Any regrets not funding a 529?

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ThankYouJack
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Any regrets not funding a 529?

Post by ThankYouJack » Tue Jan 22, 2019 8:28 pm

I'm curious for those who are on the fence with funding a 529 but decided to invest in a taxable account instead. Do you have any regrets? Did you pay for your kid's college with your taxable account and how much would you have saved if you had funded a 529 instead?

stoptothink
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Re: Any regrets not funding a 529?

Post by stoptothink » Tue Jan 22, 2019 8:33 pm

We are very much on the fence about our responsibility to financially assist our children's (possible) future university education, but we had some cash left over at the end of the year after maxing all tax-advantaged retirement space and opened 529s instead of starting a taxable account and/or throwing it at the mortgage. We'll play year-to-year here on out. I'll tell you if we have regrets in about 15yrs, kids are 6 and 3.

tony_roach
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Re: Any regrets not funding a 529?

Post by tony_roach » Tue Jan 22, 2019 8:43 pm

Different perspective...I started 529's at a young age but barely funded them (focused on maxing my retirement accounts first). Fast forward to 3 years ago and since then I've been in a position to fully fund them to the max of my state tax deduction (I now have a 10th grader and 8th grader).

Because I was able to maximize my retirement account contributions and my ability to increase my income throughout the years allowed me to fund the kids 529 later in life while still maxing out my retirement. In our case the old saying of fund your retirement first then worry about school served us well.

KlangFool
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Re: Any regrets not funding a 529?

Post by KlangFool » Tue Jan 22, 2019 8:51 pm

ThankYouJack wrote:
Tue Jan 22, 2019 8:28 pm
I'm curious for those who are on the fence with funding a 529 but decided to invest in a taxable account instead. Do you have any regrets? Did you pay for your kid's college with your taxable account and how much would you have saved if you had funded a 529 instead?
ThankYouJack,

1) A big no.

2) As soon as my son started college, I was laid off. I was unemployed for more than 1 year while my son started college. Then, my daughter started college 1 year later.

3) It is not a big deal in term of tax-advantage.

A) I did Tax Loss Harvesting.

B) While my kids go to college, I move my money from the taxable account to the 401K/457/Roth IRAs.

4) It was a close call whether I will fund my kid's college education. I was only unemployed for more than 1 year. If I was unemployed much longer, they will have to take a student loan.

5) Maybe you are a lucky one. Aka, you know that you will be fully-employed continuously over the next 10 to 20 years and your FI will be fully funded. Aka, you will not be permanently under-employed or unemployed in your 40s and 50s. For the rest of us, we need to make sure that we can feed ourselves and our family before funding a college education.

KlangFool

harvestbook
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Re: Any regrets not funding a 529?

Post by harvestbook » Tue Jan 22, 2019 8:54 pm

In our case, we kind of split the difference--instead of fully funding, I aimed for half of expected cost. Turned out we got scholarships and some aid and will probably end up with some left over (for grad and medical school). We only got one year of tax breaks before our state discontinued, but we got about a 30 percent gain on the money tax-free, so...a good outcome. I did have a taxable UTA account for our student but moved it into a Roth for her longterm instead of saving it for college.
I'm not smart enough to know, and I can't afford to guess.

bmr12
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Re: Any regrets not funding a 529?

Post by bmr12 » Tue Jan 22, 2019 9:03 pm

Avoiding the issue of whether one should fund none/some/all of a child’s college education, here’s my experience:

One child, presently in college. On track to basically burn all of the 529 for undergraduate degree.

Without looking it up, we saved about $70,000 and put into our state’s 529 over the course of 18 years from birth to matriculation. That investment accrued another $60,000 of earnings.

My state allows a deduction from state income tax at the time of contribution (~5%) and my marginal tax rate is 33%. Total tax savings of about $23,500. A 529 is/was a no-brainer for me.

Your mileage may vary if your situation is different. We max out our tax-sheltered/deferred accounts and only have one child and enough income to pay for her undergraduate degree. Changes in income, state tax level and marginal tax rate and amount of other savings would affect my decisions here too.

NoHeat
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Re: Any regrets not funding a 529?

Post by NoHeat » Tue Jan 22, 2019 9:08 pm

My main regret is not realizing, for years, that I could double my state tax deduction by contributing not only to accounts with my two children as beneficiaries, but also to accounts with me and my spouse as beneficiaries.

This is a workaround to the deduction limit, as one can can transfer funds from one beneficiary to another, e.g. from parent to child, after the contribution, so that all funds become available for the child

My youngest is now finishing college. We started 529s at birth, and I’m sure glad we did. We just had the 529 funds send checks to the colleges each semester, paying very little out of pocket while they were enrolled. They are starting their adult lives with zero debt.

Scotttheking
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Re: Any regrets not funding a 529?

Post by Scotttheking » Tue Jan 22, 2019 9:26 pm

No, because I am funding one.

brokenrecord
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Re: Any regrets not funding a 529?

Post by brokenrecord » Tue Jan 22, 2019 9:54 pm

I started funding one and stopped. I have reallocated those contributions to a second Roth IRA to provide more options. The unknowns with higher education are too great to pigeonhole into a 529.

*I live in TX and there are no immediate tax benefits.

Thegame14
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Re: Any regrets not funding a 529?

Post by Thegame14 » Tue Jan 22, 2019 10:22 pm

I am hedging my bets, we have an almost 4 year old and a baby due in 2 weeks. For first child we set up a savings account for all money he receives for birthday, baptism, etc.. when he gets to a thousand dollars, half goes to 529 half to a cd, each month we also put in $50 and $100 more for birthday and Christmas. It isn't a lot of money, which is good and bad, it isn't going to be enough to pay for his college, but it also isn't so much that we "miss it" also it has 18 years to grow so if it ends up being $25K in contributions and another hopefully $25K plus in earnings, then he has $50K and if that pays for 1-2 years at public university and he boards at home, then we paid for half, and we will see about the rest. Yes education costs keep going up but it cannot continue at anywhere near this last decade rate, or else people wont go to college anymore and just become plumbers, electricians, mechanics, etc for much cheaper and those jobs keep paying more and more. Also hard to put money into their future education when their current education "daycare" is going to cost me close to $30K a year for the two of them, so maybe once they hit public school I can add more per month.

janezoey
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Re: Any regrets not funding a 529?

Post by janezoey » Wed Jan 23, 2019 12:57 am

You know what I regret? Not superfunding that 529 on Dec 24, 2018 when the S & P 500 was down to 2351. I will try to work up the nerve to superfund the 529 accounts within the next couple of years. We will not qualify for financial aid. Yet I grew up poor, so parting with that much money at once still makes my heart thump nervously, though I know my head tells me it's probably worth it. :(

Scenario 1: I know if I contribute $150K all at once, at 5% compounding over 17 years, I could theoretically end up with about $343,802 and save $29,070 in capital gains tax (15%). (I'm leaving out tax considerations at the state level.)

Scenario 2: I know if I contribute $12k annually, at 5% compounding over 17 years, (or a total contribution of $204,000), I could end up with $325,588 and save $18,238 in capital gains tax (15%). (Again, I'm leaving out tax considerations at the state level.)

For my family, the 529 accounts would partly cover two children for selective elite colleges and we plan to cash flow the rest. We would reevaluate the accounts every year, and perhaps contribute more if tuition inflation remains high. We just know adding more money in the early years is a better way to milk the 529.

Really, I have nothing to lose. I don't worry about emergency funds, maxing out retirement accounts, or paying down the mortgage. So saving $29,070 (Scenario 1) in capital gains taxes is a pretty sweet deal. If the market performs below average for the next two decades, I think I will still come out ahead because I wouldn't have to take out as many loans. If my kids come out of undergraduate school without loans, they can get a head start in building up their own assets. If I overfund, I could use the money for their grad school or transfer to a niece or nephew or grandchild.

Now if we hadn't maxed out our retirement accounts, if we didn't have extra savings, and if our job security was not high, I am not sure if saving even $18,238 (Scenario 2) in federal capital gains taxes is worth locking the money in a 529...unless we were able to get some amazing state tax benefit.

So for my family (we fit one of the scenarios described by this Brookings Institute article) would benefit A LOT by superfunding a 529...but the uncertainty of current politics and the volatility of the stock market makes us hesitate.
https://www.brookings.edu/research/a-ta ... ngs-plans/

SimonJester
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Re: Any regrets not funding a 529?

Post by SimonJester » Wed Jan 23, 2019 10:39 am

Hedge your bets and do a little of both. For my kids I have their "college funds" in both 529s and taxable accounts (CDs / Ibonds). The taxable account is good if you plan on claiming the AOTC...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

Camarillo Brillo
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Re: Any regrets not funding a 529?

Post by Camarillo Brillo » Wed Jan 23, 2019 11:25 am

janezoey wrote:
Wed Jan 23, 2019 12:57 am
You know what I regret? Not superfunding that 529 on Dec 24, 2018 when the S & P 500 was down to 2351. I will try to work up the nerve to superfund the 529 accounts within the next couple of years. We will not qualify for financial aid. Yet I grew up poor, so parting with that much money at once still makes my heart thump nervously, though I know my head tells me it's probably worth it. :(

Scenario 1: I know if I contribute $150K all at once, at 5% compounding over 17 years, I could theoretically end up with about $343,802 and save $29,070 in capital gains tax (15%). (I'm leaving out tax considerations at the state level.)

Scenario 2: I know if I contribute $12k annually, at 5% compounding over 17 years, (or a total contribution of $204,000), I could end up with $325,588 and save $18,238 in capital gains tax (15%). (Again, I'm leaving out tax considerations at the state level.)

For my family, the 529 accounts would partly cover two children for selective elite colleges and we plan to cash flow the rest. We would reevaluate the accounts every year, and perhaps contribute more if tuition inflation remains high. We just know adding more money in the early years is a better way to milk the 529.

Really, I have nothing to lose. I don't worry about emergency funds, maxing out retirement accounts, or paying down the mortgage. So saving $29,070 (Scenario 1) in capital gains taxes is a pretty sweet deal. If the market performs below average for the next two decades, I think I will still come out ahead because I wouldn't have to take out as many loans. If my kids come out of undergraduate school without loans, they can get a head start in building up their own assets. If I overfund, I could use the money for their grad school or transfer to a niece or nephew or grandchild.

Now if we hadn't maxed out our retirement accounts, if we didn't have extra savings, and if our job security was not high, I am not sure if saving even $18,238 (Scenario 2) in federal capital gains taxes is worth locking the money in a 529...unless we were able to get some amazing state tax benefit.

So for my family (we fit one of the scenarios described by this Brookings Institute article) would benefit A LOT by superfunding a 529...but the uncertainty of current politics and the volatility of the stock market makes us hesitate.
https://www.brookings.edu/research/a-ta ... ngs-plans/
My story about superfunding. In Jan 2009 I was laid off and received a lump sum distribution from my deferred comp plan of $82K. I put all of it in a 529 for my two sons. Last year when I needed to start using it, it had grown to $239K. One son needs $180K for his college and the other will need $80K - $100K. Obviously, I was extremely lucky since I invested at a historical low in the market. Very sweet that I have to cash flow just a very small portion.

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greg24
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Re: Any regrets not funding a 529?

Post by greg24 » Wed Jan 23, 2019 11:41 am

We put just a little bit in a 529.

We've focused on retirement savings and paying off the mortgage. The mortgage will be paid off by the time #1 finishes high school.

No regrets. Very happy with our choices.

DaftInvestor
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Re: Any regrets not funding a 529?

Post by DaftInvestor » Wed Jan 23, 2019 2:32 pm

I was on the fence but plunged in - 20+ years ago. If I hadn't used 529s I would be paying thousand in taxes over an 8-10 year withdraw period on the 24 years of growth I've had in these accounts.
With all the taxes paid from any taxable accounts it feels great to be able to pull money out of these accounts 100% tax-free.
I was never on the fence about wanting to put my kids through college debt-free and this seemed the most efficient way to do so.

delamer
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Re: Any regrets not funding a 529?

Post by delamer » Wed Jan 23, 2019 2:52 pm

You really need to evaluate your personal tax situation.

In our case, we received a state tax deduction for some 529 contributions. Plus our combined (federal/state/local) marginal tax rate for qualified dividends and long-term capital gains in a taxable account was 23%. So it would have been pretty hard to rationalize using a taxable account versus a 529 for a big chunk of college savings, especially when our kids were in middle school or younger.

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goodenyou
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Re: Any regrets not funding a 529?

Post by goodenyou » Wed Jan 23, 2019 3:34 pm

I have no regrets funding a 529 for 3 kids. It was our full intention to pay for all college costs for all 3. They would not be eligible for any need based aid. They all received merit-based full scholarships from their parents. We made sure all tax-advantage space was funded. Our tax saving from the 529 gains were very very substantial. For high income earners, it makes a lot of sense. I wouldn't have done it, however, if it had meant sacrificing retirement savings.
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Polaris
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Re: Any regrets not funding a 529?

Post by Polaris » Wed Jan 23, 2019 3:58 pm

We opened 529s for our kids when we got their SS cards in the mail after they were born with the hope of being able to fund an undergrad degree at a state school. We didn't get a state tax break until 2017, so not much help there other than a ~39% tax-free gain. My oldest started school this year and should have some 529 cash left over for grad school with an assist from merit-based aid.

We funded them after maxing out retirement plans, so no regrets.

DA200
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Re: Any regrets not funding a 529?

Post by DA200 » Wed Jan 23, 2019 6:31 pm

We have chosen not to fund a 529 for our son. Instead, we invest in taxable in tax efficient Total Stock etfs.
Our reasoning was based on the following:
1) the state tax savings for contributing to a 529 was minimal (due to our low state taxable income/tax bracket - since state provides significant tax deductions to small businesses)
2) unclear if our child will go to college
3) UTMA was setup for child by grandparent to partially fund college

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ThankYouJack
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Re: Any regrets not funding a 529?

Post by ThankYouJack » Wed Jan 23, 2019 8:27 pm

Thanks all for the responses. Glad there aren't many regrets :) I'm torn myself on funding a 529 (with no state tax break). I could see having some regret if we wanted to use the assets for something else before college. But in all likely hood a 529 would probably save us some in the long run. Maybe I'll do 50% taxable and 50% 529

xiangan55
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Re: Any regrets not funding a 529?

Post by xiangan55 » Wed Jan 23, 2019 9:32 pm

NoHeat wrote:
Tue Jan 22, 2019 9:08 pm
My main regret is not realizing, for years, that I could double my state tax deduction by contributing not only to accounts with my two children as beneficiaries, but also to accounts with me and my spouse as beneficiaries.

This is a workaround to the deduction limit, as one can can transfer funds from one beneficiary to another, e.g. from parent to child, after the contribution, so that all funds become available for the child
Could you clarify how this works? I live in NY and have contributed, deducted $10k every year....isn't it the max regardless if you're contributing to multiple accounts, beneficiaries..?
Get a state income tax deduction
If you're a new York State taxpayer and an account owner, you may be able to deduct up to $5,000 ($10,000 if you're married filing jointly) of your Direct Plan contributions when you file your state income taxes. Please consult your tax advisor. **
https://www.nysaves.org/home/why-ny-529 ... efits.html

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Davinci
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Re: Any regrets not funding a 529?

Post by Davinci » Wed Jan 23, 2019 9:46 pm

Any regrets not funding a 529?
Yes did not start right away when kids were born and managed to spend that money in who knows what.

Did not get the tax benefit all those years which is unlimited at our state.

Lost the power of compounding and investing for several years which means our monthly contribution needs to be higher now which takes away from Taxable.
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

NoHeat
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Re: Any regrets not funding a 529?

Post by NoHeat » Wed Jan 23, 2019 9:57 pm

xiangan55 wrote:
Wed Jan 23, 2019 9:32 pm

Could you clarify how this works? I live in NY and have contributed, deducted $10k every year....isn't it the max regardless if you're contributing to multiple accounts, beneficiaries..?
Get a state income tax deduction
If you're a new York State taxpayer and an account owner, you may be able to deduct up to $5,000 ($10,000 if you're married filing jointly) of your Direct Plan contributions when you file your state income taxes. Please consult your tax advisor. **
https://www.nysaves.org/home/why-ny-529 ... efits.html
Good point - this must be a state-by-state thing, to watch for. In my state, the limit for deductions is per beneficiary, with no limit per account owner. So the deduction in my state is limited only by the number of qualified family members you can come up with, as beneficiaries -- I suppose that could include cousins, aunts, and so forth, if one really wanted to max things out.
Last edited by NoHeat on Wed Jan 23, 2019 10:01 pm, edited 1 time in total.

H-Town
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Re: Any regrets not funding a 529?

Post by H-Town » Wed Jan 23, 2019 9:59 pm

Can you fund 529 if you haven't had your first kid yet?

NoHeat
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Re: Any regrets not funding a 529?

Post by NoHeat » Wed Jan 23, 2019 10:01 pm

H-Town wrote:
Wed Jan 23, 2019 9:59 pm
Can you fund 529 if you haven't had your first kid yet?
Yes. Name yourself as the beneficiary. Or another qualified relative. After junior is born, change the beneficiary.

Scotttheking
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Re: Any regrets not funding a 529?

Post by Scotttheking » Wed Jan 23, 2019 11:08 pm

NoHeat wrote:
Wed Jan 23, 2019 10:01 pm
H-Town wrote:
Wed Jan 23, 2019 9:59 pm
Can you fund 529 if you haven't had your first kid yet?
Yes. Name yourself as the beneficiary. Or another qualified relative. After junior is born, change the beneficiary.
Yup. The wife and I captured another year of deduction using that method, too!

H-Town
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Re: Any regrets not funding a 529?

Post by H-Town » Wed Jan 23, 2019 11:11 pm

NoHeat wrote:
Wed Jan 23, 2019 10:01 pm
H-Town wrote:
Wed Jan 23, 2019 9:59 pm
Can you fund 529 if you haven't had your first kid yet?
Yes. Name yourself as the beneficiary. Or another qualified relative. After junior is born, change the beneficiary.
Thank you! We're lucky to have plenty of surplus taxable savings so we'll just put some into 529 plan.

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beyou
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Re: Any regrets not funding a 529?

Post by beyou » Thu Jan 24, 2019 7:05 am

This is not a binary decision of fund or not. Partially funding is a spectrum of choices. Fund anywhere from 0 to 100% of expected cost are really the decision to regret or not (and who knows what will be 100% so it’s a much broader spectrum).

My kids were funded under the assumption 529 may pay for half a private school education or all of a public in state. Glad I did at least that, the relevant question is if I should have contributed more (or had a more aggressive asset allocation). Ended up pretty much as expected, paid half of two private colleges, taxable/cashflow for the rest. Yes I could have reduced taxes further had I saved more in 529 but I do not regret. One cannot make the perfect decision but I decided on an acceptable outcome and it ocurred as planned, so to me that is 100% success.

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