Cost of college and 529

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stoptothink
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Re: Cost of college and 529

Post by stoptothink »

Bacchus01 wrote: Sun Feb 03, 2019 10:04 amI don’t think the vast, overwhelming majority of college grads are carrying the headline making debt that makes for good political fodder but is not backed up by actual facts.
Just reading this board, there is no way you'd know that the the overwhelming majority of college students aren't paying $60k+/yr for undergrad. I apologize if this comes off as judgmental, but I think some of this is due to a significant number of posters not having any role in paying for their own higher education.
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Re: Cost of college and 529

Post by vineviz »

livesoft wrote: Sun Feb 03, 2019 10:17 am
vineviz wrote: Sun Feb 03, 2019 9:53 amI believe that a family with $80k in 2019 income would have to really have struggled to accumulate even $50k in college savings, and such a family is already going to have trouble qualifying for need-based grants at an in-state public university just on income alone. Assets barely have an impact for families with over $100k in income AFAIK.
Would that same family struggle to contribute to retirement plans such as 401(k), Roth IRA, etc?
Almost certainly, but I'm trying to address the question of HOW to save for college separately from the question of WHETHER someone should save for college.

I generally agree with the sentiment of those who seem to be arguing against me, in that I personally feel like saving for retirement SHOULD be a higher priority for most families than saving for college education. I don't think it's necessary to max out all possible tax-advantaged retirement accounts before saving ANYTHING for college, but that's just how I order my own priorities.

But IF someone is saving money that they fully expect to spend on education, however big or small a personal struggle such saving is, a 529 plan is almost surely the best way to do that.
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noco-hawkeye
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Re: Cost of college and 529

Post by noco-hawkeye »

vineviz wrote: Sun Feb 03, 2019 10:41 am ..
I generally agree with the sentiment of those who seem to be arguing against me, in that I personally feel like saving for retirement SHOULD be a higher priority for most families than saving for college education. I don't think it's necessary to max out all possible tax-advantaged retirement accounts before saving ANYTHING for college, but that's just how I order my own priorities.

But IF someone is saving money that they fully expect to spend on education, however big or small a personal struggle such saving is, a 529 plan is almost surely the best way to do that.
Agree with ya 100%. If you feel like 10k / year in your 401k has you on track for retirement and now want to consider how to help your kids for school, then a 529 is probably the best option.

I don't think 10k / year in a 401k is going to be ideal for a good number of people, so they should save more and look at IRA options too.... but the question is where to put money you know for sure will go to a college? A 529 plan.
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Re: Cost of college and 529

Post by Ben Mathew »

If someone is maxing out their retirement accounts, then the choice is between 529 vs taxable. 529 easily beats taxable.

But when someone in NOT maxing out the retirement accounts, it's a tougher problem. Assuming the student won't qualify for aid, and the parent wishes to pay for their kids' college, how much should they contribute to retirement accounts and how much to the 529?

The 529 works like a Roth IRA, except that the state tax deduction sweetens the deal in many states. So let's say they contribute enough to capture the full state tax deduction. But that's not enough to cover college costs. So they are still faced with the question: more $ in retirement accounts or 529?

I would favor contributing to retirement accounts in this situation, mainly because undercontributing to the 529 is easier to fix than undercontributing to a retirement account.

If you err on the side of retirement funding, the worst that can happen is that by the time college rolls around, you find that you have overcontributed to retirement accounts and undercontributed to the college account. That's not too hard to fix. You can:

- Stop contributing to retirement accounts (beyond the match), and use the money to pay college bills instead.
- Take out loans (parent loans, student loans, HELOC) and spread the cost over a few years.
- To the extent that you can do so without penalty, withdraw money from your retirement accounts.

But if have overcontributed to the college account and undercontributed to the retirement account, it's more of a problem. Withdrawing the excess out of 529 involves the 10% penalty plus the higher ordinary income taxes on the growth. Even after you withdraw the money, you can't get it into your retirement accounts because of the annual contribution limits.

Another knock against the 529 here is that people who are not maxing out their retirement accounts will probably have lower marginal taxes in retirement than their working years. That means traditional is a better vehicle than Roth. The 529, since it works like a Roth (after the state tax benefits is captured), will not be as good a deal as a traditional retirement account.

I'd say people who are not maxing out their traditional retirement accounts should think hard about contributing to the 529 beyond the amount needed to capture any state tax benefits.
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Re: Cost of college and 529

Post by Bacchus01 »

noco-hawkeye wrote: Sun Feb 03, 2019 11:30 am
vineviz wrote: Sun Feb 03, 2019 10:41 am ..
I generally agree with the sentiment of those who seem to be arguing against me, in that I personally feel like saving for retirement SHOULD be a higher priority for most families than saving for college education. I don't think it's necessary to max out all possible tax-advantaged retirement accounts before saving ANYTHING for college, but that's just how I order my own priorities.

But IF someone is saving money that they fully expect to spend on education, however big or small a personal struggle such saving is, a 529 plan is almost surely the best way to do that.
Agree with ya 100%. If you feel like 10k / year in your 401k has you on track for retirement and now want to consider how to help your kids for school, then a 529 is probably the best option.

I don't think 10k / year in a 401k is going to be ideal for a good number of people, so they should save more and look at IRA options too.... but the question is where to put money you know for sure will go to a college? A 529 plan.
$10k a year in a 401K would be fantastic for the vast majority of people in this country since the vast majority are nowhere near that number.
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Re: Cost of college and 529

Post by TheDDC »

vrr106 wrote: Thu Jan 31, 2019 10:27 am I'm curious to hear how others on this forum are estimating future cost of college when it comes to their 529s.

From my research:
- 4 year cost for elite Private college in 2029 will be ~$500K
- 4 year cost for good Public school (out of state) such as a Big Ten school will be ~$300K
- 4 year in-state cost for University of Florida ~$150K

Given the very wide variance here, how are others planning, especially when your home state has limited choices for quality higher education?
Father of two here.

Your numbers alone (if they prove to be right) show they the path to higher education will be greatly out of reach to most of the country. To me these numbers show that higher education is an unsustainable trajectory. I don't like aiming at moving targets, so I choose not to feed the beast. No 529s here, maxing out retirement accounts.

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Re: Cost of college and 529

Post by Bacchus01 »

vrr106 wrote: Thu Jan 31, 2019 10:27 am I'm curious to hear how others on this forum are estimating future cost of college when it comes to their 529s.

From my research:
- 4 year cost for elite Private college in 2029 will be ~$500K
- 4 year cost for good Public school (out of state) such as a Big Ten school will be ~$300K
- 4 year in-state cost for University of Florida ~$150K

Given the very wide variance here, how are others planning, especially when your home state has limited choices for quality higher education?
Which states have limited choices for quality education?
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Re: Cost of college and 529

Post by vineviz »

Ben Mathew wrote: Sun Feb 03, 2019 11:41 am I'd say people who are not maxing out their traditional retirement accounts should think hard about contributing to the 529 beyond the amount needed to capture any state tax benefits.
A family making $100,000 can contribute up to over $34,000 between IRAs and a 401k (including match). More if two parents are working and are 401k eligible.

I don't think it is reasonable advice to suggest that most families need to save over 35% of their income towards retirement before they save SOMETHING for education. Most financial planners would suggest that a couple can adequately plan for retirement with a savings rate much lower than 35% of income, and I think that's true.
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EnjoyIt
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Re: Cost of college and 529

Post by EnjoyIt »

vineviz wrote: Sun Feb 03, 2019 10:41 am
livesoft wrote: Sun Feb 03, 2019 10:17 am
vineviz wrote: Sun Feb 03, 2019 9:53 amI believe that a family with $80k in 2019 income would have to really have struggled to accumulate even $50k in college savings, and such a family is already going to have trouble qualifying for need-based grants at an in-state public university just on income alone. Assets barely have an impact for families with over $100k in income AFAIK.
Would that same family struggle to contribute to retirement plans such as 401(k), Roth IRA, etc?
Almost certainly, but I'm trying to address the question of HOW to save for college separately from the question of WHETHER someone should save for college.

I generally agree with the sentiment of those who seem to be arguing against me, in that I personally feel like saving for retirement SHOULD be a higher priority for most families than saving for college education. I don't think it's necessary to max out all possible tax-advantaged retirement accounts before saving ANYTHING for college, but that's just how I order my own priorities.

But IF someone is saving money that they fully expect to spend on education, however big or small a personal struggle such saving is, a 529 plan is almost surely the best way to do that.
You are correct. If one must and will save for college then putting said money in a 529 will likely but not always be the ideal location. The few caveats are:

You will be paying for higher education while at a lower tax bracket. This applies to us.
You are not missing out on other tax incentives by not lowering your Adjusted Gross Income below certain thresholds. This also applies to us.

Actually we maxed out all tax advantages locations and still have more cash to invest. Instead of going into a taxable account we invest in a 529.
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Re: Cost of college and 529

Post by vineviz »

Bacchus01 wrote: Sun Feb 03, 2019 11:54 am Which states have limited choices for quality education?
The flagship public university in most states is generally going to be pretty good.

But if you're an exceptional student with a specific major in mind, a lower-population state might not have a public university that is genuinely nationally competitive.

For example, a student with top grades and a SAT score over 1500 who is interested in studying physics can probably identify a GOOD school in states like Wyoming, South Dakota, Montana, Idaho, etc. but they are not going to have same level of choices that a similar student in California, North Carolina, Florida, Texas, or even New Mexico would have.
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Re: Cost of college and 529

Post by Ben Mathew »

vineviz wrote: Sun Feb 03, 2019 12:05 pm
Ben Mathew wrote: Sun Feb 03, 2019 11:41 am I'd say people who are not maxing out their traditional retirement accounts should think hard about contributing to the 529 beyond the amount needed to capture any state tax benefits.
A family making $100,000 can contribute up to over $34,000 between IRAs and a 401k (including match). More if two parents are working and are 401k eligible.

I don't think it is reasonable advice to suggest that most families need to save over 35% of their income towards retirement before they save SOMETHING for education. Most financial planners would suggest that a couple can adequately plan for retirement with a savings rate much lower than 35% of income, and I think that's true.
Not contributing to the 529 does not mean that they are not saving for college. They are effectively saving for college by increasing their retirement account funding, allowing them to focus on college costs later. They have to choose between a bigger retirement account and a bigger 529 account. Both will help the family meet college costs. But the bigger retirement account has some advantages over the bigger 529 account.
Last edited by Ben Mathew on Sun Feb 03, 2019 12:25 pm, edited 2 times in total.
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Re: Cost of college and 529

Post by Bacchus01 »

vineviz wrote: Sun Feb 03, 2019 12:19 pm
Bacchus01 wrote: Sun Feb 03, 2019 11:54 am Which states have limited choices for quality education?
The flagship public university in most states is generally going to be pretty good.

But if you're an exceptional student with a specific major in mind, a lower-population state might not have a public university that is genuinely nationally competitive.

For example, a student with top grades and a SAT score over 1500 who is interested in studying physics can probably identify a GOOD school in states like Wyoming, South Dakota, Montana, Idaho, etc. but they are not going to have same level of choices that a similar student in California, North Carolina, Florida, Texas, or even New Mexico would have.
The quality of education in those states is fantastic. The question wasn’t about choices. To think that you must go to Stanford to get a good education is insane. Most of the value of the education is in what the student puts into it.
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Re: Cost of college and 529

Post by ze233 »

EnjoyIt wrote: Sun Feb 03, 2019 12:10 pm Actually we maxed out all tax advantages locations and still have more cash to invest. Instead of going into a taxable account we invest in a 529.
Same here. we max out all our tax advantage accounts, and contribute $10,000 to the 529. The $10,000 is deductible from our state taxes, and having just done our taxes this weekend, that contribution saved us over $500 on our state taxes. Contributing to a 529 is a no brainer for us really.
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Re: Cost of college and 529

Post by vineviz »

Ben Mathew wrote: Sun Feb 03, 2019 12:23 pm
vineviz wrote: Sun Feb 03, 2019 12:05 pm
Ben Mathew wrote: Sun Feb 03, 2019 11:41 am I'd say people who are not maxing out their traditional retirement accounts should think hard about contributing to the 529 beyond the amount needed to capture any state tax benefits.
A family making $100,000 can contribute up to over $34,000 between IRAs and a 401k (including match). More if two parents are working and are 401k eligible.

I don't think it is reasonable advice to suggest that most families need to save over 35% of their income towards retirement before they save SOMETHING for education. Most financial planners would suggest that a couple can adequately plan for retirement with a savings rate much lower than 35% of income, and I think that's true.
Not contributing to the 529 does not mean that they are not saving for college. They are effectively saving for college by increasing their retirement account funding, allowing them to focus on college costs later. They have to choose between a bigger retirement account and a bigger 529 account. Both will help the family meet college costs. But the bigger retirement account has some advantages over the bigger 529 account.
No question that SOME savings is better than NO savings.

Again, though, the question I was addressing is this: if someone is saving money that is dedicated for education then what is the most economical way to save for that investment goal? The answer is: a 529 plan, pretty much across the board.
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Re: Cost of college and 529

Post by vineviz »

Bacchus01 wrote: Sun Feb 03, 2019 12:24 pm The quality of education in those states is fantastic. The question wasn’t about choices. To think that you must go to Stanford to get a good education is insane. Most of the value of the education is in what the student puts into it.
Define "fantastic".

As I said, there are definitely public universities in all the states I mentioned that are most definitely quite good overall. I'm not disparaging them.

But the idea that a physics degree from University of California - Berkeley is equivalent to a physics degree from Idaho State University is ridiculous.
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Re: Cost of college and 529

Post by Bacchus01 »

vineviz wrote: Sun Feb 03, 2019 1:04 pm
Bacchus01 wrote: Sun Feb 03, 2019 12:24 pm The quality of education in those states is fantastic. The question wasn’t about choices. To think that you must go to Stanford to get a good education is insane. Most of the value of the education is in what the student puts into it.
Define "fantastic".

As I said, there are definitely public universities in all the states I mentioned that are most definitely quite good overall. I'm not disparaging them.

But the idea that a physics degree from University of California - Berkeley is equivalent to a physics degree from Idaho State University is ridiculous.
And the cost of those programs is the same, right?

Why is this so hard to understand? For 99% of people, there are very reasonable alternatives. You know, alternatives. Comparing the #3 physics program to the #146 is a baseless argument. Everyone should go to Stanford for free. Is that it?
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Re: Cost of college and 529

Post by vineviz »

Bacchus01 wrote: Sun Feb 03, 2019 1:30 pm For 99% of people, there are very reasonable alternatives. You know, alternatives. Comparing the #3 physics program to the #146 is a baseless argument. Everyone should go to Stanford for free. Is that it?
The observation, which is uncontroversial to most rational people, was merely that some states offer more choices of high quality public university educations than others.

If the top-ranked program on one state is ranked #146 and another state has three schools in the top 50 for the same major, I think the point is pretty well made.

I'm not suggesting that "everyone should go to Stanford for free", and I'm not sure why you think I am. I'm merely pointing out that a student in California has many more choices of nationally-recognized public universities than a similar student in less-populous states.
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Re: Cost of college and 529

Post by deskjockey »

ze233 wrote: Sun Feb 03, 2019 12:30 pm
EnjoyIt wrote: Sun Feb 03, 2019 12:10 pm Actually we maxed out all tax advantages locations and still have more cash to invest. Instead of going into a taxable account we invest in a 529.
Same here. we max out all our tax advantage accounts, and contribute $10,000 to the 529. The $10,000 is deductible from our state taxes, and having just done our taxes this weekend, that contribution saved us over $500 on our state taxes. Contributing to a 529 is a no brainer for us really.
We're also in this boat. I just ran the numbers and our 529 accounts have saved us nearly $10,000 in VA state taxes. Given our likely high tax bracket when our kids go to school, we stand to save several tens of thousands on the earnings from our contributions. As I said earlier in this thread, I agree 529s are not the best vehicle for everyone, and several folks have pointed out how they do not work in their specific situations. But if they are right for you, they are a really good savings vehicle.
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Re: Cost of college and 529

Post by Bacchus01 »

vineviz wrote: Sun Feb 03, 2019 2:05 pm
Bacchus01 wrote: Sun Feb 03, 2019 1:30 pm For 99% of people, there are very reasonable alternatives. You know, alternatives. Comparing the #3 physics program to the #146 is a baseless argument. Everyone should go to Stanford for free. Is that it?
The observation, which is uncontroversial to most rational people, was merely that some states offer more choices of high quality public university educations than others.

If the top-ranked program on one state is ranked #146 and another state has three schools in the top 50 for the same major, I think the point is pretty well made.

I'm not suggesting that "everyone should go to Stanford for free", and I'm not sure why you think I am. I'm merely pointing out that a student in California has many more choices of nationally-recognized public universities than a similar student in less-populous states.
Your observation was that some states have limited choices of quality education. That simply is not accurate. Regardless, there are always choices and the “need” to go out of state for “the vast majority” of rational students is extremely low.

Saving for the extreme education examples is like saying I need to save $5M to buy a house because that’s what the cost in the Bay Area.
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Re: Cost of college and 529

Post by vineviz »

Bacchus01 wrote: Sun Feb 03, 2019 2:59 pm Your observation was that some states have limited choices of quality education.
If you read what I wrote again I think you'll see that your'e seeing words I never used.

What I actually said was this:
If you're an exceptional student with a specific major in mind, a lower-population state might not have a public university that is genuinely nationally competitive.
It's not a very radical statement.
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Re: Cost of college and 529

Post by Ben Mathew »

vineviz wrote: Sun Feb 03, 2019 12:52 pm
Ben Mathew wrote: Sun Feb 03, 2019 12:23 pm
vineviz wrote: Sun Feb 03, 2019 12:05 pm
Ben Mathew wrote: Sun Feb 03, 2019 11:41 am I'd say people who are not maxing out their traditional retirement accounts should think hard about contributing to the 529 beyond the amount needed to capture any state tax benefits.
A family making $100,000 can contribute up to over $34,000 between IRAs and a 401k (including match). More if two parents are working and are 401k eligible.

I don't think it is reasonable advice to suggest that most families need to save over 35% of their income towards retirement before they save SOMETHING for education. Most financial planners would suggest that a couple can adequately plan for retirement with a savings rate much lower than 35% of income, and I think that's true.
Not contributing to the 529 does not mean that they are not saving for college. They are effectively saving for college by increasing their retirement account funding, allowing them to focus on college costs later. They have to choose between a bigger retirement account and a bigger 529 account. Both will help the family meet college costs. But the bigger retirement account has some advantages over the bigger 529 account.
No question that SOME savings is better than NO savings.

Again, though, the question I was addressing is this: if someone is saving money that is dedicated for education then what is the most economical way to save for that investment goal? The answer is: a 529 plan, pretty much across the board.
I was making a stronger statement than "some savings is better than no savings". My claim was that if retirement accounts are not being maxed out, it's better to "save for college" in the retirement account. Basically, save for retirement early on, and save for college closer to when that expense will happen. This prevents the risk of overcontributing to the 529, which is harder to fix than overcontributing to the retirement account (because you can just stop contributing beyond the match and redirect towards college expenses). Here's an example:

A couple have a child at age 30. They can save $25,000 per year total towards retirement and/or kid's college. They are in the 22% fed + 5% state = 27% bracket. So the $25,000 becomes $25,000*(1+.27)=$31,750 in the retirement account. Everything is in today's dollars (inflation adjusted).

They plan to spend $50,000 per year for four years of college when the kid is 18 to 21 years old. For simplicity, assume no state tax benefits for 529 contributions. (If there are benefits, they should contribute enough to the 529 to capture the maximum benefit.)

Option A: Fully fund 529
If they get a 3% real rate of return on their investments, they will need to contribute $7,938 per year to the 529 to fully fund it by the time kid is ready to go to college. When the kid is in college, they take out $50K per year from the 529 to pay for college. They are left with $0 in the 529 and $703,882 in the retirement account.

Option B: Partially fund 529 + cash flow college
They contribute only to retirement account till there's only five years left for college. Then they contribute $20,591 per year, leaving only $5,600 for retirement account contributions. When college arrives, they pay the same $20,591 /year directly to the college plus take out $29,410 from the 529. At the end of college, they are again left with $0 in the 529 and $703,882 in the retirement account.

Image

The advantage of option B is a lower risk of overcontributing to the 529, which is costlier to correct than overcontributing to the retirement account.

But the spreadsheet shows that I was wrong about the following point:
Ben Mathew wrote: Sun Feb 03, 2019 11:41 am Another knock against the 529 here is that people who are not maxing out their retirement accounts will probably have lower marginal taxes in retirement than their working years. That means traditional is a better vehicle than Roth. The 529, since it works like a Roth (after the state tax benefits is captured), will not be as good a deal as a traditional retirement account.
That was sloppy thinking. The ending balance is the same in both cases. I now see why. Contributing to college by redirecting from traditional is equivalent to withdrawing money from the traditional account (without penalty). It doesn't matter when you "withdraw", whether early as in option A, or late as in option B, the only thing that matters is the marginal tax rate when you withdraw. Since the marginal tax remained constant at 27% when the withdrawals happened, you always lost 27%. So A and B came out even. Keeping money in traditional for longer (option B) would become better only if the parents are in a lower tax bracket when they "withdraw" the money needed from the traditional account for college expenses (by contributing to the 529 or cash-flowing college expenses).
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Re: Cost of college and 529

Post by FoolStreet »

vineviz wrote: Sat Feb 02, 2019 4:44 pm
EnjoyIt wrote: Sat Feb 02, 2019 4:13 pm One can disagree with opinions but math is more difficult to disagree with.
Yet you insist on doing so.

For a parent who wants to save money for a child's education, the 529 plan is the "mathematically" superior way to do it. Period.
I would think you would want to contribute the max to your Roth IRA before contributing to 529, right?

That's $6k via backdoor Roth. And another ~$26k via megabackdoor (53K total: 18k personal contributions, 9k generous employer contributions, and 26k after tax contribution that you then convert to Roth IRA).

Do you really have extra money to contribute to 529 after the $26k to After Tax Megabackdoor Roth? If so, then you are not only high-earning, but maybe have assets from parents or other? Heck, if you have two working parents, that means, you can put close to $60k+ into combined Roth IRAs before even being able to get to 529s.

Honestly, if you have access to Mega Backdoor Roth, I don't think anyone can recommend 529. Under those assumptions, am I missing anything?

* the other assumption is that with a new child(s) at home when you are ready to start saving for kids, you have other expenses such as nanny-share, pre-school, buying a bigger house, new SUV(not that I recommend it, but isn't that what new parents do?). And by the time you get through those expenses, you get so close to school that your asset allocation for college-funds starts getting conservative, and do you really need the tax savings on conservative investments vs munis? Dunno... Personally, I don't understand the 529.
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Re: Cost of college and 529

Post by vineviz »

Ben Mathew wrote: Sun Feb 03, 2019 4:48 pm
I was making a stronger statement than "some savings is better than no savings". My claim was that if retirement accounts are not being maxed out, it's better to "save for college" in the retirement account.
Yeah, but this statement is TOO strong.

In part because it is not necessarily true that retirement accounts need to be maxed out in order for retirement goals to be fully funded. For some investors that might be true, especially for folks with incomes well in excess of median household income, but definite not for ALL investors.

Don't forget, too, that failing to max out the 529 state tax deduction in each year is a cost that may not be able to be recouped later. This benefit is not available in every state but it is available in most states. And for the portion that you had the family cash flowing in Option B, they're paying marginal income tax rates on that larger amount at college time instead of on a smaller amount earlier (the gains on which are not taxed at all).

I think budgeting to spend $50,000 per year is highly likely to result in overfunding, so I'd probably not use that example. At the very least I'd construct an Option C, whereby the 529 funding goal was more in the neighborhood of maximizing the state tax deduction and/or aiming for the average net price for the state public flagship university. That's probably much closer to what the typical family actually spends.

In Virginia, for instance, the state tax deduction limit is $4,000 which provides a state tax savings of something like $230/year. That's not a huge amount but it's free money and compounded over 20 years is nearly an $8,000 advantage of Option B.

Either way, the family comes out ahead using the 529 in some form as opposed to not using it at all.
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Re: Cost of college and 529

Post by vineviz »

FoolStreet wrote: Sun Feb 03, 2019 4:59 pm I would think you would want to contribute the max to your Roth IRA before contributing to 529, right?
Only if you WANT the savings associated with maxing the Roth savings. Not every investor needs or wants to fund their retirement at the level implied by maxing out all available retirement vehicles.

For instance, my household is contributing only $12,000 a year to a single 401(k) with no IRA contributions at all yet I project that we are extremely likely to die with six figures in our accounts even if my wife and I live past 100 years old. This is due to the great fortune and privilege in current and prior employment, but I can see no scenario in which it makes any sense at all to save more than we currently do before funding at least a portion of the college education for my children.

For money that WILL eventually be spent on education, 529 plans offer financial benefits that no Roth IRA strategy can match.
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Re: Cost of college and 529

Post by FoolStreet »

vineviz wrote: Sun Feb 03, 2019 5:18 pm
FoolStreet wrote: Sun Feb 03, 2019 4:59 pm I would think you would want to contribute the max to your Roth IRA before contributing to 529, right?
Only if you WANT the savings associated with maxing the Roth savings. Not every investor needs or wants to fund their retirement at the level implied by maxing out all available retirement vehicles.

For instance, my household is contributing only $12,000 a year to a single 401(k) with no IRA contributions at all yet I project that we are extremely likely to die with six figures in our accounts even if my wife and I live past 100 years old. This is due to the great fortune and privilege in current and prior employment, but I can see no scenario in which it makes any sense at all to save more than we currently do before funding at least a portion of the college education for my children.

For money that WILL eventually be spent on education, 529 plans offer financial benefits that no Roth IRA strategy can match.
I can understand if you don't need to save more for retirement, but if you are going to save and have room, isn't Roth better than 529? Maybe it's just a California thing, but my understanding is that a Roth has all the features of a 529 and more. Maybe other states give tax breaks for contributing to 529. I don't think we get them here in California.

Therefore, unless we are talking about state-specific tax breaks, I don't understand your statement at all. It seems like I think a Roth is better than a 529. And you think a 529 is better than a Roth?
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Re: Cost of college and 529

Post by Ben Mathew »

vineviz wrote: Sun Feb 03, 2019 5:10 pm
Ben Mathew wrote: Sun Feb 03, 2019 4:48 pm
I was making a stronger statement than "some savings is better than no savings". My claim was that if retirement accounts are not being maxed out, it's better to "save for college" in the retirement account.
Yeah, but this statement is TOO strong.

In part because it is not necessarily true that retirement accounts need to be maxed out in order for retirement goals to be fully funded. For some investors that might be true, especially for folks with incomes well in excess of median household income, but definite not for ALL investors.

Don't forget, too, that failing to max out the 529 state tax deduction in each year is a cost that may not be able to be recouped later. This benefit is not available in every state but it is available in most states. And for the portion that you had the family cash flowing in Option B, they're paying marginal income tax rates on that larger amount at college time instead of on a smaller amount earlier (the gains on which are not taxed at all).

I think budgeting to spend $50,000 per year is highly likely to result in overfunding, so I'd probably not use that example. At the very least I'd construct an Option C, whereby the 529 funding goal was more in the neighborhood of maximizing the state tax deduction and/or aiming for the average net price for the state public flagship university. That's probably much closer to what the typical family actually spends.

In Virginia, for instance, the state tax deduction limit is $4,000 which provides a state tax savings of something like $230/year. That's not a huge amount but it's free money and compounded over 20 years is nearly an $8,000 advantage of Option B.

Either way, the family comes out ahead using the 529 in some form as opposed to not using it at all.
The 529 vs retirement account decision comes relatively early in life, so it's hard to know how well funded retirement is going to be.

But other than that, I think we're in agreement on most points. If the 529 contributions is kept low enough that there is little risk of overfunding, and the state tax deduction is being maxed out, then that's the way to go. The retirement accounts become attractive when there is a risk of overfunding the 529, which will usually require contributions above the state tax deduction maximum.
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Re: Cost of college and 529

Post by codedude »

vineviz wrote: Sun Feb 03, 2019 5:10 pm
Ben Mathew wrote: Sun Feb 03, 2019 4:48 pm
I was making a stronger statement than "some savings is better than no savings". My claim was that if retirement accounts are not being maxed out, it's better to "save for college" in the retirement account.
Yeah, but this statement is TOO strong.

In part because it is not necessarily true that retirement accounts need to be maxed out in order for retirement goals to be fully funded. For some investors that might be true, especially for folks with incomes well in excess of median household income, but definite not for ALL investors.

Don't forget, too, that failing to max out the 529 state tax deduction in each year is a cost that may not be able to be recouped later. This benefit is not available in every state but it is available in most states. And for the portion that you had the family cash flowing in Option B, they're paying marginal income tax rates on that larger amount at college time instead of on a smaller amount earlier (the gains on which are not taxed at all).

I think budgeting to spend $50,000 per year is highly likely to result in overfunding, so I'd probably not use that example. At the very least I'd construct an Option C, whereby the 529 funding goal was more in the neighborhood of maximizing the state tax deduction and/or aiming for the average net price for the state public flagship university. That's probably much closer to what the typical family actually spends.

In Virginia, for instance, the state tax deduction limit is $4,000 which provides a state tax savings of something like $230/year. That's not a huge amount but it's free money and compounded over 20 years is nearly an $8,000 advantage of Option B.

Either way, the family comes out ahead using the 529 in some form as opposed to not using it at all.

vineviz,

In Virginia, the $4000 deduction limit is per unique combination of owner-beneficiary-portfolio. So $4000 for spouse1-child1-domestic stock portfolio, $4000 for spouse1-child1-foreign stock portfolio etc. So it can be a lot more than approx $230 per year.

Thanks.
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Re: Cost of college and 529

Post by KlangFool »

Ben Mathew wrote: Sun Feb 03, 2019 5:35 pm
The 529 vs retirement account decision comes relatively early in life, so it's hard to know how well funded retirement is going to be.

But other than that, I think we're in agreement on most points. If the 529 contributions is kept low enough that there is little risk of overfunding, and the state tax deduction is being maxed out, then that's the way to go. The retirement accounts become attractive only when there is a risk of overfunding the 529, which will usually require contributions above the state tax deduction maximum.
Ben Mathew,

Low as compared to what? For normal people that do not max up their 401K/IRA

A) They pay Federal Marginal Income Tax on the 529 contribution. It is 10% to 20+% tax.

B) Their retirement/FI is underfunded anyhow. And, 10 to 20 years before the kid started school, their portfolio is very small. Contributing to 529 and pay more taxes will make their portfolio smaller.

C) In summary, their risk exposure to short-term unemployment is higher.

D) A US recession occurred at least once every 10 years since 1836. So, they have to survive multiple recessions without severe short-term unemployment.

For normal people, it is a no-win situation.

1) Contributing a lot to 529. You may not survive financially.

2) Contributing a little to 529. Why bother? It is not big enough to help. But, when you are unemployed, you could use the extra money.

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Re: Cost of college and 529

Post by Bacchus01 »

vineviz wrote: Sun Feb 03, 2019 4:19 pm
Bacchus01 wrote: Sun Feb 03, 2019 2:59 pm Your observation was that some states have limited choices of quality education.
If you read what I wrote again I think you'll see that your'e seeing words I never used.

What I actually said was this:
If you're an exceptional student with a specific major in mind, a lower-population state might not have a public university that is genuinely nationally competitive.
It's not a very radical statement.
You are correct. I got my posters mixed up.

Now, if you are an exceptional student with a specific major in mind, isn’t the OOS option likely going to result in a high ROI under those situations?

What I’m arguing against is that people are constantly saying you must pay oodles for quality education and that we have an epidemic on our hands. I don’t believe, for the absolute vast majority of people, that this is true. I also believe that for many people who do end up wracking up debt at Stanford, Caltech or Berkeley, they will more likely be rewarded and compensated at a point where it’s not relevant. Eg ROO is very high.

Instead, we let the media use the scare tactic of the art history major who spent $250K to go to a liberal arts school without the academic merit to achieve merit aid, as the barometer of what is wrong with our educational system. I think that is patently false and the data supports the fact that it is still a hugely rewarding ROI for the vast majority of people at any income or cost level. There are the 1% that make interesting headlines but aren’t really representative.
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Re: Cost of college and 529

Post by KlangFool »

Ben Mathew wrote: Sun Feb 03, 2019 5:35 pm
The 529 vs retirement account decision comes relatively early in life, so it's hard to know how well funded retirement is going to be.

But other than that, I think we're in agreement on most points. If the 529 contributions is kept low enough that there is little risk of overfunding, and the state tax deduction is being maxed out, then that's the way to go. The retirement accounts become attractive when there is a risk of overfunding the 529, which will usually require contributions above the state tax deduction maximum.
Ben Mathew,

For normal people that do not max up 401K/IRAs. The math is very simple. Let's assume a 20% marginal tax rate.

A) Pay $200 in taxes and contribute $800 to 529. Use the 529's money after 18 years.

B) Contribute $1,000 to 401K/IRA. Get the retirement/FI funded. After 18 years, partially stop 401/IRA contribution and pay from the annual savings across 5 years.

Who will end up with more money? (A) or (B)? The answer is obvious. It is (B).

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Re: Cost of college and 529

Post by Ben Mathew »

KlangFool wrote: Sun Feb 03, 2019 5:58 pm A) They pay Federal Marginal Income Tax on the 529 contribution. It is 10% to 20+% tax.
Federal is still lower than federal+state, which is what they will be paying otherwise. Contributing enough to the 529 to take the state tax deduction is a clear win as long as

(a) the money will be used for education expenses, and
(b) it won't affect financial aid
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Re: Cost of college and 529

Post by Ben Mathew »

KlangFool wrote: Sun Feb 03, 2019 6:05 pm
Ben Mathew wrote: Sun Feb 03, 2019 5:35 pm
The 529 vs retirement account decision comes relatively early in life, so it's hard to know how well funded retirement is going to be.

But other than that, I think we're in agreement on most points. If the 529 contributions is kept low enough that there is little risk of overfunding, and the state tax deduction is being maxed out, then that's the way to go. The retirement accounts become attractive when there is a risk of overfunding the 529, which will usually require contributions above the state tax deduction maximum.
Ben Mathew,

For normal people that do not max up 401K/IRAs. The math is very simple. Let's assume a 20% marginal tax rate.

A) Pay $200 in taxes and contribute $800 to 529. Use the 529's money after 18 years.

B) Contribute $1,000 to 401K/IRA. Get the retirement/FI funded. After 18 years, partially stop 401/IRA contribution and pay from the annual savings across 5 years.

Who will end up with more money? (A) or (B)? The answer is obvious. It is (B).

KlangFool
This is not correct. The spreadsheet I posted above shows why. No matter when you pay for college, you lose 20%. In your example, you lose 20% on the funds you fail to contribute to the traditional IRA when you are paying for college instead. In your example, both A and B will be equal. If there was a state tax benefit, then A would be better.
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Re: Cost of college and 529

Post by KlangFool »

Ben Mathew wrote: Sun Feb 03, 2019 6:06 pm
KlangFool wrote: Sun Feb 03, 2019 5:58 pm A) They pay Federal Marginal Income Tax on the 529 contribution. It is 10% to 20+% tax.
Federal is still lower than federal+state, which is what they will be paying otherwise. Contributing enough to the 529 to take the state tax deduction is a clear win as long as

(a) the money will be used for education expenses, and
(b) it won't affect financial aid
Ben Mathew,

You do not pay state income tax on your contribution to 401K/IRA. For 529, you do not pay state income tax. So, as per my example, the difference is 20%.

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Re: Cost of college and 529

Post by vineviz »

KlangFool wrote: Sun Feb 03, 2019 6:11 pm
Ben Mathew wrote: Sun Feb 03, 2019 6:06 pm
KlangFool wrote: Sun Feb 03, 2019 5:58 pm A) They pay Federal Marginal Income Tax on the 529 contribution. It is 10% to 20+% tax.
Federal is still lower than federal+state, which is what they will be paying otherwise. Contributing enough to the 529 to take the state tax deduction is a clear win as long as

(a) the money will be used for education expenses, and
(b) it won't affect financial aid
Ben Mathew,

You do not pay state income tax on your contribution to 401K/IRA. For 529, you do not pay state income tax. So, as per my example, the difference is 20%.

KlangFool
But you’ll pay all those taxes on ALL the money when converting the 401k to Roth and then withdrawing to spend on college. More taxes than if you’d just used the 529 to begin with.
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Re: Cost of college and 529

Post by vineviz »

FoolStreet wrote: Sun Feb 03, 2019 5:27 pm
vineviz wrote: Sun Feb 03, 2019 5:18 pm
FoolStreet wrote: Sun Feb 03, 2019 4:59 pm I would think you would want to contribute the max to your Roth IRA before contributing to 529, right?
Only if you WANT the savings associated with maxing the Roth savings. Not every investor needs or wants to fund their retirement at the level implied by maxing out all available retirement vehicles.

For instance, my household is contributing only $12,000 a year to a single 401(k) with no IRA contributions at all yet I project that we are extremely likely to die with six figures in our accounts even if my wife and I live past 100 years old. This is due to the great fortune and privilege in current and prior employment, but I can see no scenario in which it makes any sense at all to save more than we currently do before funding at least a portion of the college education for my children.

For money that WILL eventually be spent on education, 529 plans offer financial benefits that no Roth IRA strategy can match.
I can understand if you don't need to save more for retirement, but if you are going to save and have room, isn't Roth better than 529? Maybe it's just a California thing, but my understanding is that a Roth has all the features of a 529 and more. Maybe other states give tax breaks for contributing to 529. I don't think we get them here in California.

Therefore, unless we are talking about state-specific tax breaks, I don't understand your statement at all. It seems like I think a Roth is better than a 529. And you think a 529 is better than a Roth?
Even without the state tax deduction, the 529 money is taxed at a lower rate and on a lower base than the Roth mine when the money is used for education.
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Re: Cost of college and 529

Post by Ben Mathew »

KlangFool wrote: Sun Feb 03, 2019 6:11 pm
Ben Mathew wrote: Sun Feb 03, 2019 6:06 pm
KlangFool wrote: Sun Feb 03, 2019 5:58 pm A) They pay Federal Marginal Income Tax on the 529 contribution. It is 10% to 20+% tax.
Federal is still lower than federal+state, which is what they will be paying otherwise. Contributing enough to the 529 to take the state tax deduction is a clear win as long as

(a) the money will be used for education expenses, and
(b) it won't affect financial aid
Ben Mathew,

You do not pay state income tax on your contribution to 401K/IRA. For 529, you do not pay state income tax. So, as per my example, the difference is 20%.

KlangFool
That is not the right comparison. Whatever money you use for college will incur federal+state. Even if you choose to save in the retirement account early and then redirect savings towards college later, you will pay federal+state on the money you use for college (the money that didn't go into the retirement account). At some point, the money you use for college is money that's not in the retirement account. That money got taxed federal+state. There's just no way to around it. If you don't capture the state tax deduction through 529 contributions, however you slice it, you will end up paying the full marginal tax rate of federal+state.
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Re: Cost of college and 529

Post by KlangFool »

Ben Mathew wrote: Sun Feb 03, 2019 6:09 pm
This is not correct. The spreadsheet I posted above shows why. No matter when you pay for college, you lose 20%. In your example, you lose 20% on the funds you fail to contribute to the traditional IRA when you are paying for college instead. In your example, both A and B will be equal. If there was a state tax benefit, then A would be better.
Ben Mathew,

We are talking about normal people here. So, where is the 20% come from?

A) You get $2,500 of AOTC tax credit.

B) Even the 529 folks need to pay $4,000 outside of the 529 to claim this credit.

C) So, if you are normal people at 100K or below, that $2,500 AOTC tax credit wipes out your top marginal tax rate.

Now, an even smarter play contributes to 529 and spend it in the same year. Then, you get all the tax benefits.

So, where is the 20%?

Normal people cannot pay a lot for a college education.

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Last edited by KlangFool on Sun Feb 03, 2019 6:48 pm, edited 1 time in total.
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Re: Cost of college and 529

Post by Ben Mathew »

vineviz wrote: Sun Feb 03, 2019 6:17 pm
KlangFool wrote: Sun Feb 03, 2019 6:11 pm
Ben Mathew wrote: Sun Feb 03, 2019 6:06 pm
KlangFool wrote: Sun Feb 03, 2019 5:58 pm A) They pay Federal Marginal Income Tax on the 529 contribution. It is 10% to 20+% tax.
Federal is still lower than federal+state, which is what they will be paying otherwise. Contributing enough to the 529 to take the state tax deduction is a clear win as long as

(a) the money will be used for education expenses, and
(b) it won't affect financial aid
Ben Mathew,

You do not pay state income tax on your contribution to 401K/IRA. For 529, you do not pay state income tax. So, as per my example, the difference is 20%.

KlangFool
But you’ll pay all those taxes on ALL the money when converting the 401k to Roth and then withdrawing to spend on college. More taxes than if you’d just used the 529 to begin with.
But you do pay taxes on all the money you are using for college. Which is what should be in the 529 anyway. What happens to the rest of the money (the part you're using for retirement) does not matter.
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Re: Cost of college and 529

Post by Ben Mathew »

KlangFool wrote: Sun Feb 03, 2019 6:22 pm
Ben Mathew wrote: Sun Feb 03, 2019 6:09 pm
This is not correct. The spreadsheet I posted above shows why. No matter when you pay for college, you lose 20%. In your example, you lose 20% on the funds you fail to contribute to the traditional IRA when you are paying for college instead. In your example, both A and B will be equal. If there was a state tax benefit, then A would be better.
Ben Mathew,

We are talking about normal people here. So, where is the 20% come from?

A) You get $2,500 of AOTC tax credit.

B) Even the 529 folks need to pay $4,000 outside of the 529 to claim this credit.

C) So, if you are normal people at 100K or below, that $2,500 AOTC tax credit wipes out your top marginal tax rate.

Now, an even smarter play contributes to 529 and spend it in the same year. Then, you get all the tax benefits.

So, where is the 20%?

Normal people cannot pay a lot of college education.

KlangFool
I got the 20% from the example you gave.

The AOTC is $2,500/year for four years. I don't know if it will make a big difference for most people.

But, yes, if capturing the state tax deduction causes the 529 to be overfunded, it might not be worth it. For many people, that's unlikely to be the case.
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Re: Cost of college and 529

Post by KlangFool »

Ben Mathew wrote: Sun Feb 03, 2019 6:30 pm
I got the 20% from the example you gave.

The AOTC is $2,500 for all four years. I don't know if it will make a big difference for most people.

And again, if capturing the state tax deduction causes the 529 to be overfunded, it might not be worth it. For many people, that's unlikely to be the case.
Ben Mathew,

1) You pay 20% taxes when you contribute to the 529.

2) You do not necessarily pay 20% tax when you stop or reduce your 401K/IRA contribution while paying for college education. The $2,500 AOTC is a tax credit. At 20%, it wipes out $2,500/20% = $12,500 of your top 20% marginal taxable income.

<<And again, if capturing the state tax deduction causes the 529 to be overfunded,>>

3) You still could capture the 529 state tax deduction while paying for your kid's college education. You just contribute and use it in the same year. Most normal folks could not contribute the full 529 maximum amount every year anyhow.

KlangFool
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Re: Cost of college and 529

Post by nix4me »

It doesn't have to cost that much.

Military - i got 2 years free
Corporate Programs - Mine paid 75% tuition
Dual Enrollment - My daughter just got 2 years free, graduates with AA and high school at same time
State programs - Lottery programs, differ by state, will pay 50-100 tuition

We used a Coverdale ESA - she has plenty of money to finish BS and maybe even MS. If she wants Dr - she will need to figure that out as i will be preparing for retirement. She starts at UCF this August.
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Re: Cost of college and 529

Post by Grt2bOutdoors »

Bacchus01 wrote: Sun Feb 03, 2019 12:24 pm
vineviz wrote: Sun Feb 03, 2019 12:19 pm
Bacchus01 wrote: Sun Feb 03, 2019 11:54 am Which states have limited choices for quality education?
The flagship public university in most states is generally going to be pretty good.

But if you're an exceptional student with a specific major in mind, a lower-population state might not have a public university that is genuinely nationally competitive.

For example, a student with top grades and a SAT score over 1500 who is interested in studying physics can probably identify a GOOD school in states like Wyoming, South Dakota, Montana, Idaho, etc. but they are not going to have same level of choices that a similar student in California, North Carolina, Florida, Texas, or even New Mexico would have.
The quality of education in those states is fantastic. The question wasn’t about choices. To think that you must go to Stanford to get a good education is insane. Most of the value of the education is in what the student puts into it.
Maybe, but if you are qualified to gain admission to Stanford you should go. The caliber of companies and/or opportunities that are available at Stanford will/may not be available at the good flagship state university. Is it worth an additional $150k to pay for those opportunities? Maybe.
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Re: Cost of college and 529

Post by pdavi21 »

You all always get hung up arguing the wrong points. A 529 plan is a BACKWARDS investment. You are promising (and hoping) to spend money later. The urge to avoid contribution regret (and spend the whole balance) is very likely to largely outweigh the tax benefits.

Now problem 2 is restrictive withdrawals. Someone has to approve that your expense was qualified. The restrictions introduce risk and reduce options.

Problem 3 is many 529s have higher expense ratios or poor fund choices. You are limited if using for state tax breaks.

That being said, they are probably useful for high earners who want to spend a lot on their kids' college.
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Re: Cost of college and 529

Post by vrr106 »

ram wrote: Fri Feb 01, 2019 10:50 pm viewtopic.php?f=2&t=255699&start=200

This is our actual experience from 2010- 2019.

My daughter graduated from high school in 2010 and it is anticipated that by June 2019 she will have BSc, MD, MPH degrees and will start a medical residency and then support herself.

We promised her 250K for all of her education. Balance if any would be hers to keep. If she had attended her first choice schools where she was accepted her cost of education would have been as follows:
Undergrad: Johns Hopkins..................240K
Med school : Northwestern, Chicago......300K
MPH: Harvard 18 months ...................!20K
Total ...........................................660K

Instead the path she actually took was:
College credits in high school ............0.5K
State flagship school ......................60 K (partial tuition scholarship)
State flagship Med school.................95 K (full tuition scholarship)
MPH Harvard 12 months ..................80 K
Total........................................235 K

The balance 15 K will pay for her car when she starts the residency.

The high school AP classes meant that she already had about 2 years of college credits when she started college. This allowed her to do some courses in undergrad that are typically done by grad students. These in turn allowed her to do the MPH degree in 12 months.
Great perspective, thanks. From my own experience I do believe that undergrads are usually still unsure of what they want to do, but a strong graduate degree can go a long way - because the kid knows what they want at that point and you typically know the worth of that degree. Thanks
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Re: Cost of college and 529

Post by FoolStreet »

vineviz wrote: Sun Feb 03, 2019 6:19 pm
FoolStreet wrote: Sun Feb 03, 2019 5:27 pm
vineviz wrote: Sun Feb 03, 2019 5:18 pm
FoolStreet wrote: Sun Feb 03, 2019 4:59 pm I would think you would want to contribute the max to your Roth IRA before contributing to 529, right?
Only if you WANT the savings associated with maxing the Roth savings. Not every investor needs or wants to fund their retirement at the level implied by maxing out all available retirement vehicles.

For instance, my household is contributing only $12,000 a year to a single 401(k) with no IRA contributions at all yet I project that we are extremely likely to die with six figures in our accounts even if my wife and I live past 100 years old. This is due to the great fortune and privilege in current and prior employment, but I can see no scenario in which it makes any sense at all to save more than we currently do before funding at least a portion of the college education for my children.

For money that WILL eventually be spent on education, 529 plans offer financial benefits that no Roth IRA strategy can match.
I can understand if you don't need to save more for retirement, but if you are going to save and have room, isn't Roth better than 529? Maybe it's just a California thing, but my understanding is that a Roth has all the features of a 529 and more. Maybe other states give tax breaks for contributing to 529. I don't think we get them here in California.

Therefore, unless we are talking about state-specific tax breaks, I don't understand your statement at all. It seems like I think a Roth is better than a 529. And you think a 529 is better than a Roth?
Even without the state tax deduction, the 529 money is taxed at a lower rate and on a lower base than the Roth mine when the money is used for education.
How so?

- I can’t contribute to 529 pre tax. Is that possible?
- both are post tax contributions. So both are at the same tax rate.

Unless there are state-specific incentives for 529 that I don’t know about since we don’t get them here in California.
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Re: Cost of college and 529

Post by vineviz »

FoolStreet wrote: Sun Feb 03, 2019 8:19 pm How so?

- I can’t contribute to 529 pre tax. Is that possible?
- both are post tax contributions. So both are at the same tax rate.

Unless there are state-specific incentives for 529 that I don’t know about since we don’t get them here in California.
For someone living in California, with no state tax deduction for 529 contributions, contributions a 529 and a Roth will be funded with after-tax money as you point out.

Withdrawals, however, may be taxed differently for money that is spent on education. From a 529 plan, withdrawals are not taxed at all.

From a Roth, the contributed portion is untaxed but any gains are taxed at ordinary income tax rates unless your age is over 59½.

So it is true that for someone wanting to use a Roth instead of a 529, in a best case scenario (living in a state without a 529 state tax deduction AND either being over age 59½ when their child goes to college or not needing to use any of the capital gains from the Roth to pay for the college expense) then the Roth and 529 work out to be equivalent.

For someone who expects to be in this unusual circumstance, I agree that the flexibility of the Roth probably tips the advantage in that direction. From a purely financial point of view, however, the Roth NEVER is cheaper than the 529 plan and for MOST investors will be more a more expensive way to fund college expenses.
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vineviz
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Re: Cost of college and 529

Post by vineviz »

pdavi21 wrote: Sun Feb 03, 2019 7:31 pm Problem 3 is many 529s have higher expense ratios or poor fund choices. You are limited if using for state tax breaks.
Maybe, although in most states it's not hard to avoid this problem.

Federal guidelines allow one 529 rollover in every rolling 12 month period, so it's generally possible to contribute to your state plan then rollover the money to a plan with lower ongoing expenses.

I live in Maryland, for instance, which allows a state tax deduction but has a plan with decidedly mediocre expenses. I contribute enough to the MD plan get the maximum state tax deduction, then rollover the entire balance once a year to a plan with much lower expenses (Michigan in our case, but the New York plan is even cheaper still).

This won't work seamlessly for everyone because there are a handful of states which will "claw back" the tax deduction if the money is rolled over too quickly, but for the most part there is no need to choose between taking the state tax deduction and keeping plan expenses low.
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alfaspider
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Re: Cost of college and 529

Post by alfaspider »

Bacchus01 wrote: Fri Feb 01, 2019 11:36 pm
alfaspider wrote: Fri Feb 01, 2019 10:54 am
KlangFool wrote: Fri Feb 01, 2019 10:23 am OP,

529 is a tax break for rich folks. There are plenty of lawyers and doctors that use 529. Please make sure that you are rich enough before you start putting money into 529. If not, besides not helping your kids, it will hurt their chances in getting financial aid.

KlangFool
I'd caveat that by saying it's for rich folks unless you get a state tax deduction to go with it. Then it may make sense to make a small contribution up to the limit (which is usually pretty low anyways). This is especially true now that the SALT deduction is capped.

But even for rich folks, it's hardly a game changer. At most, a 529 is going to save you 15% or so on your college expenses (obviously depending on your returns and tax rates when your kid is in college). A nice little perk, but not a game changer.
You think investment growth over ~20 years plus a state tax deduction is only worth 15%?
I posted my math earlier. The investment growth would happen with or without the 529 account. This is 529 vs taxable, not 529 vs not saving. YMMV on state deduction (my state has no income tax so not relevant to me), and I mentioned that state deduction may change the calculus in my earlier posts.
alfaspider
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Re: Cost of college and 529

Post by alfaspider »

KingRiggs wrote: Fri Feb 01, 2019 4:40 pm
alfaspider wrote: Fri Feb 01, 2019 10:54 am
KlangFool wrote: Fri Feb 01, 2019 10:23 am

But even for rich folks, it's hardly a game changer. At most, a 529 is going to save you 15% or so on your college expenses (obviously depending on your returns and tax rates when your kid is in college). A nice little perk, but not a game changer.
I put away a total of $200k over the years. Doubled it to $400k by the time kids were in mid-high school. I'd call that a game-changer.

Could I have done it in a taxable account? Probably. But having it is an account earmarked just for college forces you to treat it differently (ie, not use it to put a new roof on the house).
The investment gains are indeed a game changer, but I don't see why you'd magically spend it just because it wasn't in a designated account. The money for the roof is going to come from somewhere. Also, if you don't actually SPEND the $400k on education, you could end up worse off than if you had saved it in a taxable. Yes, scholarships get you off the hook, but what if your kids want to go to a cheap state school and don't need it for grad school? I suppose there's always grandkids, but no guarantee of those either. It's a very personal decision, but I've decided to contribute no more than $100k to my kids accounts for those reasons.
Last edited by alfaspider on Mon Feb 04, 2019 9:19 am, edited 1 time in total.
FoolStreet
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Re: Cost of college and 529

Post by FoolStreet »

vineviz wrote: Mon Feb 04, 2019 8:30 am
FoolStreet wrote: Sun Feb 03, 2019 8:19 pm How so?

- I can’t contribute to 529 pre tax. Is that possible?
- both are post tax contributions. So both are at the same tax rate.

Unless there are state-specific incentives for 529 that I don’t know about since we don’t get them here in California.
For someone living in California, with no state tax deduction for 529 contributions, contributions a 529 and a Roth will be funded with after-tax money as you point out.

Withdrawals, however, may be taxed differently for money that is spent on education. From a 529 plan, withdrawals are not taxed at all.

From a Roth, the contributed portion is untaxed but any gains are taxed at ordinary income tax rates unless your age is over 59½.

So it is true that for someone wanting to use a Roth instead of a 529, in a best case scenario (living in a state without a 529 state tax deduction AND either being over age 59½ when their child goes to college or not needing to use any of the capital gains from the Roth to pay for the college expense) then the Roth and 529 work out to be equivalent.

For someone who expects to be in this unusual circumstance, I agree that the flexibility of the Roth probably tips the advantage in that direction. From a purely financial point of view, however, the Roth NEVER is cheaper than the 529 plan and for MOST investors will be more a more expensive way to fund college expenses.
Thanks for the clarification. Good to know. I will have to make sure that Canguard’s Roth allows me to choose the distribution type. Still, at close to $30k/year contribution capacity, I would argue Roth is the better vehicle. For me, anyway.
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