Bad Idea or Good Idea? - Investing in 529 College Savings Plan

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pdavi21
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by pdavi21 » Tue Feb 12, 2019 9:35 pm

GoldStar wrote:
Tue Feb 12, 2019 9:04 am
pdavi21 wrote:
Tue Feb 12, 2019 8:53 am
If you want to lose money and most of the earnings on it (minus tax) to pay for your kids college....
really?
Its baffling to me why some folks seem like they have some sort of personal Vendetta against 529s making summary statements like this that are generally false - there are some great 529 plans out there and they can save you thousands in taxes.
But, as a tax-payer, I'm happy if you want to avoid them - more tax dollars into the government coffers.
You lose the money because you spend it...on qualified expenses.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

pdavi21
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by pdavi21 » Tue Feb 12, 2019 9:35 pm

Grt2bOutdoors wrote:
Tue Feb 12, 2019 9:24 am
pdavi21 wrote:
Tue Feb 12, 2019 8:53 am
If you want to lose money and most of the earnings on it (minus tax) to pay for your kids college, AND you are in a higher fed/state bracket, AND you have good 529 options and tax breaks, AND you maxed out all other tax advantaged space, go for it.

Otherwise, I'd avoid anything over a nominal contribution.
LOSE money? How?

If you put money in a 529 plan, your principal is no more at risk than if you took the money and placed in it in a taxable account holding like investments - apples to apples. Your statement should be adjusted to read as follows: If you want to GAIN money and most of the earnings on it (ZERO tax) to pay for your kids college, AND you are in a higher fed/state bracket, AND you have good 529 options and tax breaks, AND you maxed out all other tax advantaged space, go for it.
You lose it because you spend it on qualified expenses.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Grt2bOutdoors
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by Grt2bOutdoors » Tue Feb 12, 2019 10:25 pm

pdavi21 wrote:
Tue Feb 12, 2019 9:35 pm
Grt2bOutdoors wrote:
Tue Feb 12, 2019 9:24 am
pdavi21 wrote:
Tue Feb 12, 2019 8:53 am
If you want to lose money and most of the earnings on it (minus tax) to pay for your kids college, AND you are in a higher fed/state bracket, AND you have good 529 options and tax breaks, AND you maxed out all other tax advantaged space, go for it.

Otherwise, I'd avoid anything over a nominal contribution.
LOSE money? How?

If you put money in a 529 plan, your principal is no more at risk than if you took the money and placed in it in a taxable account holding like investments - apples to apples. Your statement should be adjusted to read as follows: If you want to GAIN money and most of the earnings on it (ZERO tax) to pay for your kids college, AND you are in a higher fed/state bracket, AND you have good 529 options and tax breaks, AND you maxed out all other tax advantaged space, go for it.
You lose it because you spend it on qualified expenses.
How else do you propose paying for those qualified expenses? On a tax free basis?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

986racer
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by 986racer » Wed Feb 13, 2019 12:29 am

janezoey wrote:
Tue Feb 12, 2019 11:29 am
I always will start a post like this with "fund your retirement first and emergency fund first". Then the rest really depends on your household income and needs and the academic ability of your children.

Go to a net price calculator of your state school, a dream school (e.g. Harvard or Amherst College), and a local school where most kids attend. You'll probably be shocked to find out most schools offer loans and call it "meeting full financial need". You can try for merit, but getting a full merit ride has the chance of like 1.5%. So yeah, shop around and set expectations early, but don't fully rely on merit aid or need-based grants. I'm skeptical of the idea that only households making above $300k should use the 529. In a net price calculator for Harvard (the most generous college because it gives out grants in lieu of loans and does not count home equity), I added my household income of $200k and $0 savings. My family would still have to pay $43,600 for one year. If I put in $200k household income and $200k savings, I would pay $51,100. I could perhaps cashflow some of that amount, but more than half I would have to co-sign loans, which have origination fees and interest rates higher than the 5.64% used to assess parental assets. It gets even worse if I have two in college at the same time. Remember, this is in today's dollars. Tuition inflation is rising faster than regular inflation and most other schools cost much more than Harvard.

Most schools will assess a 529 as a parental asset, which is calculated as 5.64% percent above a certain allowance. But then your taxable account will also be assessed similarly. So if your household income has to pay capital gains tax anyway and you might get a state tax deduction and you don't have liquidity concerns, then why worry about 5.64%? You can try to "hide" your money in home equity, but most top tier CSS profile schools use home equity to assess financial aid anyway. I think the only safe place to stuff savings is a retirement account, but I would be wary of using it to fund college. For example, if you use a Roth IRA to fund college, you have to make sure you only use it during the last two years of your youngest child's enrollment, or else the Roth distributions will be assessed as income, which impacts financial aid much more severely than the parental asset category.

I think a lot of people are too breezy about college financing. People think they can take a student loan and simply repay it back. You know federal loans (as of today) your child can only borrow up to $31k for undergraduate degrees. The rest of the college bill, you would have to co-sign a private loan or sign a federal Parent PLUS loan. Did you know the Parent PLUS loan (as of today) has an origination fee of 4.248% and then a 7.6% interest rate that will accumulate while your child is still in college? Did you know student loans are practically impossible to discharge in bankruptcy? Did you know they can garnish your Social Security if you don't pay it back? If your children die and you had co-signed their private loans, you still would be on the hook for those loans.

I'm totally for funding retirement first before you even think of funding education, but geez, don't endanger your retirement by borrowing for education. You know how many sob stories there are of parents of NYU graduates literally losing the roof over their heads because they took out loans and then fell on hard times? Seriously, do the calculations now and adjust every year moving forward. I think the worst thing a family can do is kick the planning down the road and then suddenly have to scramble for college funding because they didn't save for college or set realistic expectations early on of where their child should go.
+1,000,000

Maybe you don't need a 529 plan, but if you think you are getting need based financial aid, I'd suggest doing a bunch of research. The schools that can provide need based aid in the form of grants will tend to use the CSS. The CSS makes it much harder to hide money in retirement accounts, life insurance, etc. I.e., you can try putting millions into a retirement account and retire and show no income. With CSS, you might still have to pay the full amount anyhow. There are numerous college planning forums where people discuss this exact issue.

Whether or not a 529 is right for you is a decision that is tailored for your unique circumstances. I will say that if you 100% know that you will need to provide X dollars for college, there is no better place to put those X dollars than a 529 plan. However, the more doubts you have that you will actually need to spend those dollars on college, the worse the 529 plan is. Having unused money in a 529 plan can be extremely costly.

For me, it was an easy decision to use a 529 because I knew I wasn't getting need based aid and I had three children, so I figured that I had a good chance that at least one of them would go on to college.

Also, on the other long thread, I mentioned that if you do have some equities that have lots of appreciation in a taxable account, you could potentially gift those to your child and let the sell, pay the taxes, and take the AOTC credit. It's a nice way to get tax free gains on a taxable account (almost converting it into a Roth or 529)

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teen persuasion
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by teen persuasion » Wed Feb 13, 2019 8:12 am

986racer wrote:
Wed Feb 13, 2019 12:29 am

Also, on the other long thread, I mentioned that if you do have some equities that have lots of appreciation in a taxable account, you could potentially gift those to your child and let the sell, pay the taxes, and take the AOTC credit. It's a nice way to get tax free gains on a taxable account (almost converting it into a Roth or 529)
Doesn't the kiddie tax come into play here?

DS2 told me a friend had an unexpectedly large tax bill one year, and asked me if I could figure out why. From the details he knew, it seems her parents were divorced, and both remarried. Her dad gifted her appreciated stocks to sell and use to pay college expenses. As she was her mother's dependent, she was taxed on it at her mother's and step-father's rate. I believe the kiddie tax was altered by the tax changes recently, and uses trust tax rates now.

986racer
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by 986racer » Wed Feb 13, 2019 12:57 pm

teen persuasion wrote:
Wed Feb 13, 2019 8:12 am
986racer wrote:
Wed Feb 13, 2019 12:29 am

Also, on the other long thread, I mentioned that if you do have some equities that have lots of appreciation in a taxable account, you could potentially gift those to your child and let the sell, pay the taxes, and take the AOTC credit. It's a nice way to get tax free gains on a taxable account (almost converting it into a Roth or 529)
Doesn't the kiddie tax come into play here?

DS2 told me a friend had an unexpectedly large tax bill one year, and asked me if I could figure out why. From the details he knew, it seems her parents were divorced, and both remarried. Her dad gifted her appreciated stocks to sell and use to pay college expenses. As she was her mother's dependent, she was taxed on it at her mother's and step-father's rate. I believe the kiddie tax was altered by the tax changes recently, and uses trust tax rates now.
Yes, it comes into play. It effectively limits the amount that can be transferred to about 16K of capital gains per year.

livesoft
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by livesoft » Wed Feb 13, 2019 1:21 pm

janezoey wrote:
Tue Feb 12, 2019 11:29 am
[...]
I'm skeptical of the idea that only households making above $300k should use the 529.
Me, too. For one thing, the American Opportunity Credit is not available to parents with MAGI above $180K and is reduced for parents with MAGI between $160K and $180K. Thus, parents with incomes above about $160K should consider a 529 plan.

Also note that maxing out retirement plan contributions before college paying years does not shield money dedicated to retirement plans during college paying years. The schools and FAFSA assume that a $19,000 401(k) contribution and $12,000 to two Roths are available to pay them instead. One beauty of making maximum retirement contributions before college paying years, is that the family will be used to a lower set of living expenses, so that the retirement plan contributions diverted to college coffers does not impact their standard of living too much.
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SchruteB&B
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by SchruteB&B » Wed Feb 13, 2019 2:16 pm

pdavi21 wrote:
Tue Feb 12, 2019 9:35 pm
GoldStar wrote:
Tue Feb 12, 2019 9:04 am
pdavi21 wrote:
Tue Feb 12, 2019 8:53 am
If you want to lose money and most of the earnings on it (minus tax) to pay for your kids college....
really?
Its baffling to me why some folks seem like they have some sort of personal Vendetta against 529s making summary statements like this that are generally false - there are some great 529 plans out there and they can save you thousands in taxes.
But, as a tax-payer, I'm happy if you want to avoid them - more tax dollars into the government coffers.
You lose the money because you spend it...on qualified expenses.
This is a very odd use of the phrase “lose money.” I don’t consider paying for something and receiving exactly what I paid for in return to be losing money.

fourkids
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by fourkids » Wed Feb 13, 2019 2:23 pm

Generally, 529 plans are a good idea if you are saving for college, rather than a taxable investment account.

To determine available financial aid, you have to complete a FAFSA application.
It calculates that 5.64% of parental non-retirement assets should be used toward school expenses. This is called the Expected family contribution (EFC). Parental non-retirement assets include both 529 accounts and normal bank and investment accounts.

Therefore, all else equal, it makes sense to save for college through a 529 account, where the earnings grow tax-free, and you may get a state tax deduction for contributions. (Of course, max out your retirement accounts first)

WhiteMaxima
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by WhiteMaxima » Wed Feb 13, 2019 3:00 pm

I think 529 is a good idea if you fully funded your pre-tax 401k and Roth. 529 can serve as a cushion when kids go to college. 529 is also a good estate planning tools to pass wealth to future generation, Tax Free.

pdavi21
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by pdavi21 » Wed Feb 13, 2019 4:26 pm

SchruteB&B wrote:
Wed Feb 13, 2019 2:16 pm
pdavi21 wrote:
Tue Feb 12, 2019 9:35 pm
GoldStar wrote:
Tue Feb 12, 2019 9:04 am
pdavi21 wrote:
Tue Feb 12, 2019 8:53 am
If you want to lose money and most of the earnings on it (minus tax) to pay for your kids college....
really?
Its baffling to me why some folks seem like they have some sort of personal Vendetta against 529s making summary statements like this that are generally false - there are some great 529 plans out there and they can save you thousands in taxes.
But, as a tax-payer, I'm happy if you want to avoid them - more tax dollars into the government coffers.
You lose the money because you spend it...on qualified expenses.
This is a very odd use of the phrase “lose money.” I don’t consider paying for something and receiving exactly what I paid for in return to be losing money.
Do you have the money when you are done? When you put money in a 529 plan, 10-100 percent (plus earnings) of it is gone forever from your net worth. The only way to get it back is to pay a 10% penalty and receive no tax benefits. The option you prefer is to spend 100% (plus earnings minus tax breaks) on your kid's education. You end up with 0-90% of the money you started with (plus earnings minus tax) after your child completes college. This makes a 529 plan almost akin to insurance. You pay upfront to hopefully reduce expense later.

In my OP, I suggest only people with a lot of tax benefits to gain should do it. Some may pay negative or zero tax investing in taxable accounts over most of the 18 year period (a 529 is not for them). Some do not want to pay a lot for their kid's college (a 529 is probably not for them). Some do not receive state tax breaks or have high ER funds that eat into state tax breaks (a 529 is probably not for them). Some do not max out all other retirement accounts (a 529 plan is almost definitely not for them). For all others a 529 plan is GREAT.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

EddyB
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by EddyB » Wed Feb 13, 2019 6:13 pm

pdavi21 wrote:
Wed Feb 13, 2019 4:26 pm
SchruteB&B wrote:
Wed Feb 13, 2019 2:16 pm
pdavi21 wrote:
Tue Feb 12, 2019 9:35 pm
GoldStar wrote:
Tue Feb 12, 2019 9:04 am
pdavi21 wrote:
Tue Feb 12, 2019 8:53 am
If you want to lose money and most of the earnings on it (minus tax) to pay for your kids college....
really?
Its baffling to me why some folks seem like they have some sort of personal Vendetta against 529s making summary statements like this that are generally false - there are some great 529 plans out there and they can save you thousands in taxes.
But, as a tax-payer, I'm happy if you want to avoid them - more tax dollars into the government coffers.
You lose the money because you spend it...on qualified expenses.
This is a very odd use of the phrase “lose money.” I don’t consider paying for something and receiving exactly what I paid for in return to be losing money.
Do you have the money when you are done? When you put money in a 529 plan, 10-100 percent (plus earnings) of it is gone forever from your net worth. The only way to get it back is to pay a 10% penalty and receive no tax benefits. The option you prefer is to spend 100% (plus earnings minus tax breaks) on your kid's education. You end up with 0-90% of the money you started with (plus earnings minus tax) after your child completes college. This makes a 529 plan almost akin to insurance. You pay upfront to hopefully reduce expense later.

In my OP, I suggest only people with a lot of tax benefits to gain should do it. Some may pay negative or zero tax investing in taxable accounts over most of the 18 year period (a 529 is not for them). Some do not want to pay a lot for their kid's college (a 529 is probably not for them). Some do not receive state tax breaks or have high ER funds that eat into state tax breaks (a 529 is probably not for them). Some do not max out all other retirement accounts (a 529 plan is almost definitely not for them). For all others a 529 plan is GREAT.
Yeah, if you're not going to pay for college (or some other qualified expense), a 529 is probably a bad idea. But if you've committed yourself to paying for college, whether from a 529, cash-flowing or taxable investments, you've "lost" that money. Just like buying a present for someone is a loss of the money spent.

pdavi21
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by pdavi21 » Wed Feb 13, 2019 10:42 pm

EddyB wrote:
Wed Feb 13, 2019 6:13 pm
pdavi21 wrote:
Wed Feb 13, 2019 4:26 pm
SchruteB&B wrote:
Wed Feb 13, 2019 2:16 pm
pdavi21 wrote:
Tue Feb 12, 2019 9:35 pm
GoldStar wrote:
Tue Feb 12, 2019 9:04 am

really?
Its baffling to me why some folks seem like they have some sort of personal Vendetta against 529s making summary statements like this that are generally false - there are some great 529 plans out there and they can save you thousands in taxes.
But, as a tax-payer, I'm happy if you want to avoid them - more tax dollars into the government coffers.
You lose the money because you spend it...on qualified expenses.
This is a very odd use of the phrase “lose money.” I don’t consider paying for something and receiving exactly what I paid for in return to be losing money.
Do you have the money when you are done? When you put money in a 529 plan, 10-100 percent (plus earnings) of it is gone forever from your net worth. The only way to get it back is to pay a 10% penalty and receive no tax benefits. The option you prefer is to spend 100% (plus earnings minus tax breaks) on your kid's education. You end up with 0-90% of the money you started with (plus earnings minus tax) after your child completes college. This makes a 529 plan almost akin to insurance. You pay upfront to hopefully reduce expense later.

In my OP, I suggest only people with a lot of tax benefits to gain should do it. Some may pay negative or zero tax investing in taxable accounts over most of the 18 year period (a 529 is not for them). Some do not want to pay a lot for their kid's college (a 529 is probably not for them). Some do not receive state tax breaks or have high ER funds that eat into state tax breaks (a 529 is probably not for them). Some do not max out all other retirement accounts (a 529 plan is almost definitely not for them). For all others a 529 plan is GREAT.
Yeah, if you're not going to pay for college (or some other qualified expense), a 529 is probably a bad idea. But if you've committed yourself to paying for college, whether from a 529, cash-flowing or taxable investments, you've "lost" that money. Just like buying a present for someone is a loss of the money spent.
Not exactly. You can change your mind and not pay a penalty if you do not have a 529. Then you keep 100% (plus earnings minus taxes). If you change your mind with a 529, you can only keep up to 90% (plus earnings minus taxes).
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

markcoop
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by markcoop » Wed Feb 13, 2019 11:00 pm

pdavi21 wrote:
Wed Feb 13, 2019 10:42 pm
EddyB wrote:
Wed Feb 13, 2019 6:13 pm
pdavi21 wrote:
Wed Feb 13, 2019 4:26 pm
SchruteB&B wrote:
Wed Feb 13, 2019 2:16 pm
pdavi21 wrote:
Tue Feb 12, 2019 9:35 pm


You lose the money because you spend it...on qualified expenses.
This is a very odd use of the phrase “lose money.” I don’t consider paying for something and receiving exactly what I paid for in return to be losing money.
Do you have the money when you are done? When you put money in a 529 plan, 10-100 percent (plus earnings) of it is gone forever from your net worth. The only way to get it back is to pay a 10% penalty and receive no tax benefits. The option you prefer is to spend 100% (plus earnings minus tax breaks) on your kid's education. You end up with 0-90% of the money you started with (plus earnings minus tax) after your child completes college. This makes a 529 plan almost akin to insurance. You pay upfront to hopefully reduce expense later.

In my OP, I suggest only people with a lot of tax benefits to gain should do it. Some may pay negative or zero tax investing in taxable accounts over most of the 18 year period (a 529 is not for them). Some do not want to pay a lot for their kid's college (a 529 is probably not for them). Some do not receive state tax breaks or have high ER funds that eat into state tax breaks (a 529 is probably not for them). Some do not max out all other retirement accounts (a 529 plan is almost definitely not for them). For all others a 529 plan is GREAT.
Yeah, if you're not going to pay for college (or some other qualified expense), a 529 is probably a bad idea. But if you've committed yourself to paying for college, whether from a 529, cash-flowing or taxable investments, you've "lost" that money. Just like buying a present for someone is a loss of the money spent.
Not exactly. You can change your mind and not pay a penalty if you do not have a 529. Then you keep 100% (plus earnings minus taxes). If you change your mind with a 529, you can only keep up to 90% (plus earnings minus taxes).
Not exactly. The 10% penalty is on the earnings, not on the whole value.
Mark

EddyB
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by EddyB » Wed Feb 13, 2019 11:00 pm

pdavi21 wrote:
Wed Feb 13, 2019 10:42 pm
EddyB wrote:
Wed Feb 13, 2019 6:13 pm
pdavi21 wrote:
Wed Feb 13, 2019 4:26 pm
SchruteB&B wrote:
Wed Feb 13, 2019 2:16 pm
pdavi21 wrote:
Tue Feb 12, 2019 9:35 pm


You lose the money because you spend it...on qualified expenses.
This is a very odd use of the phrase “lose money.” I don’t consider paying for something and receiving exactly what I paid for in return to be losing money.
Do you have the money when you are done? When you put money in a 529 plan, 10-100 percent (plus earnings) of it is gone forever from your net worth. The only way to get it back is to pay a 10% penalty and receive no tax benefits. The option you prefer is to spend 100% (plus earnings minus tax breaks) on your kid's education. You end up with 0-90% of the money you started with (plus earnings minus tax) after your child completes college. This makes a 529 plan almost akin to insurance. You pay upfront to hopefully reduce expense later.

In my OP, I suggest only people with a lot of tax benefits to gain should do it. Some may pay negative or zero tax investing in taxable accounts over most of the 18 year period (a 529 is not for them). Some do not want to pay a lot for their kid's college (a 529 is probably not for them). Some do not receive state tax breaks or have high ER funds that eat into state tax breaks (a 529 is probably not for them). Some do not max out all other retirement accounts (a 529 plan is almost definitely not for them). For all others a 529 plan is GREAT.
Yeah, if you're not going to pay for college (or some other qualified expense), a 529 is probably a bad idea. But if you've committed yourself to paying for college, whether from a 529, cash-flowing or taxable investments, you've "lost" that money. Just like buying a present for someone is a loss of the money spent.
Not exactly. You can change your mind and not pay a penalty if you do not have a 529. Then you keep 100% (plus earnings minus taxes). If you change your mind with a 529, you can only keep up to 90% (plus earnings minus taxes).
And if you end up paying for it with money that includes capital gains or withdrawals from IRAs or 401(k)s, you’ve lost the tax amount. I’m not sure what your point is.

markcoop
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by markcoop » Wed Feb 13, 2019 11:05 pm

I find this hate of 529 plans to be odd. I think there are many people who have used 529s, given that college was their secondary goal (retirement being their primary savings goal), and are better off financially because of it. I guess if you don't like it, then don't use it. Just don't blindly advise others not to use it. Sure, given an individuals circumstances it doesn't make sense for all. But it certainly makes sense for many people who will be paying for college.
Mark

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teen persuasion
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by teen persuasion » Thu Feb 14, 2019 8:57 am

I don't hate 529s, but the challenge is deciding if funding a 529 will be good or bad for your situation. The advantages are touted often, and the potential cost of college is frightening to many families, so there's a better than zero chance that some people will decide to split their savings between retirement and a 529, in an attempt to hedge their bets. At certain income levels, they could be much better off if they fully funded retirement and avoided funding the 529. When filing the FAFSA, the 529 balance will drive their EFC higher than it would be without it, shrinking their aid. As their retirement is underfunded, they have a choice of two bad options: drop retirement savings even lower to divert $$ to cover the financial aid shortfall, or try to ramp up retirement savings to catch up but force more loans on their child to cover the financial aid shortfall. Yes they have the 529 funds, but at the income levels I'm figuring, they won't be enough to cover expenses fully.


The debate is something like the debate over Roth vs traditional - if you choose Roth, you are prepaying taxes. If your tax rate in retirement is lower, you've paid too much, and if you haven't saved enough, that's an unnecessary expense. If you choose traditional and end up with too much, you still have the option to convert to Roth later, and if RMDs are really large in retirement, it just means you have plenty to pay the tax. But if you have an extenuating circumstance, like pension driving up retirement income, then going Roth makes more sense.



If you know your income will exclude you from financial aid, then using a 529 makes sense for the tax savings. But if you might be eligible for aid, funding a 529 hurts your aid and diverts $$ away from retirement, possibly straining later finances. Most of the articles touting 529 accounts don't help people figure out which camp they are in, and it's tricky to know 18 or so years in advance.

KlangFool
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by KlangFool » Thu Feb 14, 2019 10:25 am

teen persuasion wrote:
Thu Feb 14, 2019 8:57 am

If you know your income will exclude you from financial aid, then using a 529 makes sense for the tax savings. But if you might be eligible for aid, funding a 529 hurts your aid and diverts $$ away from retirement, possibly straining later finances. Most of the articles touting 529 accounts don't help people figure out which camp they are in, and it's tricky to know 18 or so years in advance.
teen persuasion,

The problem with that is how will the person know whether he/she will be fully-employed when the kids go to college? In the best case, the person maybe early retired voluntarily. In the worst case, the person might be unemployed or under-employed. For folks in a profession with serious age discrimination problem, this problem is prevalent. The person may face job security problem right when the kids go to college.

KlangFool

markcoop
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by markcoop » Thu Feb 14, 2019 10:50 am

markcoop wrote:
Wed Feb 13, 2019 11:00 pm
pdavi21 wrote:
Wed Feb 13, 2019 10:42 pm
EddyB wrote:
Wed Feb 13, 2019 6:13 pm
pdavi21 wrote:
Wed Feb 13, 2019 4:26 pm
SchruteB&B wrote:
Wed Feb 13, 2019 2:16 pm

This is a very odd use of the phrase “lose money.” I don’t consider paying for something and receiving exactly what I paid for in return to be losing money.
Do you have the money when you are done? When you put money in a 529 plan, 10-100 percent (plus earnings) of it is gone forever from your net worth. The only way to get it back is to pay a 10% penalty and receive no tax benefits. The option you prefer is to spend 100% (plus earnings minus tax breaks) on your kid's education. You end up with 0-90% of the money you started with (plus earnings minus tax) after your child completes college. This makes a 529 plan almost akin to insurance. You pay upfront to hopefully reduce expense later.

In my OP, I suggest only people with a lot of tax benefits to gain should do it. Some may pay negative or zero tax investing in taxable accounts over most of the 18 year period (a 529 is not for them). Some do not want to pay a lot for their kid's college (a 529 is probably not for them). Some do not receive state tax breaks or have high ER funds that eat into state tax breaks (a 529 is probably not for them). Some do not max out all other retirement accounts (a 529 plan is almost definitely not for them). For all others a 529 plan is GREAT.
Yeah, if you're not going to pay for college (or some other qualified expense), a 529 is probably a bad idea. But if you've committed yourself to paying for college, whether from a 529, cash-flowing or taxable investments, you've "lost" that money. Just like buying a present for someone is a loss of the money spent.
Not exactly. You can change your mind and not pay a penalty if you do not have a 529. Then you keep 100% (plus earnings minus taxes). If you change your mind with a 529, you can only keep up to 90% (plus earnings minus taxes).
Not exactly. The 10% penalty is on the earnings, not on the whole value.
I got a little interested in the mistake about the 10%. To accurately understand the penalty, you need to compare the 10% on just the earnings with the extra bonus received with tax deferral in the 529 account (the money only got taxed at the end meaning there was compounding going on while the money sat in a 529). If the money was not in a 529, it would've been taxed every year. Sure, if you invested in tax-efficient stock mutual funds, this point could be moot. However, it would make sense to invest the money more conservatively as the goal approached. That means more bonds, which in turn means more yearly taxes, which in turn means more of a deferral bonus in the 529 case. Of course, I don't plan to not use the money in the 529 for education (would probably fund grad school or grandchildren if there were extra), but the consequences of the money being in a 529 and not all used for college vs being in a taxable account is not that large.
Mark

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teen persuasion
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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by teen persuasion » Thu Feb 14, 2019 1:22 pm

KlangFool wrote:
Thu Feb 14, 2019 10:25 am
teen persuasion wrote:
Thu Feb 14, 2019 8:57 am

If you know your income will exclude you from financial aid, then using a 529 makes sense for the tax savings. But if you might be eligible for aid, funding a 529 hurts your aid and diverts $$ away from retirement, possibly straining later finances. Most of the articles touting 529 accounts don't help people figure out which camp they are in, and it's tricky to know 18 or so years in advance.
teen persuasion,

The problem with that is how will the person know whether he/she will be fully-employed when the kids go to college? In the best case, the person maybe early retired voluntarily. In the worst case, the person might be unemployed or under-employed. For folks in a profession with serious age discrimination problem, this problem is prevalent. The person may face job security problem right when the kids go to college.

KlangFool
I agree.

The biggest advantage to 529s comes from tax avoidance on years of growth after contributing early, but the biggest risk is how things can change in those intervening years.

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Re: Bad Idea or Good Idea? - Investing in 529 College Savings Plan

Post by Broken Man 1999 » Tue Feb 19, 2019 10:03 am

I like 529 plans because I think they are more of a representation of a commitment to pay some/all college expenses.

Saying "we will cash flow" when the expenses come due just doesn't seem to give as much security.

Note, I believe those who want to cash flow are absolutely sincere, and have every intent to assist, but, life happens.

And, honestly, my grandchildren could possibly be affected if their Papa decides to raid their 529 plans. But, I have duplicate statements sent to their mothers so I don't get away with it through treachery.

I like using 529 plans for the same reason I like giving my grandchildren any legacy direct (in trust) instead of tasking their parents to flow it to them. It is my desire to do so, therefore it is also my responsibility to set things up.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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