College Saving Plans - Options

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endeavor
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College Saving Plans - Options

Post by endeavor » Fri Jul 20, 2018 4:06 pm

Hello fellow Bogleheades,

I am new to this form, and seek suggestions for college fund investment. I am 36 years old. My kids are 6 and 3. Based on the online resources available, I estimated that, by the time they go to college, both the kids require about $400 k for college costs for a govt university.

I am doing college fund for both the kids through UT 529 plan that should cover around 50% of the college costs for both the kids. I have been hearing from few people that the 529 plans impacts the scholarships. Even if the Kid is eligible to obtain scholarship, colleges typically forces the parents to use the 529 funds (if available), and then scholarship kicks in. The argument here is that the college would let other eligible students (who don't have 529 funds or poor) to use these funds. This is also said by one of the whole life insurance agent (probably his sales pitch).

This confused me and i am hesitating to invest 100% college fund in 529 accounts. Below are my questions:
1. Have any of you heard about this before (scholarships vs 529 funds)?
2. If this argument is not true, do you still recommend to invest 100% college fund in 529 accounts? or should i be looking for different investment option (may be real estate)
3. I am also thinking about opening a Roth IRA account, i've came to know that the funds from Roth IRA can be used for educational expenses (not taxable, and no penalty). Is it a good idea? By the way, i am using the employee sponsored 401K plan for retirement purpose.

Your suggestions are highly appreciated. Thanks.

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willthrill81
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Re: College Saving Plans - Options

Post by willthrill81 » Fri Jul 20, 2018 5:16 pm

While not directly answering your question, I'll kindly say this: you will almost certainly be better off by not contributing to any 529 plan until you've first maxed out all of your other tax-advantaged accounts (e.g. IRAs, 401k/403B/457, HSA).

If need be, you can merely suspend contributions to these other tax-advantaged accounts and pay for college expense from your regular income if you're able to.

Do not sacrifice your own retirement security to help your children avoid student loans. They can get a loan to pay for college, whereas you cannot get a loan to pay for your retirement.
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livesoft
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Re: College Saving Plans - Options

Post by livesoft » Fri Jul 20, 2018 5:29 pm

Not only should you open a Roth IRA first, but your spouse should open a Roth IRA as well. And both should contribute the maximum allowed every year to the Roth IRAs before considering 529 plans.

But after that, 529 plans are great for the folks who can contribute to them.

One thing that people don't really realize when calculating college costs in the future is that everything goes up with inflation except maybe a fixed rate monthly mortgage payment. So by the time your kids are in college, you will be making lots more money and the annual limits for 401(k) and Roth IRA contributions will be huge. If you get used to making the maximum contributions to your 401(k)s and Roth IRAs, then you can simply stop making those contributions for the few years your kids are in college and divert the cash into the coffers of the universities of choice.

I'll give a concrete example: My son's full cost of college last year was about $20,000. But 401(k) limits were $24,000 for each of us and Roth IRA contributions limits were $6,500 for each of us. So combined our contributions limits were $55,000 while college was only $20,000.
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delamer
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Re: College Saving Plans - Options

Post by delamer » Fri Jul 20, 2018 8:10 pm

My older kid received a partial scholarship to a private college. It was a merit scholarship based on kid’s high school ACT/GPA being higher than average for that college.

The college never asked us to provide any financial information before awarding the scholarship, and we had significant money in a 529 plan.

That said, a merit scholarship is a different thing than a need-based scholarship. For a need-based scholarship, money in a 529 will have an impact on how much is awarded.
Last edited by delamer on Sat Jul 21, 2018 11:45 am, edited 1 time in total.

SimonJester
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Re: College Saving Plans - Options

Post by SimonJester » Fri Jul 20, 2018 10:54 pm

Your income matters far more for needs based scholarships then the 529 account.
As others have pointed out you need to fund your retirement first then move onto the 529 space.

If you have fulfilled the retirement contribution (maxing out Roth IRA and 401Ks) and still have the ability to fund $200k per child into a 529, I would not not contribute tot he 529 based on the idea it would hinder scholarships. What you are going to find is other then merit based scholarships, financial aid = parent plus loans. There are tons of scholarships but many of them are for smaller amounts, think $1,000 to $3,000 and there are lots and lots of students applying for them.

All that aside you do want to leave some college funds outside the 529 in order to take advantage of certain tax credits.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

endeavor
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Re: College Saving Plans - Options

Post by endeavor » Sat Jul 21, 2018 3:05 pm

Thank you so much for your reply,Simon Jester, delamer, liftsoft and willthrill81. It really clears lot of confusions, and gave me a lot more clarity on the retirement plan vs college savings. The examples and your experiences are very helpful. I agree all of you that i need to open a Roth IRA first before contributing to 529 account. I already changed the 401K contributions to maximum limit.

Could you provide some insight on the best place to open roth IRA account? There are lot of different places, like Vanguard, FIdelity, John Hancock....or the robotics advisers like, betterment..and lot more options. My employee sponsored 401K is with John Hancock. Not sure which is the good option to start with. Thanks.

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camillus
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Re: College Saving Plans - Options

Post by camillus » Sat Jul 21, 2018 7:02 pm

Hi Endeavor,

The three places I would consider opening a Roth IRA are Vanguard, Charles Schwab, and Fidelity. Vanguard is for purists, but Charles Schwab and Fidelity probably have better customer service and interface.

You mention maxing out your 401k, and that your 401k is with John Hancock. I believe John Hancock might have very high fees across the board by way of mutual fund expense ratios. That might alter your decisions in terms of the priority of where you invest. I'd look at the fees in your 401k and post back here.

If they are quite high (perhaps above 0.60%), you might want to consider these investing priorities:
1) 401k up to company match
*2) IRA, whether Roth or Traditional
3) 401k up to maximum
4) other retirement, tax advantaged accounts (HSA)
5) 529

Notice with the above that you max out your IRAs before your 401k.

JBTX
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Re: College Saving Plans - Options

Post by JBTX » Sat Jul 21, 2018 7:18 pm

endeavor wrote:
Fri Jul 20, 2018 4:06 pm
Hello fellow Bogleheades,

I am new to this form, and seek suggestions for college fund investment. I am 36 years old. My kids are 6 and 3. Based on the online resources available, I estimated that, by the time they go to college, both the kids require about $400 k for college costs for a govt university.

I am doing college fund for both the kids through UT 529 plan that should cover around 50% of the college costs for both the kids. I have been hearing from few people that the 529 plans impacts the scholarships. Even if the Kid is eligible to obtain scholarship, colleges typically forces the parents to use the 529 funds (if available), and then scholarship kicks in. The argument here is that the college would let other eligible students (who don't have 529 funds or poor) to use these funds. This is also said by one of the whole life insurance agent (probably his sales pitch).

This confused me and i am hesitating to invest 100% college fund in 529 accounts. Below are my questions:
1. Have any of you heard about this before (scholarships vs 529 funds)?
It will have a modest impact but generally similar to any other of the parents assets. So whether you save in a taxable account or a 529 impact should be similar.
2. If this argument is not true, do you still recommend to invest 100% college fund in 529 accounts? or should i be looking for different investment option (may be real estate)
I think your idea of funding 50% is better. I know it is hard to believe but both your kids may not go to college. It happens more than you think, even for upper middle class families. I'd save the rest in taxable accounts. Maybe a little bit in ibonds.

As to real estate, whether you want to get into that should be a separate question.

3. I am also thinking about opening a Roth IRA account, i've came to know that the funds from Roth IRA can be used for educational expenses (not taxable, and no penalty). Is it a good idea? By the way, i am using the employee sponsored 401K plan for retirement purpose.

Your suggestions are highly appreciated. Thanks.
Before investing for college, you should max your 401k and max out all Roth IRA opportunities, HSA opportunities and any other tax deferred opportunities. Kids can borrow for college if needed. You can't really borrow for retirement.

John Hancock 401ks are usually pretty crappy with high fees, but chances are you will be able to roll it over in the future so I'd still max it out if you can. I agree with the order spelled out in the post above by camillus

krafty81
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Re: College Saving Plans - Options

Post by krafty81 » Sat Jul 21, 2018 7:25 pm

I second Schwab or Vanguard for Roth IRA.

I did a pre-paid for both my kids when they were born. One was from Alabama, one was from Nevada. I was in the military and had some flexibility for states. In 92 and 93 when they were born, I looked at inflation rates, return on a stock portfolio and rates of tuition increases at colleges. College tuition rates went up more than anything else I could find. Alabama offered the option to pay Alabama average tuition in any other state. Nevada was about the same. Long story short, my first did not need it (used a scholarship), so I transferred it to my second who then had two programs that completely paid for his attendance at Cal Poly in San Luis Obispo, CA.

A friend of mine had a 529 which was hammered in 2008 because he had left it in stocks too close to his daughter's entrance to college. I am glad I did the pre-paid. These days, you can choose from almost any state. :happy

daveydoo
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Re: College Saving Plans - Options

Post by daveydoo » Sat Jul 21, 2018 7:57 pm

Google "effect of 529 on EFC." I think ~ 5.6% of the 529 counts against expected family contribution. This is much lower than for some other assets. We funded our kids' 529s like crazy for many years but have been trying to cash-flow the first couple of years of expenses.
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teen persuasion
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Re: College Saving Plans - Options

Post by teen persuasion » Sat Jul 21, 2018 8:45 pm

daveydoo wrote:
Sat Jul 21, 2018 7:57 pm
Google "effect of 529 on EFC." I think ~ 5.6% of the 529 counts against expected family contribution. This is much lower than for some other assets. We funded our kids' 529s like crazy for many years but have been trying to cash-flow the first couple of years of expenses.
As far as the FAFSA is concerned, there are 2 kinds of assets: retirement accounts, and everything else (savings, checking, investments, 529s, etc.). Retirement accounts are excluded from the EFC calculation, while 12% of other assets are included as "available assets". Available Assets plus Available income have a progressive rate applied, 22% to 47%. So the top rate of 47% * 12% of assets = a maximum of 5.64% of assets that is included in the EFC calculation.

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