: 4064
Joined: Wed Feb 19, 2014 10:11 am

Re: Should I stop 529 Contributions

Post by DaftInvestor » Sat Jan 20, 2018 6:57 am

Personally I would contribute a bit more before stopping to fund (provided you are maxing out tax advantaged retirement savings vehicles).
The number of students going to grad school is on the rise - not sure what the trend will be 17 years from now when your 5 year old will be finishing up undergrad but that is one of many options for you if you slightly overfund the account. In my opinion the tax free growth nature of the 529 is too great not to try to fully take advantage of it even if you end up with a bit left over that is either passed on to somone else or withdrawn later with the penalty.

User avatar
birdog
Posts: 168
Joined: Fri Apr 07, 2017 1:35 pm

Re: Should I stop 529 Contributions

Post by birdog » Sat Jan 20, 2018 7:04 am

I am of the opinion it is better to underfund than overfund a 529k. I love the one thousand dollar state tax credit I get every year and I started early as well to let compounding do it’s thing but I plan to err on the low side because I don’t like the dollars being so restricted (can only be used for education). I can make up any difference from my taxable account for college costs. Plus, you can borrow for college but not for retirement. I certainly would make sure my retirement accounts are funded before I was funding a 529 to begin with. Are you able to fully fund your retirement accounts and add to a taxable account every year if you quit funding the 529? If so, then I agree that you might want to back off of the 529 additions. Some point to the tax free growth benefits of the 529 but that comes with an educational use restriction. If it weren’t for the state tax credit (in addition to the tax-free growth) I probably wouldn’t fund a 529 much if at all.
Last edited by birdog on Sat Jan 20, 2018 7:46 am, edited 1 time in total.

Jack FFR1846
Posts: 7972
Joined: Tue Dec 31, 2013 7:05 am

Re: Should I stop 529 Contributions

Post by Jack FFR1846 » Sat Jan 20, 2018 7:39 am

Before funding dollar one for a 529, I would first:

Max 401k (or whatever plan you have)
Max Roth
Buy $10k each in US Savings bonds
pay off mortgage

These give you more flexibility in how the money is spent while considering possible FAFSA impacts.

We have one in college ($65k per year) and one in high school. Funding from savings bonds and cash flow.
Bogle: Smart Beta is stupid

User avatar
Sammy_M
Posts: 1888
Joined: Sun Nov 25, 2007 8:30 am

Re: Should I stop 529 Contributions

Post by Sammy_M » Sat Jan 20, 2018 7:52 am

Jack FFR1846 wrote:
Sat Jan 20, 2018 7:39 am
Before funding dollar one for a 529, I would first:

Max 401k (or whatever plan you have)
Max Roth
Buy $10k each in US Savings bonds
pay off mortgage

These give you more flexibility in how the money is spent while considering possible FAFSA impacts.

We have one in college ($65k per year) and one in high school. Funding from savings bonds and cash flow.
Completely agree about Max 401k and IRA. The rest depends on your marginal tax rate, mortgage rate and whether you get a state tax benefit for contributing to a 529. It also depends on how likely you are to get aid through FAFSA. I would at least contribute the minimum to get the state tax benefit.

leftcoaster
Posts: 338
Joined: Mon Jul 23, 2007 4:04 pm

Re: Should I stop 529 Contributions

Post by leftcoaster » Sat Jan 20, 2018 10:39 am

Grad school likely?

DIFAR31
Posts: 147
Joined: Mon Jan 01, 2018 5:51 pm

Re: Should I stop 529 Contributions

Post by DIFAR31 » Sat Jan 20, 2018 11:09 am

birdog wrote:
Sat Jan 20, 2018 7:04 am
I don’t like the dollars being so restricted (can only be used for education).
529 dollars can be used for anything, at any time. Or they can be used for nothing, forever, and continue to grow tax deferred or tax free. The question is what will the tax treatment of earnings be when a distribution is made.

If used for 529 qualified education expenses: tax free
If used for non-qualified expenses in a limited number of circumstances: tax deferred
If used for non-qualified expenses in other circumstances: tax deferred plus 10% additional tax

If there is tax owed, it will be assessed against the recipient of the distribution, which is generally either the beneficiary or the account owner.

User avatar
birdog
Posts: 168
Joined: Fri Apr 07, 2017 1:35 pm

Re: Should I stop 529 Contributions

Post by birdog » Sat Jan 20, 2018 12:14 pm

DIFAR31 wrote:
Sat Jan 20, 2018 11:09 am
birdog wrote:
Sat Jan 20, 2018 7:04 am
I don’t like the dollars being so restricted (can only be used for education).
529 dollars can be used for anything, at any time. Or they can be used for nothing, forever, and continue to grow tax deferred or tax free. The question is what will the tax treatment of earnings be when a distribution is made.

If used for 529 qualified education expenses: tax free
If used for non-qualified expenses in a limited number of circumstances: tax deferred
If used for non-qualified expenses in other circumstances: tax deferred plus 10% additional tax

If there is tax owed, it will be assessed against the recipient of the distribution, which is generally either the beneficiary or the account owner.
Correct, to be more clear I should have said "I don’t like the dollars being so restricted (can only be used for education) if you don't mind paying income taxes on the earnings plus a penalty."

The earnings portion of a nonqualified withdrawal is taxable as ordinary income. In addition, a 10 percent penalty tax must be computed on the earnings portion and paid with your federal tax return, unless you qualify for an exception to the penalty. The exceptions relate to withdrawals made on account of the beneficiary's death, disability, receipt of a scholarship, or attendance at a Unites States military academy. A limited exception also exists for families claiming a Hope credit or Lifetime Learning credit since those credits act to reduce your qualified higher education expenses.
http://www.savingforcollege.com/questio ... icle_id=21

I would rather underfund than overfund a 529. The state tax credit is a big reason that I contribute.

raamakoti
Posts: 119
Joined: Mon Jul 31, 2017 10:20 am

Re: Should I stop 529 Contributions

Post by raamakoti » Sat Jan 20, 2018 1:33 pm

leftcoaster wrote:
Sat Jan 20, 2018 10:39 am
Grad school likely?
We can hope that she would go to grad school because we both went to. But what we did is not a metric for her just a hope of optimistic parents.

Thank you for the replies. Yes we are maxing out tax advantage accounts

letsgobobby
Posts: 11649
Joined: Fri Sep 18, 2009 1:10 am

Re: Should I stop 529 Contributions

Post by letsgobobby » Sat Jan 20, 2018 1:37 pm

You have not said what your goal is, so hard to know.

In particular if you plan to eventually fund some of your grandkids' educations, I'd keep going.

Stormbringer
Posts: 606
Joined: Sun Jun 14, 2015 7:07 am

Re: Should I stop 529 Contributions

Post by Stormbringer » Sat Jan 20, 2018 2:01 pm

raamakoti wrote:
Sat Jan 20, 2018 5:27 am
We are maxing our tax advantage accounts all of them. Our 529 stands at $62k
Age of the kid is 5 years.
I think $62k at age 5 is great, but recommend saving a bit more. Many kids (mine included) now take 5 years to graduate, and if they pick an expensive school it could run $40-60K per year in today's dollars. With college being just 13 years away, it is unlikely that $62K in a 529 is going to double and then double again in the time frame.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Grt2bOutdoors
Posts: 19324
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Should I stop 529 Contributions

Post by Grt2bOutdoors » Sat Jan 20, 2018 2:14 pm

Go to vanguard website, select college planner, input child’s age today, how much you already have saved, either name of school you think child might attend or the average cost of school, you will see what it determines you should contribute per month or year. You are doing good savings wise, but I agree with other poster to believe monies will double and double again in 12-13 years is highly unlikely. I would keep saving and revisit this question at age 10.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

HopeToGolf
Posts: 326
Joined: Fri Dec 24, 2010 4:04 pm

Re: Should I stop 529 Contributions

Post by HopeToGolf » Sat Jan 20, 2018 3:18 pm

Do you think you will get aid (free money...not loans)?

If not, run a college cost calculator using the current tuition costs of a public and private school of your choice. You can also run a future value calculation using expected inflation. Be prepared to be shocked and to keep saving (if you want to pay for 4 years).

I am about 5.5 years away from my first bill and a number of years ago I estimated about ~$250K for public school and ~$400K for private. Unfortunately, my estimates are tracking with these numbers and for private I may have underestimated by a bit.

The whole situation has me a bit angry. That said, the system is market based and there is a ton of demand for even the worst of $50K schools.

Post Reply