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

Posted: Tue Feb 12, 2019 12:43 am
by teelainen
Is it a bad idea or a good idea to invest in a 529 College Savings Plan?

1. I have heard that having a lot of assets in a 529 College Savings Plan can hurt the chances of your child getting "free" grants and scholarships for college. Is this true?

2. Are there are any other downsides to having a 529 College Savings Plan?

Thanks.

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

Posted: Tue Feb 12, 2019 1:10 am
by Thecallofduty
Short answer is it depends. We need to know more about your financials.

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

Posted: Tue Feb 12, 2019 3:07 am
by Small Savanna
If you and your spouse both have good jobs and are in your peak earning years when your kids are in college, it is unlikely that they will qualify for Pell Grants or other need-based scholarships. They can take out loans, but loans have to be paid back.

Over the ten years before they went to college we put away about $60K for each of two kids in Virginia's 529 plan, which provided an immediate break on state income taxes, plus tax free growth and no taxes on withdrawals used for college expenses. We were fortunate to have enough spare income that we could do this and still contribute adequately to retirement accounts.

$60K wasn't enough to cover everything, but it made the expenses while they were in college a lot more manageable. Our youngest graduates in May, and both are starting adult life debt free.

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

Posted: Tue Feb 12, 2019 6:44 am
by OnTrack2020
We did not put money into 529s. All education money was put into taxable, and am very happy we made that decision.

For us, the deciding factor was what if our kids do not go to college. In grade school, you simply do not know if your child will be able to attend college/will want to attend college. It is really not until around freshman/sophomore year that you have a good idea.

We have four children; two are currently in college. Of the two in college, one we simply did not know if he would attend due to his needs. It worked out and he was able to attend. If it didn't work out, we would have used that money towards housing.

One of our other children in high school, we do not know if she will be able to attend as she greatly struggles with academics. We're not sure college would be a good fit for her. We are able to use some of the money saved for her college now for items such as school trips, a laptop computer, extracurricular school uniforms, etc. Should she decide to try and attend a local community college, we would still have enough for her to attend. Any funds remaining would go toward future housing costs, such as a downpayment, etc.

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

Posted: Tue Feb 12, 2019 6:48 am
by onourway
FWIW there is an on-going thread on this topic that is 300+ posts long. Your questions are debated endlessly there.

The short answer is, it’s complicated. Without a more specific look at your entire financial picture it’s difficult to give you actionable advice.

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

Posted: Tue Feb 12, 2019 6:49 am
by Vulcan
teelainen wrote:
Tue Feb 12, 2019 12:43 am
Is it a bad idea or a good idea to invest in a 529 College Savings Plan?

1. I have heard that having a lot of assets in a 529 College Savings Plan can hurt the chances of your child getting "free" grants and scholarships for college. Is this true?

2. Are there are any other downsides to having a 529 College Savings Plan?
The was just a lengthy thread on this topic.
viewtopic.php?f=1&t=271389

Yes, it can hurt chances for financial aid, and unless you already max out all retirement accounts putting money in 529 is generally not a good idea.

They are best suited for the rich who can superfund them at birth and enjoy years of tax-free growth.

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

Posted: Tue Feb 12, 2019 6:56 am
by TomatoTomahto
onourway wrote:
Tue Feb 12, 2019 6:48 am
FWIW there is an on-going thread on this topic that is 300+ posts long. Your questions are debated endlessly there.

The short answer is, it’s complicated. Without a more specific look at your entire financial picture it’s difficult to give you actionable advice.
And, even with a specific look at your entire financial picture, there will be a debate about how we can’t predict future unemployment, your kids’ odds of getting into a demonstrated need school, your kids’ career choices, etc.

Please read the referenced threads until your eyes roll back in your head. Then save as you see fit. Welcome to the forum.

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

Posted: Tue Feb 12, 2019 8:40 am
by GoldStar
If you can afford to put away a good amount of money towards college, and funding college is one of your goals in life - it is a great idea since the money grows tax free (and in some states, can reduce your taxes as you contribute).
I used 529s and have saved many thousands in taxes by doing so. I disagree with others that you shouldn't use them unless you are maxing out all your retirement accounts. Your goal might be to fund BOTH college for your kids AND your retirement - you can put money towards both.
If you make good income - you won't be eligible for need-based grants and merit-based scholarships won't care about your 529.
You also don't need to "superfund" from the beginning. Regardless of how much and how often you put money in - it still grows tax free and can save you a lot in taxes over the years.

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

Posted: Tue Feb 12, 2019 8:53 am
by pdavi21
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.

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

Posted: Tue Feb 12, 2019 9:04 am
by GoldStar
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.

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

Posted: Tue Feb 12, 2019 9:15 am
by livesoft
529 plans are a great idea if you are wealthy, don't expect financial aid, your child is going to college, and you have all your retirement funding bases covered. Don't let anyone bully you into not having one or two of them, especially if you get state income tax savings.

529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.

Folks who cannot afford to contribute the maximums to their retirement plans also cannot afford to contribute to a 529 plan.

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

Posted: Tue Feb 12, 2019 9:17 am
by KlangFool
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are a great idea if you are wealthy, don't expect financial aid, your child is going to college, and you have all your retirement funding bases covered. Don't let anyone bully you into not having one or two of them, especially if you get state income tax savings.

529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.

Folks who cannot afford to contribute the maximums to their retirement plans also cannot afford to contribute to a 529 plan.
+1,000.

KlangFool

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

Posted: Tue Feb 12, 2019 9:24 am
by Grt2bOutdoors
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.

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

Posted: Tue Feb 12, 2019 9:31 am
by Grt2bOutdoors
KlangFool wrote:
Tue Feb 12, 2019 9:17 am
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are a great idea if you are wealthy, don't expect financial aid, your child is going to college, and you have all your retirement funding bases covered. Don't let anyone bully you into not having one or two of them, especially if you get state income tax savings.

529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.

Folks who cannot afford to contribute the maximums to their retirement plans also cannot afford to contribute to a 529 plan.
+1,000.

KlangFool
+1000 and caveated with the below:

BTW, Financial Aid = loans. Loans are instruments you are required to start paying back once you graduate from school. Loans are not dischargeable in bankruptcy, they will follow you until you die. A child can only sign for $5,500 in loans, after that the parent must sign the loan document to guarantee payment, these loans are known as ParentPlus loans. The banks love these ParentPlus loans.

Grants - money you don't have to pay back. Merit - money given for those who have achieved high academic standards prior to or while attending college, also money does not need to be paid back so long as you keep your high achievement status, a 529 plan does not prevent one from receiving a merit scholarship. However, if you apply to certain schools known for NOT giving out merit/grants and instead are known for offering financial aid in the form of loans, then yes, your 529 plan will affect the amount of "aid" offered. As certain schools are selective, so should you be.

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

Posted: Tue Feb 12, 2019 9:35 am
by snowman
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are a great idea if you are wealthy, don't expect financial aid, your child is going to college, and you have all your retirement funding bases covered. Don't let anyone bully you into not having one or two of them, especially if you get state income tax savings.

529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.

Folks who cannot afford to contribute the maximums to their retirement plans also cannot afford to contribute to a 529 plan.
Yep, that pretty much covers it.

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

Posted: Tue Feb 12, 2019 9:48 am
by marcopolo
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are a great idea if you are wealthy, don't expect financial aid, your child is going to college, and you have all your retirement funding bases covered. Don't let anyone bully you into not having one or two of them, especially if you get state income tax savings.

529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.

Folks who cannot afford to contribute the maximums to their retirement plans also cannot afford to contribute to a 529 plan.
I think think this is largely true, with the caveat that you have to use a reasonable definition of "wealthy", not what is typical on this forum, where people routinely talk about making $300+k/yr, having multi-million dollar portfolio, and do not consider themselves "wealthy"

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

Posted: Tue Feb 12, 2019 9:50 am
by livesoft
OK, wealthy might be "Ineligible for the American Opportunity Tax Credit because of income."

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

Posted: Tue Feb 12, 2019 9:56 am
by NotWhoYouThink
Grt2bOutdoors wrote:
Tue Feb 12, 2019 9:31 am

BTW, Financial Aid = loans. Loans are instruments you are required to start paying back once you graduate from school. Loans are not dischargeable in bankruptcy, they will follow you until you die. A child can only sign for $5,500 in loans, after that the parent must sign the loan document to guarantee payment, these loans are known as ParentPlus loans. The banks love these ParentPlus loans.

Grants - money you don't have to pay back. Merit - money given for those who have achieved high academic standards prior to or while attending college, also money does not need to be paid back so long as you keep your high achievement status, a 529 plan does not prevent one from receiving a merit scholarship. However, if you apply to certain schools known for NOT giving out merit/grants and instead are known for offering financial aid in the form of loans, then yes, your 529 plan will affect the amount of "aid" offered. As certain schools are selective, so should you be.
Those may be your personal definitions, but they are not the ones commonly in use.

Financial aid can take the form of grants or loans. Grants are rare except from the universities that are hardest to get in. Grants to state schools are not common, with some exceptions, like University of Virginia.

Merit aid never has to be paid back, but may not be continued if academic performance suffers.

If you have money saved for college, in a 529 or anywhere else, you are more able to pay for college than people who do not have money saved for college. Whether that is your priority or not is up to you.

Since most kids go to college before their parents retire, parents often do much of their retirement savings after their kids graduate from college. It makes a difference whether you were 18 or 38 when your kids were born. It makes a difference whether your job and career are safe. It makes a difference whether you expect to earn $50K or $250K a year.

As any EMBA knows, the correct answer is always "It depends."

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

Posted: Tue Feb 12, 2019 9:56 am
by alamo
teelainen wrote:
Tue Feb 12, 2019 12:43 am
Is it a bad idea or a good idea to invest in a 529 College Savings Plan?

1. I have heard that having a lot of assets in a 529 College Savings Plan can hurt the chances of your child getting "free" grants and scholarships for college. Is this true?

2. Are there are any other downsides to having a 529 College Savings Plan?

Thanks.
I opened a 529 for each kid in 2012. Just logged in to each account. The accounts below earnings are completely tax free.

Account 1 - Contributions 56,310, Earnings 35,327 = 91,637 +83.32% Return
Account 2 - Contributions 43,748, Earnings 30,025 = 73,774 +84.77% Return (<- kid already in college)

Kid can keep using the funds for grad school and any other education. If the kid didnt need the fund we would just change the beneficiary to their future kids (grand kids). I dont see the downside here.

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

Posted: Tue Feb 12, 2019 10:03 am
by EddyB
Vulcan wrote:
Tue Feb 12, 2019 6:49 am
teelainen wrote:
Tue Feb 12, 2019 12:43 am
Is it a bad idea or a good idea to invest in a 529 College Savings Plan?

1. I have heard that having a lot of assets in a 529 College Savings Plan can hurt the chances of your child getting "free" grants and scholarships for college. Is this true?

2. Are there are any other downsides to having a 529 College Savings Plan?
Yes, it can hurt chances for financial aid, and unless you already max out all retirement accounts putting money in 529 is generally not a good idea.
Are you suggesting that having assets in a 529 has a different effect financial aid effect than having the same amount of assets in ordinary investments?

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

Posted: Tue Feb 12, 2019 10:05 am
by markcoop
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.
Let me address each item. Let me start by saying I have used a 529 account that had a balance that reached a little over $300K for my 3 kids.

1) I am not wealthy (and do get the AOTC). Not really sure why this is necessary to save money.
2) I am currently getting need based financial aid (didn't expect to, but I am, especially with two in college at the same time) at a meets full need school. If the money was not in a 529 plan, it would have to be somewhere and count the same against financial aid (unless you are very creative, like maybe putting it in life insurance).
3) I have not maxed out all my retirement plans - I have contributed quite a bit. I maxed out one 401K and put a decent amount in Roth IRAs. I did not max out the Roth IRAs and did not max out my wife's lousy 401K. I feel I am on track for retirement.

There is nothing wrong with a middle class person who will get financial aid to prioritize their goals (retirement is certainly first) and contribute to a secondary goal of college via a 529.

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

Posted: Tue Feb 12, 2019 10:06 am
by RickBoglehead
For those that are worried that child A may not go to college, a few points:

1) You don't need to setup four 529s for 4 kids. Setup one. When a child is ready for college, simply open a new 529 and move funds to it.

2) If you're worried about the existence of a 529 impacting aid, make sure you understand the nuances. Since you can change beneficiaries easily, you could remove the child's name as a beneficiary, let them do some college, then add them as a beneficiary at a time that may suit your better.

3) If no child uses any of the 529 funds, they are good for a whole host of relatives. When our oldest was ready to go to grad school, mostly paid for by his employer, we setup a new 529 and transferred funds from the youngest's 529 to cover the remaining balance. After both were done with grad school, we still had funds leftover. I took 7 courses and obtained a certificate in an area of interest to me, and the 529s paid the entire balance. Right now we have the funds split into 3 accounts, one with each of them as a beneficiary, one for me, with me as the owner of all three. As grandchildren are born, or as they approach college age, we can shift funds around and/or change ownership/beneficiaries with no problem. Since the accounts are owned by the grandparents (us) at this time, and no grandchildren are yet named as a beneficiary (we have one step-granddaughter), there is no issue with aid for anyone yet.

4) If there are still funds leftover after grandchildren, the accounts can continue onward.

I totally agree with maximizing your retirement first.

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

Posted: Tue Feb 12, 2019 10:07 am
by NotWhoYouThink
markcoop wrote:
Tue Feb 12, 2019 10:05 am
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.
Let me address each item. Let me start by saying I have used a 529 account that had a balance that reached a little over $300K for my 3 kids.

1) I am not wealthy. Not really sure why this is necessary to save money.
2) I am currently getting need based financial aid (didn't expect to, but I am, especially with two in college at the same time) at a meets full need school. If the money was not in a 529 plan, it would have to be somewhere and count the same against financial aid (unless you are very creative, like maybe putting it in life insurance).
3) I have not maxed out all my retirement plans - I have contributed quite a bit. I maxed out one 401K and put a decent amount in Roth IRAs. I did not max out the Roth IRAs and did not max out my wife's lousy 401K. I feel I am on track for retirement.

There is nothing wrong with a middle class person who will get financial aid to prioritize their goals (retirement is certainly first) and contribute to a secondary goal of college via a 529.
+1

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

Posted: Tue Feb 12, 2019 10:08 am
by livesoft
@markcoop, I think what you are saying is that your family would have received lots more financial aid if you did not have money in a 529 plan and had put it in retirement plans instead.

Does your family use the AOTC?

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

Posted: Tue Feb 12, 2019 10:10 am
by KlangFool
markcoop wrote:
Tue Feb 12, 2019 10:05 am
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.
Let me address each item. Let me start by saying I have used a 529 account that had a balance that reached a little over $300K for my 3 kids.

1) I am not wealthy.
markcoop,

Please note that for most people including me, someone that can afford to pay 300K for their kid's college education is wealthy and rich. You may not think so. But, this opinion may not be shared by many others.

I pay 240K for my kids' college education. I know that I am rich and wealthy.

KlangFool

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

Posted: Tue Feb 12, 2019 10:12 am
by markcoop
livesoft wrote:
Tue Feb 12, 2019 10:08 am
@markcoop, I think what you are saying is that your family would have received lots more financial aid if you did not have money in a 529 plan and had put it in retirement plans instead.

Does your family use the AOTC?
If I did not put money in the 529, how would I pay for college? Assets only count for around 5%. I would've gotten a little more aid but wouldn't be able to pay for college.

Yes, we use the AOTC.

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

Posted: Tue Feb 12, 2019 10:16 am
by stoptothink
livesoft wrote:
Tue Feb 12, 2019 9:50 am
OK, wealthy might be "Ineligible for the American Opportunity Tax Credit because of income."
We are eligible for AOC and easily max out all available retirement vehicles ($62K+/yr) and make double payments on a 15yr mortgage, do we qualify? We do have 529s, up to state deduction max, although our children's future college education is about the last thing on our list of financial priorities.

If you get a state deduction, IMO, the 529 is definitely something to consider once you feel comfortable with retirement savings (which we do). Where I fall away is when I hear everyone saying one must spend $50k or more per year to get a decent university education these days and that it is their responsibility as parents to fund the entire thing.

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

Posted: Tue Feb 12, 2019 10:19 am
by markcoop
KlangFool wrote:
Tue Feb 12, 2019 10:10 am
markcoop wrote:
Tue Feb 12, 2019 10:05 am
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.
Let me address each item. Let me start by saying I have used a 529 account that had a balance that reached a little over $300K for my 3 kids.

1) I am not wealthy.
markcoop,

Please note that for most people including me, someone that can afford to pay 300K for their kid's college education is wealthy and rich. You may not think so. But, this opinion may not be shared by many others.

I pay 240K for my kids' college education. I know that I am rich and wealthy.

KlangFool
Fair enough. I didn't invest $300K, but it grew to that amount. It was my goal (cost of a state school for all my 3 children). Personally, I have never viewed my self as rich.

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

Posted: Tue Feb 12, 2019 10:23 am
by letsgobobby
Deleted

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

Posted: Tue Feb 12, 2019 10:26 am
by Vulcan
EddyB wrote:
Tue Feb 12, 2019 10:03 am
Vulcan wrote:
Tue Feb 12, 2019 6:49 am
teelainen wrote:
Tue Feb 12, 2019 12:43 am
Is it a bad idea or a good idea to invest in a 529 College Savings Plan?

1. I have heard that having a lot of assets in a 529 College Savings Plan can hurt the chances of your child getting "free" grants and scholarships for college. Is this true?

2. Are there are any other downsides to having a 529 College Savings Plan?
Yes, it can hurt chances for financial aid, and unless you already max out all retirement accounts putting money in 529 is generally not a good idea.
Are you suggesting that having assets in a 529 has a different effect financial aid effect than having the same amount of assets in ordinary investments?
No, why do you say that?

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

Posted: Tue Feb 12, 2019 10:27 am
by markcoop
letsgobobby wrote:
Tue Feb 12, 2019 10:23 am
markcoop wrote:
Tue Feb 12, 2019 10:05 am
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.
Let me address each item. Let me start by saying I have used a 529 account that had a balance that reached a little over $300K for my 3 kids.

1) I am not wealthy (and do get the AOTC). Not really sure why this is necessary to save money.
2) I am currently getting need based financial aid (didn't expect to, but I am, especially with two in college at the same time) at a meets full need school. If the money was not in a 529 plan, it would have to be somewhere and count the same against financial aid (unless you are very creative, like maybe putting it in life insurance).
3) I have not maxed out all my retirement plans - I have contributed quite a bit. I maxed out one 401K and put a decent amount in Roth IRAs. I did not max out the Roth IRAs and did not max out my wife's lousy 401K. I feel I am on track for retirement.

There is nothing wrong with a middle class person who will get financial aid to prioritize their goals (retirement is certainly first) and contribute to a secondary goal of college via a 529.
Would you have gotten more need based aid if more of that money had been in your wife's lousy 403b instead of the 529?
Yes, I would've. At around 5%. My first child got no aid. My second child is at a meets full need school. I would say the average balance in the 529 has been $200K for the second child. At 5%, that would be around $10K more aid per year. However, I wouldn't be able to pay for the rest of college. In addition, I realized the point I made in the other thread during this time - if I change ownership of part of the 529 money to my youngest, than the aid would be affected even less.

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

Posted: Tue Feb 12, 2019 10:28 am
by Vulcan
livesoft wrote:
Tue Feb 12, 2019 10:08 am
@markcoop, I think what you are saying is that your family would have received lots more financial aid if you did not have money in a 529 plan and had put it in retirement plans instead.

Does your family use the AOTC?
Yep on both counts

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

Posted: Tue Feb 12, 2019 10:31 am
by Vulcan
RickBoglehead wrote:
Tue Feb 12, 2019 10:06 am
For those that are worried that child A may not go to college, a few points:

2) If you're worried about the existence of a 529 impacting aid, make sure you understand the nuances. Since you can change beneficiaries easily, you could remove the child's name as a beneficiary, let them do some college, then add them as a beneficiary at a time that may suit your better.


I totally agree with maximizing your retirement first.
Beneficiary doesn't matter. It's parent's assets either way.

Maxing out retirement accounts is never wrong

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

Posted: Tue Feb 12, 2019 10:31 am
by livesoft
We took out a 401(k) loan in order to put the money into 529 plans. The 401(k) was lousy, but did allow for a loan option. We saved at least a couple thousand dollars of 401(k) fund expenses.

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

Posted: Tue Feb 12, 2019 10:39 am
by markcoop
livesoft wrote:
Tue Feb 12, 2019 10:31 am
We took out a 401(k) loan in order to put the money into 529 plans. The 401(k) was lousy, but did allow for a loan option. We saved at least a couple thousand dollars of 401(k) fund expenses.
If my wife's 401K plan was good, I am not sure I would've made all the same choices I did. That's why some of these sweeping remarks about not using a 529 plan if you have any retirement account space available bother me. If I feel I have alot saved for retirement (no one knows how close they are to being on track when you start saving for college) and my other retirement choices are sub-par, I see investing in a 529 as a viable option. It's just not as simple as a hard rule.

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

Posted: Tue Feb 12, 2019 10:41 am
by teen persuasion
EddyB wrote:
Tue Feb 12, 2019 10:03 am
Vulcan wrote:
Tue Feb 12, 2019 6:49 am
teelainen wrote:
Tue Feb 12, 2019 12:43 am
Is it a bad idea or a good idea to invest in a 529 College Savings Plan?

1. I have heard that having a lot of assets in a 529 College Savings Plan can hurt the chances of your child getting "free" grants and scholarships for college. Is this true?

2. Are there are any other downsides to having a 529 College Savings Plan?
Yes, it can hurt chances for financial aid, and unless you already max out all retirement accounts putting money in 529 is generally not a good idea.
Are you suggesting that having assets in a 529 has a different effect financial aid effect than having the same amount of assets in ordinary investments?
That's not how I read it - UNLESS you already max out all retirement accounts is the key phrase. If you have not maxed out all retirement accounts, putting saving in retirement is better for financial aid purposes, because retirement account balances are not reported on the FAFSA. After you've maxed all available retirement accounts, then you are left with the choice between ordinary investments and 529 accounts. Those are equivalent on the FAFSA, both included in Available Income at 12%.

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

Posted: Tue Feb 12, 2019 10:42 am
by barreg
NotWhoYouThink wrote:
Tue Feb 12, 2019 10:07 am
markcoop wrote:
Tue Feb 12, 2019 10:05 am
livesoft wrote:
Tue Feb 12, 2019 9:15 am
529 plans are not a great idea if you are not wealthy, expect financial aid, or you have not contributed maximums possible to your retirement plans.
Let me address each item. Let me start by saying I have used a 529 account that had a balance that reached a little over $300K for my 3 kids.

1) I am not wealthy. Not really sure why this is necessary to save money.
2) I am currently getting need based financial aid (didn't expect to, but I am, especially with two in college at the same time) at a meets full need school. If the money was not in a 529 plan, it would have to be somewhere and count the same against financial aid (unless you are very creative, like maybe putting it in life insurance).
3) I have not maxed out all my retirement plans - I have contributed quite a bit. I maxed out one 401K and put a decent amount in Roth IRAs. I did not max out the Roth IRAs and did not max out my wife's lousy 401K. I feel I am on track for retirement.

There is nothing wrong with a middle class person who will get financial aid to prioritize their goals (retirement is certainly first) and contribute to a secondary goal of college via a 529.
+1
+2

I don't understand these threads where people say you have to be "wealthy" to benefit from a 529. Tax free growth is tax free growth and there are a lot of very good plans/investment options available. Also, as already mentioned income has a way larger impact on financial aid than assets, e.g. up to ~50% of income vs 5.64% of assets, and those assets are going to get counted whether in a taxable account or in a 529. Additionally, I don't understand the logic that you have to max out retirement investments before saving for college. Both are a priority to me and I'm well aware of how much I'm investing for each.

From my perspective, the main risk of a 529 is that your child either doesn't go to college or you overfund the 529 and want to use the funds for non-education purposes, paying the 10% tax penalty to get at the funds. For me, I'm addressing this by trying to save 70% of the cost of the flagship in-state U in a 529 and will plan to cash flow the rest, but I'm pretty sure that my kids' 529s won't be overfunded.

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

Posted: Tue Feb 12, 2019 10:46 am
by alamo
letsgobobby wrote:
Tue Feb 12, 2019 10:23 am

Would you have gotten more need based aid if more of that money had been in your wife's lousy 403b instead of the 529?
Your need based aid is primarily based on the parents Income not savings. All 529s are considered available for child 1 when they start college. If you have 4 529s with each kid as the beneficiary it doesnt matter. When you complete the FAFSA for first kid, the total 529 balances is part of the calculation ~6% the same as a taxable savings account. The designation of different kids as 529 beneficiaries with different "accounts" is irrelevant for aid calculations. Now having multiple kids in college at the same time impacts need based aid. FAFSA is completed every year for each kid in college. The primary factor on determining your expected financial contribution for college is your income from your tax year 2 years prior.

Every college has an EFC calculator on their website that anyone can use to get their estimated costs given their income and assets.

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

Posted: Tue Feb 12, 2019 10:48 am
by EddyB
teen persuasion wrote:
Tue Feb 12, 2019 10:41 am
EddyB wrote:
Tue Feb 12, 2019 10:03 am
Vulcan wrote:
Tue Feb 12, 2019 6:49 am
teelainen wrote:
Tue Feb 12, 2019 12:43 am
Is it a bad idea or a good idea to invest in a 529 College Savings Plan?

1. I have heard that having a lot of assets in a 529 College Savings Plan can hurt the chances of your child getting "free" grants and scholarships for college. Is this true?

2. Are there are any other downsides to having a 529 College Savings Plan?
Yes, it can hurt chances for financial aid, and unless you already max out all retirement accounts putting money in 529 is generally not a good idea.
Are you suggesting that having assets in a 529 has a different effect financial aid effect than having the same amount of assets in ordinary investments?
That's not how I read it - UNLESS you already max out all retirement accounts is the key phrase. If you have not maxed out all retirement accounts, putting saving in retirement is better for financial aid purposes, because retirement account balances are not reported on the FAFSA. After you've maxed all available retirement accounts, then you are left with the choice between ordinary investments and 529 accounts. Those are equivalent on the FAFSA, both included in Available Income at 12%.
Ok; I took that as an independent clause.

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

Posted: Tue Feb 12, 2019 10:51 am
by alamo
teen persuasion wrote:
Tue Feb 12, 2019 10:41 am

That's not how I read it - UNLESS you already max out all retirement accounts is the key phrase. If you have not maxed out all retirement accounts, putting saving in retirement is better for financial aid purposes, because retirement account balances are not reported on the FAFSA. After you've maxed all available retirement accounts, then you are left with the choice between ordinary investments and 529 accounts. Those are equivalent on the FAFSA, both included in Available Income at 12%.
Parents assets are counted at 5.64% whether 529 or taxable.

I think you are missing the point. If you dont save for your kids college the money will not likely come from need based aid unless your are low income. You will only get need based financial aid if your income is low. If someone's income is that low, they are not maxing their retirement accounts.

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

Posted: Tue Feb 12, 2019 11:01 am
by Grt2bOutdoors
NotWhoYouThink wrote:
Tue Feb 12, 2019 9:56 am
Grt2bOutdoors wrote:
Tue Feb 12, 2019 9:31 am

BTW, Financial Aid = loans. Loans are instruments you are required to start paying back once you graduate from school. Loans are not dischargeable in bankruptcy, they will follow you until you die. A child can only sign for $5,500 in loans, after that the parent must sign the loan document to guarantee payment, these loans are known as ParentPlus loans. The banks love these ParentPlus loans.

Grants - money you don't have to pay back. Merit - money given for those who have achieved high academic standards prior to or while attending college, also money does not need to be paid back so long as you keep your high achievement status, a 529 plan does not prevent one from receiving a merit scholarship. However, if you apply to certain schools known for NOT giving out merit/grants and instead are known for offering financial aid in the form of loans, then yes, your 529 plan will affect the amount of "aid" offered. As certain schools are selective, so should you be.
Those may be your personal definitions, but they are not the ones commonly in use.

Financial aid can take the form of grants or loans. Grants are rare except from the universities that are hardest to get in. Grants to state schools are not common, with some exceptions, like University of Virginia.

Merit aid never has to be paid back, but may not be continued if academic performance suffers.

If you have money saved for college, in a 529 or anywhere else, you are more able to pay for college than people who do not have money saved for college. Whether that is your priority or not is up to you.

Since most kids go to college before their parents retire, parents often do much of their retirement savings after their kids graduate from college. It makes a difference whether you were 18 or 38 when your kids were born. It makes a difference whether your job and career are safe. It makes a difference whether you expect to earn $50K or $250K a year.

As any EMBA knows, the correct answer is always "It depends."
What is an "EMBA"?

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

Posted: Tue Feb 12, 2019 11:03 am
by NotWhoYouThink
Executive Masters of Business Administration. Like an MBA, but more prestigious.

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

Posted: Tue Feb 12, 2019 11:18 am
by RickBoglehead
NotWhoYouThink wrote:
Tue Feb 12, 2019 11:03 am
Executive Masters of Business Administration. Like an MBA, but more prestigious.
No, it's not more prestigious.

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

Posted: Tue Feb 12, 2019 11:29 am
by janezoey
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.

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

Posted: Tue Feb 12, 2019 11:38 am
by teen persuasion
alamo wrote:
Tue Feb 12, 2019 10:51 am
teen persuasion wrote:
Tue Feb 12, 2019 10:41 am

That's not how I read it - UNLESS you already max out all retirement accounts is the key phrase. If you have not maxed out all retirement accounts, putting saving in retirement is better for financial aid purposes, because retirement account balances are not reported on the FAFSA. After you've maxed all available retirement accounts, then you are left with the choice between ordinary investments and 529 accounts. Those are equivalent on the FAFSA, both included in Available Income at 12%.
Parents assets are counted at 5.64% whether 529 or taxable.

I think you are missing the point. If you dont save for your kids college the money will not likely come from need based aid unless your are low income. You will only get need based financial aid if your income is low. If someone's income is that low, they are not maxing their retirement accounts.
There are other variables at *low* income - when the auto EFC = zero threshold was ~$32k, we could put enough in DH's 401k to hit that threshold. No, it wasn't maxing retirement, at the time. Later when they retroactively dropped it to $23k, we couldn't afford to put the amount needed into his 401k to reach that AGI, but we could put enough in to be eligible for quite a bit of refundable credits, enough to max 2 Roth IRAs (I was SAHM, so that was maxing my available retirement account) and creeping closer to maxing DH's 401k. Our EFC calculated out to zero then, due to family size. Now I'm working, too, but part time, and no access to a 401k, so we still fund DH's 401k for both of us. Maxes have been increased, we've hit 50+, so we have catch up amounts, too. DH shifted to maxing his HSA as a priority over his 401k a few years back, but a small bump in pay allowed him to again reach the higher max this past year. Now I may get a SIMPLE IRA at work, so we'll shift priority again - max mine before filling his, to get some traditional contributions in my name, for future state tax perks ($20k/person withdrawals not taxable after age 59.5, non transferable).

So "maxing" retirement accounts is a moving, fuzzy target. But at least this low income couple is (occasionally) doing it


That *magic* 5.64% of assets comes from the calculation of available assets: (total assets - asset protection amount) * 12%. Available Assets are added to Available Income, and a progressive rate is applied. The top rate is 47%. So 12% * 47% = 5.64%. Someone previously mentioned $300k in a 529 - that would increase the EFC by $16920 above whatever the family's available income generated.

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

Posted: Tue Feb 12, 2019 12:33 pm
by alamo
teen persuasion wrote:
Tue Feb 12, 2019 11:38 am

There are other variables at *low* income - when the auto EFC = zero threshold was ~$32k, we could put enough in DH's 401k to hit that threshold. No, it wasn't maxing retirement, at the time. Later when they retroactively dropped it to $23k, we couldn't afford to put the amount needed into his 401k to reach that AGI, but we could put enough in to be eligible for quite a bit of refundable credits, enough to max 2 Roth IRAs (I was SAHM, so that was maxing my available retirement account) and creeping closer to maxing DH's 401k. Our EFC calculated out to zero then, due to family size. Now I'm working, too, but part time, and no access to a 401k, so we still fund DH's 401k for both of us. Maxes have been increased, we've hit 50+, so we have catch up amounts, too. DH shifted to maxing his HSA as a priority over his 401k a few years back, but a small bump in pay allowed him to again reach the higher max this past year. Now I may get a SIMPLE IRA at work, so we'll shift priority again - max mine before filling his, to get some traditional contributions in my name, for future state tax perks ($20k/person withdrawals not taxable after age 59.5, non transferable).

So "maxing" retirement accounts is a moving, fuzzy target. But at least this low income couple is (occasionally) doing it


That *magic* 5.64% of assets comes from the calculation of available assets: (total assets - asset protection amount) * 12%. Available Assets are added to Available Income, and a progressive rate is applied. The top rate is 47%. So 12% * 47% = 5.64%. Someone previously mentioned $300k in a 529 - that would increase the EFC by $16920 above whatever the family's available income generated.
And the important part the $300k affords options if income is too high for need based aid, kid doesnt qualify for merit based scholarships, or kid finds a non merit aid school is the best fit. The impact of increasing the EFC 16920 on a bill of $70k is not really the relevant part. Its that the $70k school would not be an option at all for this particular student, period without the $300k.

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

Posted: Tue Feb 12, 2019 1:57 pm
by teen persuasion
alamo wrote:
Tue Feb 12, 2019 12:33 pm
teen persuasion wrote:
Tue Feb 12, 2019 11:38 am

There are other variables at *low* income - when the auto EFC = zero threshold was ~$32k, we could put enough in DH's 401k to hit that threshold. No, it wasn't maxing retirement, at the time. Later when they retroactively dropped it to $23k, we couldn't afford to put the amount needed into his 401k to reach that AGI, but we could put enough in to be eligible for quite a bit of refundable credits, enough to max 2 Roth IRAs (I was SAHM, so that was maxing my available retirement account) and creeping closer to maxing DH's 401k. Our EFC calculated out to zero then, due to family size. Now I'm working, too, but part time, and no access to a 401k, so we still fund DH's 401k for both of us. Maxes have been increased, we've hit 50+, so we have catch up amounts, too. DH shifted to maxing his HSA as a priority over his 401k a few years back, but a small bump in pay allowed him to again reach the higher max this past year. Now I may get a SIMPLE IRA at work, so we'll shift priority again - max mine before filling his, to get some traditional contributions in my name, for future state tax perks ($20k/person withdrawals not taxable after age 59.5, non transferable).

So "maxing" retirement accounts is a moving, fuzzy target. But at least this low income couple is (occasionally) doing it


That *magic* 5.64% of assets comes from the calculation of available assets: (total assets - asset protection amount) * 12%. Available Assets are added to Available Income, and a progressive rate is applied. The top rate is 47%. So 12% * 47% = 5.64%. Someone previously mentioned $300k in a 529 - that would increase the EFC by $16920 above whatever the family's available income generated.
And the important part the $300k affords options if income is too high for need based aid, kid doesnt qualify for merit based scholarships, or kid finds a non merit aid school is the best fit. The impact of increasing the EFC 16920 on a bill of $70k is not really the relevant part. Its that the $70k school would not be an option at all for this particular student, period without the $300k.
I believe the OP asked if 529s were a good idea, or a bad idea. Many posters gave broad pros and cons. I particularly liked livesoft's broad rules. Some posters gave obviously incorrect information, which others pointed out. We've since progressed to some specific situations, where 529s are useful, or harmful. They basically all boil down to an individual's financial situation: income and savings and family size.

Where to save (and for which purpose) should drive the discussion. The usual hierarchy of savings targets is a ladder - with more income you can climb up the ladder higher before you run out of money to fund each rung. But like a ladder, you begin at the bottom, and climb one step at a time, you don't jump to the top and then back to the middle, then to the first rung, etc. The bottom of the ladder is usually EF, 401k to match, HSA for triple tax advantage, IRA for cheaper investments, back to 401k to max, taxable investments for retirement, and finally 529s for education. Most people, outside of Bogleheads, rarely reach the upper rungs of the ladder, they don't have the disposable income to fund all of the intermediate accounts. The FAFSA calculations take this into account. Lower income families have lower EFC, resulting in more aid. Retirement savings shouldn't be raided for education, they aren't part of the calculation on the FAFSA. Higher income families can shield their savings from FAFSA consideration by placing them in retirement accounts. Savings exceeding the maxes indicates more disposable income, some of which is available for education. A higher income family, which will likely receive little need based aid due to their income, is the obvious preferred target for saving in 529s, they derive a tax benefit from contributing if their state has a tax credit, they enjoy tax free gains, and tax free withdrawals if used as intended for education. They also already expect to pay fully for college.

It's the people in between the two extremes who need to figure out if 529 contributions are worthwhile FOR THEM. They need to understand how 529 account balances affect EFC calculations and thus aid. They need to weigh the decision on where to put their limited disposable income each year - in retirement, or in 529. The promise of years of tax free growth are what draws people in to considering starting a 529 when their child is young. But most young families aren't yet fully maxing their retirement accounts with EXTRA to save. And it's difficult to know what your financial situation will be nearly 2 decades in the future when the child begins college.

So if the choice is between saving for retirement or for education, save for retirement first. You don't have enough to save for education. If you have extra left after saving sufficiently for retirement, then saving for education is a great idea, and a 529 is superior to taxable. If you save everything towards retirement early on, but get a boost in income as the college years approach, you may have enough already in retirement to redirect $ from new retirement savings to college expenses for those years. Savings already in retirement will continue compounding in the meantime, and you can return to contributing afterwards. Another option is to borrow from a well funded retirement account, and return funds from future income. Or retire early and manipulate your Available Income for both ACA and EFC purposes.

I like options - I happen to like the options I have with larger retirement account balances, better than the more restrictive 529 account rules. But that reflects my financial situation, and I made the decision to forego 529s based on knowing how the EFC is calculated and how 529 accounts vs retirement accounts are included.

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

Posted: Tue Feb 12, 2019 6:10 pm
by majiaknight
janezoey wrote:
Tue Feb 12, 2019 11:29 am
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.
Thanks for the information. I'm a little shocked to learn these facts as an immigrant coming to US to attend grad school w/ full scholarships. Need to talk to DW about this and prioritize 529/savings for our little kid's college funding.

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

Posted: Tue Feb 12, 2019 6:21 pm
by passiveTiger
RickBoglehead wrote:
Tue Feb 12, 2019 11:18 am
NotWhoYouThink wrote:
Tue Feb 12, 2019 11:03 am
Executive Masters of Business Administration. Like an MBA, but more prestigious.
No, it's not more prestigious.
+1

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

Posted: Tue Feb 12, 2019 6:34 pm
by passiveTiger
529s are excellent cost savings plans perfect for working professionals and retirees.

Are you located near an inexpensive (relatively) community college?

So you want a tax-efficient way to lose weight and exercise without paying a gym membership or purchasing equipment? Major in health or kinesiology and those types of classes will likely be in the degree plan and eligible for 529 spending. Activity classes like that normally are not deductible, eligible for credits, or can be paid with 529 money - unless they are a part of the degree plan.

Want to maintain current certifications, learn to paint, learn professional photography, complete education for a real estate license, repair your car/computer/etc., become a registered EMT in one semester, etc.?

Community colleges offer all of those things as credit classes.

How about a new smartphone or computer and peripherals like a printer and your cost of monthly internet access?

529s pay for all of that too.