Invest or 529 PLan

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bg5
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Invest or 529 PLan

Post by bg5 »

Hey Gang,

A question I have is should my wife and I invest in a 529 plan or put that money into our retirement and cash flow college when the time comes?

Some Quick info on my wife and I

Ages 38 and 33 - Income - $160,000 combined

Retirement = we both will get pensions of 50% of our highest 3 years of salary with cola. We currently invest around 15% of our income towards retirement.

On top of that we invest $500 a month into a 529 plan. The question I have is should we continue to invest into the 529 plan or just cash flow college when the time comes. My daughter is 10 and my son is 7 and we also have a baby on the way. Right now we have around $20,000 in college savings for the 3 kids.

State colleges in our area are very strong and cost around $25,000 a year for room and board. We plan to 100% fund their college
livesoft
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Re: Invest or 529 PLan

Post by livesoft »

Do you know about the significant tax credits for using non-529 plan money for college tuition?

I suggest contributing the maximums possible to retirement plans ($19K + $19K + $6K + $6K) before contributing one cent to 529 plans.

Also, will you all be eligible for Social Security in retirement or not? WEP problems?
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GoldStar
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Re: Invest or 529 PLan

Post by GoldStar »

When one 529 plan thread gets locked another gets started :)

bg5,
Every time someone asks a question about 529 plans it turns into a 12 page debate.

My own personal thoughts:
- By using a 529 you can take advantage of 20+ years of tax-free growth + a state deduction (in many states)
- Folks will tell you to max out all retirement accounts making sure you take care of your needs first since "You can borrow for college but not retirement". On the other hand paying for college comes before paying for retirement for many folks - I believe it is okay to save for both simultaneously if both are priority financial goals for you.
- The other argument against 529s is they can reduce your Expected Financial Contribution for Financial Aid purposes but what is the alternative? Save more for retirement or spend the money on luxury cars and such. With your income you are unlikely to be eligible for financial aid anyway.
- And then the argument usually turns into a "Make your kids work through college" which isn't always practical.
- If you choose to cash flow college when the time comes you will miss out on 20 years of tax-free savings.
- 529s have worked out well for me! For someone with your income I believe they make a lot of sense - if you want to fund college for your kids 529s are a great way to do so.
Last edited by GoldStar on Fri Feb 15, 2019 10:49 am, edited 1 time in total.
onourway
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Re: Invest or 529 PLan

Post by onourway »

Do you get a state tax break for using the 529? What is the maximum benefit if so?

How many years do you need to stay at your current jobs until your pension is fully vested? How secure is that pension's future?

I would generally agree with Livesoft - if you are not already maxing out your pre-tax retirement space, do that before using a 529.

Also interested in whether you qualify for SS.
Last edited by onourway on Fri Feb 15, 2019 10:41 am, edited 1 time in total.
Minty
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Re: Invest or 529 PLan

Post by Minty »

My family was in almost exactly the same situation as you were when I was your age; income, pension, good state schools, except we had two kids, not three. Now one is in college and the other is heading there in the fall. We saved in 529s, and are very glad we did. In my case, the calculation turned on (1) a very stable job, and (2) solid retirement savings. bg5, do you have a fully-funded emergency fund? Is your job stable? If so, and you have made the decision to fund the kids college, a 529 is a great way to go.
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Topic Author
bg5
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Re: Invest or 529 PLan

Post by bg5 »

Thanks for the info so far.

Yes, I will qualify for full benefits in SS along with getting my pension. The pension does have COLA and survivor benefits as well.

In our state you can deduct up to $5000 for state income tax.

Our jobs are very stable and we do have a solid emergency fund. We also are already 100% vested for our pension and our pension fund is very stable as well.
onourway
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Re: Invest or 529 PLan

Post by onourway »

I would consider contributing enough to capture the full state tax benefit, but no more, at least until you have filled up your pre-tax and Roth space. You are at the income level where you will want to pay some college costs out of pocket to capture the tax credits Livesoft mentioned.
Thecallofduty
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Re: Invest or 529 PLan

Post by Thecallofduty »

bg5 wrote: Fri Feb 15, 2019 10:55 am Thanks for the info so far.

Yes, I will qualify for full benefits in SS along with getting my pension. The pension does have COLA and survivor benefits as well.

In our state you can deduct up to $5000 for state income tax.

Our jobs are very stable and we do have a solid emergency fund. We also are already 100% vested for our pension and our pension fund is very stable as well.

If you are certain your kids are going to college its hard to argue against a 529. Sounds like you have a solid retirement plan in place. The decision is a very personal one and in your scenario I think it makes sense to put money in the 529.
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NotWhoYouThink
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Re: Invest or 529 PLan

Post by NotWhoYouThink »

viewtopic.php?f=2&t=272694
viewtopic.php?f=2&t=271389

Read through these 700 or so posts from the last couple of weeks and then ask any questions that weren't addressed here.
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teen persuasion
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Re: Invest or 529 PLan

Post by teen persuasion »

GoldStar wrote: Fri Feb 15, 2019 10:33 am When one 529 plan thread gets locked another gets started :)

bg5,
Every time someone asks a question about 529 plans it turns into a 12 page debate.

My own personal thoughts:
- By using a 529 you can take advantage of 20+ years of tax-free growth + a state deduction (in many states)
- Folks will tell you to max out all retirement accounts making sure you take care of your needs first since "You can borrow for college but not retirement". On the other hand paying for college comes before paying for retirement for many folks - I believe it is okay to save for both simultaneously if both are priority financial goals for you.
- The other argument against 529s is they can reduce your Expected Financial Contribution for Financial Aid purposes but what is the alternative? Save more for retirement or spend the money on luxury cars and such. With your income you are unlikely to be eligible for financial aid anyway.
- And then the argument usually turns into a "Make your kids work through college" which isn't always practical.
- If you choose to cash flow college when the time comes you will miss out on 20 years of tax-free savings.
- 529s have worked out well for me! For someone with your income I believe they make a lot of sense - if you want to fund college for your kids 529s are a great way to do so.
One correction: assets in a 529 account INCREASE your expected family contribution, which decreases your financial aid. Of course, if OP saves the same amount in taxable, the effect is the same. Assets in retirement accounts (including Roth IRAs, which could be tapped for education) are not included in EFC calculations, so do not increase EFC. Withdrawals, even tax free and penalty free ones from Roth IRAs, ARE included in Available income, though, so are best done in non FAFSA years. It can get challenging with multiple children's overlapping college years.
markcoop
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Re: Invest or 529 PLan

Post by markcoop »

GoldStar wrote: Fri Feb 15, 2019 10:33 am With your income you are unlikely to be eligible for financial aid anyway.
I would not assume this, especially with 3 kids where you will likely have multiple kids in college at the same time. Financial aid can be complicated and difficult to prepare for. I think you should do your due diligence and weigh the possibility of aid against your potential sources of college funding. If you can set up sources of college funding and keep aid a possibility, you have done well.
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GoldStar
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Re: Invest or 529 PLan

Post by GoldStar »

markcoop wrote: Fri Feb 15, 2019 11:20 am
GoldStar wrote: Fri Feb 15, 2019 10:33 am With your income you are unlikely to be eligible for financial aid anyway.
I would not assume this, especially with 3 kids where you will likely have multiple kids in college at the same time. Financial aid can be complicated and difficult to prepare for. I think you should do your due diligence and weigh the possibility of aid against your potential sources of college funding. If you can set up sources of college funding and keep aid a possibility, you have done well.
Note I didn't say to assume it - just mentioned it is "unlikely" which I believe a fair statement.
livesoft
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Re: Invest or 529 PLan

Post by livesoft »

One is more likely to receive more financial aid if all the money in a 529 plan was in a 401(k).

Is that not a fair statement?
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GoldStar
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Re: Invest or 529 PLan

Post by GoldStar »

livesoft wrote: Fri Feb 15, 2019 12:03 pm One is more likely to receive more financial aid if all the money in a 529 plan was in a 401(k).

Is that not a fair statement?
Sure - but also one is more likely to have to take risky loans out against their 401K (or figure out how to use iBonds, etc. even though they are over income limits to do so as we see in other threads) if they have not saved for college.
(One is also more likely to receive more financial aid if they find a lower paying job and spend any excess money on luxury watches and cars - but that doesn't mean they should do that either).

Personally - I put my retirement savings in retirement savings plans and my college savings in a college savings plan - seems to work well.
Last edited by GoldStar on Fri Feb 15, 2019 12:34 pm, edited 1 time in total.
KlangFool
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Re: Invest or 529 PLan

Post by KlangFool »

livesoft wrote: Fri Feb 15, 2019 10:20 am Do you know about the significant tax credits for using non-529 plan money for college tuition?

I suggest contributing the maximums possible to retirement plans ($19K + $19K + $6K + $6K) before contributing one cent to 529 plans.

Also, will you all be eligible for Social Security in retirement or not? WEP problems?
+1,000.

OP,

Your kids' ages are spread widely. So, essentially, you only need to pay 25K per year with little to no overlap. You do not need to save for college education. You can "cash flow" all of them.

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Vulcan
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Re: Invest or 529 PLan

Post by Vulcan »

GoldStar wrote: Fri Feb 15, 2019 10:33 am When one 529 plan thread gets locked another gets started :)

bg5,
Every time someone asks a question about 529 plans it turns into a 12 page debate.

My own personal thoughts:
- By using a 529 you can take advantage of 20+ years of tax-free growth + a state deduction (in many states)
- Folks will tell you to max out all retirement accounts making sure you take care of your needs first since "You can borrow for college but not retirement". On the other hand paying for college comes before paying for retirement for many folks - I believe it is okay to save for both simultaneously if both are priority financial goals for you.
- The other argument against 529s is they can reduce your Expected Financial Contribution for Financial Aid purposes but what is the alternative? Save more for retirement or spend the money on luxury cars and such. With your income you are unlikely to be eligible for financial aid anyway.
As a high earner, OP can cash flow (especially if they also pay off the mortgage before college), so there is no reason not to maximize tax advantaged retirement space first - it can't be recouped later.

Sounds like they aren't rich enough to superfund the 529s to gain meaningfully long exposure to stocks in the early years (before prudent college portfolio necessarily becomes bond heavy) for the tax benefits to become meaningful.

As discussed in the recently locked thread, strategy above allows them to both maximize tax benefits and ensure highest possible need award if their kids get into full need school, especially if they suffer a loss of income during college years.

viewtopic.php?f=2&t=271389&start=350#p4369543
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Re: Invest or 529 PLan

Post by Vulcan »

GoldStar wrote: Fri Feb 15, 2019 12:01 pm
markcoop wrote: Fri Feb 15, 2019 11:20 am
GoldStar wrote: Fri Feb 15, 2019 10:33 am With your income you are unlikely to be eligible for financial aid anyway.
I would not assume this, especially with 3 kids where you will likely have multiple kids in college at the same time. Financial aid can be complicated and difficult to prepare for. I think you should do your due diligence and weigh the possibility of aid against your potential sources of college funding. If you can set up sources of college funding and keep aid a possibility, you have done well.
Note I didn't say to assume it - just mentioned it is "unlikely" which I believe a fair statement.
We have a higher income, and NPCs of many top schools of interest to us come back with up to 20K in gift aid per year.
That is hard to beat with 529 tax savings.

Of course, even the very top students are "unlikely" to get into those top schools, but nobody is forcing anyone into paying 70K/yr for schools that aren't absolutely best in the world.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Vulcan
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Re: Invest or 529 PLan

Post by Vulcan »

bg5 wrote: Fri Feb 15, 2019 10:55 am Thanks for the info so far.

Yes, I will qualify for full benefits in SS along with getting my pension. The pension does have COLA and survivor benefits as well.

In our state you can deduct up to $5000 for state income tax.

Our jobs are very stable and we do have a solid emergency fund. We also are already 100% vested for our pension and our pension fund is very stable as well.
That is all very good. However, the question remains:
are you maximizing all tax advantaged retirement accounts? That is 60K/yr.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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GoldStar
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Re: Invest or 529 PLan

Post by GoldStar »

Vulcan wrote: Fri Feb 15, 2019 12:18 pm
GoldStar wrote: Fri Feb 15, 2019 12:01 pm
markcoop wrote: Fri Feb 15, 2019 11:20 am
GoldStar wrote: Fri Feb 15, 2019 10:33 am With your income you are unlikely to be eligible for financial aid anyway.
I would not assume this, especially with 3 kids where you will likely have multiple kids in college at the same time. Financial aid can be complicated and difficult to prepare for. I think you should do your due diligence and weigh the possibility of aid against your potential sources of college funding. If you can set up sources of college funding and keep aid a possibility, you have done well.
Note I didn't say to assume it - just mentioned it is "unlikely" which I believe a fair statement.
We have a higher income, and NPCs of many top schools of interest to us come back with up to 20K in gift aid per year.
That is hard to beat with 529 tax savings.

Of course, even the very top students are "unlikely" to get into those top schools, but nobody is forcing anyone into paying 70K/yr for schools that aren't absolutely best in the world.
I don't know what you mean by "gift aid" - need based or merit based? 529 accounts have zero bearing on merit-based aid and If you get merit based aid (which many non-ivy colleges will give if you play it right) you can pull out the equal amount from your 529 with no penalty but there is certainly nothing that says you should save enough for colleges that cost 70k/yr - we funded so we could afford to send our kids to public college (but then with merit aid one of them went to a private for the same cost). Anything extra in a 529 can be used for grad-school, other kids, etc. As stated in the other locked thread - you also don't need to list each child as a beneficiary of specific 529s and the amount of savings in general they expect you to spend from a parents account is small as compared to income.

Personally I don't get why folks seem to go out of there way to come up with reasons not to save for college.
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Re: Invest or 529 PLan

Post by miamivice »

livesoft wrote: Fri Feb 15, 2019 12:03 pm One is more likely to receive more financial aid if all the money in a 529 plan was in a 401(k).

Is that not a fair statement?
Maybe, maybe not.

a. A family with substantial taxable assets is unlikley to receive financial aid regardless of the 529.
b. At most colleges, the primary form of financial aid is student loans. It may not be purposeful to try to chase student loans.
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Re: Invest or 529 PLan

Post by miamivice »

Vulcan wrote: Fri Feb 15, 2019 12:28 pm
bg5 wrote: Fri Feb 15, 2019 10:55 am Thanks for the info so far.

Yes, I will qualify for full benefits in SS along with getting my pension. The pension does have COLA and survivor benefits as well.

In our state you can deduct up to $5000 for state income tax.

Our jobs are very stable and we do have a solid emergency fund. We also are already 100% vested for our pension and our pension fund is very stable as well.
That is all very good. However, the question remains:
are you maximizing all tax advantaged retirement accounts? That is 60K/yr.
We do not maximize our tax advantaged accounts. I see no need to. We have $750k in retirement at age 40 and are putting about $40k a year in. I see no purpose in putting more than that we currently do because we won't need that much in our retirement.
markcoop
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Re: Invest or 529 PLan

Post by markcoop »

I do believe there is a path where one can take all the money they were going to put into 529 and do things like payoff the mortgage and put it into retirement accounts. When it comes time to pay for college, mortgage money can be diverted to college, Roth money can be used during the last 2.5 years of the youngest child (to not affect aid) and possibly more than that. But is that the best plan? This website has taught me the value of meeting my financial goals taking the least amount of risk. I claim that such strategies, when implemented to the degree talked about here are risky. They need things to really line up nicely - can you pay off your mortgage by the time your fist child enters school? Will you have multiple kids in school at the same time?. In addition, even if things lined up ok with kids in school and the mortgage, rules change over time. FAFSA/Profile now use prior prior to compute EFC. That's a whole year of planning that could have messed up your planning. Perhaps they change the system to use multiple years in the future to prevent people from gaming the system (ie., doing the kind of strategies mentioned here)? Perhaps the cost of college changes more than anticipated? Perhaps your income is bad for a few years and then higher when your kids start college? By saving for college, in the intended vehicles meant for college, I think you're given yourself the best chance to meet your college goals. If you lose out on some aid because you saved in a 529 and now have a higher EFC because you have less need (the way the system is supposed to work), then I would argue you did it with less risk which is the more prudent financial move. One more point - it is not either or. If you were not planning to put money into a Roth and you put some in to pay for last 2.5 years of the youngest child, that is fine. And you can also contribute to a 529 for the first 2 kids and part of the 3rd kid. These threads, at least, are awesome of showing you the options.
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Re: Invest or 529 PLan

Post by Vulcan »

GoldStar wrote: Fri Feb 15, 2019 12:43 pm
Vulcan wrote: Fri Feb 15, 2019 12:18 pm We have a higher income, and NPCs of many top schools of interest to us come back with up to 20K in gift aid per year.
That is hard to beat with 529 tax savings.

Of course, even the very top students are "unlikely" to get into those top schools, but nobody is forcing anyone into paying 70K/yr for schools that aren't absolutely best in the world.
I don't know what you mean by "gift aid" - need based or merit based? 529 accounts have zero bearing on merit-based aid
Word "aid" is usually used for need-based.
Top schools do not offer any merit scholarships.
and If you get merit based aid (which many non-ivy colleges will give if you play it right) you can pull out the equal amount from your 529 with no penalty
But you will pay tax at ordinary income rates, so 529 will lose out even to taxable in that scenario.
but there is certainly nothing that says you should save enough for colleges that cost 70k/yr - we funded so we could afford to send our kids to public college (but then with merit aid one of them went to a private for the same cost). Anything extra in a 529 can be used for grad-school, other kids, etc. As stated in the other locked thread - you also don't need to list each child as a beneficiary of specific 529s and the amount of savings in general they expect you to spend from a parents account is small as compared to income.

Personally I don't get why folks seem to go out of there way to come up with reasons not to save for college.
Who you list as a 529 beneficiary doesn't matter in the slightest form the finaid perspective.
They are all parents' assets either way, and you are expected to spend 20% of them over 4 years.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by Vulcan »

miamivice wrote: Fri Feb 15, 2019 12:58 pm
Vulcan wrote: Fri Feb 15, 2019 12:28 pm That is all very good. However, the question remains:
are you maximizing all tax advantaged retirement accounts? That is 60K/yr.
We do not maximize our tax advantaged accounts. I see no need to. We have $750k in retirement at age 40 and are putting about $40k a year in.
We are at similar age with similar assets.
I see no purpose in putting more than that we currently do because we won't need that much in our retirement.
You like paying more taxes than you have to?

PS: A more common limit is 50K. Our situation allows us to shelter 60 due to plan offerings.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by miamivice »

Vulcan wrote: Fri Feb 15, 2019 1:39 pm
You like paying more taxes than you have to?
We aren't paying taxes on 529 money. All of that growth is tax free.

As far as our taxable accounts, I have plans to spend that money prior to retirement. So yes, I am happy to pay taxes on growth from taxable funds in order to have the flexibility to use it pre-retirement.
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Re: Invest or 529 PLan

Post by Vulcan »

GoldStar wrote: Fri Feb 15, 2019 12:43 pm Personally I don't get why folks seem to go out of there way to come up with reasons not to save for college.
When the problem is framed as "how do I save for college" it limits you in what solutions you would consider.

It is the typical case of mental accounting, a common behavioral error.

The question is more appropriately framed as "how do I save money to best position myself to pay for college".
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by Vulcan »

miamivice wrote: Fri Feb 15, 2019 1:42 pm
Vulcan wrote: Fri Feb 15, 2019 1:39 pm
You like paying more taxes than you have to?
We aren't paying taxes on 529 money. All of that growth is tax free.
You can't know that until you spend the money on college.
With Roth, if you are eligible, you are guaranteed it will be tax free after 59 1/2 (absent legislative changes, of course)
And then you still have to consider finaid impact, and when you do that, you might find that the tax benefits were consumed by paying more than you otherwise would.
As far as our taxable accounts, I have plans to spend that money prior to retirement. So yes, I am happy to pay taxes on growth from taxable funds in order to have the flexibility to use it pre-retirement.
Well, if you have high earnings, high assets, and are maxing out, or at least almost maxing out your retirement accounts, 529s may make sense if you are sure your kid isn't getting any merit money.

There are so many ifs around 529s that at some point I gave up on them.
In hindsight, I wish the assets we currently have in 529s were in my retirement accounts instead - we weren't maxing them out back then and had space available.

And we used taxable funds to pay off the mortgage to free up cash flow and move assets to non-reportable.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by miamivice »

Vulcan wrote: Fri Feb 15, 2019 1:50 pm
miamivice wrote: Fri Feb 15, 2019 1:42 pm
Vulcan wrote: Fri Feb 15, 2019 1:39 pm
You like paying more taxes than you have to?
We aren't paying taxes on 529 money. All of that growth is tax free.
You can't know that until you spend the money on college.
With Roth, if you are eligible, you are guaranteed it will be tax free after 59 1/2 (absent legislative changes, of course)
And then you still have to consider finaid impact, and when you do that, you might find that the tax benefits were consumed by paying more than you otherwise would.
As far as our taxable accounts, I have plans to spend that money prior to retirement. So yes, I am happy to pay taxes on growth from taxable funds in order to have the flexibility to use it pre-retirement.
Well, if you have high earnings, high assets, and are maxing out, or at least almost maxing out your retirement accounts, 529s may make sense if you are sure your kid isn't getting any merit money.

There are so many ifs around 529s that at some point I gave up on them.
In hindsight, I wish the assets we currently have in 529s were in my retirement accounts instead - we weren't maxing them out back then and had space available.

And we used taxable funds to pay off the mortgage to free up cash flow and move assets to non-reportable.
There are ifs in everything in life. I made the best decisions for our family based on my perspective.

With that said, we're not talking about a lot of money. I put a total of $73,000 in 529s up front when our children were in the womb. As long as that money is used for their education (I do not anticipate grants/scholarships of any type paying for a significant portion of their college costs), I will reap the benefits of 18 years of tax free growth.

Yes, there is the risk that the money might not be needed for college. If that's the case, well, oh well. I guess that $73,000 could have been better put somewhere else.

You take chances in all aspects of investing and future financial planning. We can only make the best guesses about the future using the data that we have.
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Re: Invest or 529 PLan

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Re: Invest or 529 PLan

Post by Vulcan »

miamivice wrote: Fri Feb 15, 2019 2:05 pm With that said, we're not talking about a lot of money. I put a total of $73,000 in 529s up front when our children were in the womb.
Congratulations, you are one of the few people for whom 529s provide the biggest benefits.

Clearly yours is not the situation OP, and overwhelming majority of 529 investors, are in.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by doss »

This site has an investments prioritization wiki page....is it possible some of the gurus can do something similar for college planning/529s? Perhaps say things like "if you're income is above XXX, and you have maxed out your retirement accounts, then do THIS". The more I read about 529s and how families can be penalized with no financial aid because of the choices a family made together that goes against the status quo (so those that decide to spend $$ on a fancy car get financial aid --- but those that bought a used car and put off instant gratification for a healthy retirement, nope...you get to shoulder the burden of costs and you will help subsidize other people's children!).
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Re: Invest or 529 PLan

Post by miamivice »

Vulcan wrote: Fri Feb 15, 2019 2:07 pm
miamivice wrote: Fri Feb 15, 2019 2:05 pm With that said, we're not talking about a lot of money. I put a total of $73,000 in 529s up front when our children were in the womb.
Congratulations, you are one of the few people for whom 529s provide the biggest benefits.

Clearly yours is not the situation OP, and overwhelming majority of 529 investors, are in.
Yeah, it's not typical. In retrospect, I'm really glad that I did because now that our family is older and consuming more financial resources, it would be really hard to set aside in a 529 now. I am glad that we don't need to worry about that at the moment.
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Re: Invest or 529 PLan

Post by miamivice »

doss wrote: Fri Feb 15, 2019 2:08 pm The more I read about 529s and how families can be penalized with no financial aid because of the choices a family made together that goes against the status quo (so those that decide to spend $$ on a fancy car get financial aid --- but those that bought a used car and put off instant gratification for a healthy retirement, nope...you get to shoulder the burden of costs and you will help subsidize other people's children!).
I think the idea that financial aid is beneficial is overblown. My perspective is that the majority of financial aid disbursed is in the form of loans which must be repaid and only the most needy of families qualify for grants and scholarships. Some will show a particular college to point out they only give scholarships, but I think most students at most colleges who receive financial aid receive it in the form of loans.

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Re: Invest or 529 PLan

Post by Vulcan »

doss wrote: Fri Feb 15, 2019 2:08 pm This site has an investments prioritization wiki page....is it possible some of the gurus can do something similar for college planning/529s? Perhaps say things like "if you're income is above XXX, and you have maxed out your retirement accounts, then do THIS". The more I read about 529s and how families can be penalized with no financial aid because of the choices a family made together that goes against the status quo (so those that decide to spend $$ on a fancy car get financial aid --- but those that bought a used car and put off instant gratification for a healthy retirement, nope...you get to shoulder the burden of costs and you will help subsidize other people's children!).
The prioritization the way I see it for those for whom cash flowing college is feasible is:
- max out all available tax-advantaged space
- pay off mortgage (and other debt, if any)
- complete necessary major purchases before filing FAFSA/CSS (e.g. if you need a new car or your house needs a new roof)
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by willthrill81 »

livesoft wrote: Fri Feb 15, 2019 10:20 am Do you know about the significant tax credits for using non-529 plan money for college tuition?

I suggest contributing the maximums possible to retirement plans ($19K + $19K + $6K + $6K) before contributing one cent to 529 plans.

Also, will you all be eligible for Social Security in retirement or not? WEP problems?
+1

And if your state does not allow you to deduct 529 contributions, it's an even bigger slam dunk to avoid the 529 in lieu of an HSA and retirement plans.
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Re: Invest or 529 PLan

Post by Vulcan »

miamivice wrote: Fri Feb 15, 2019 2:16 pm I think the idea that financial aid is beneficial is overblown. My perspective is that the majority of financial aid disbursed is in the form of loans which must be repaid and only the most needy of families qualify for grants and scholarships. Some will show a particular college to point out they only give scholarships, but I think most students at most colleges who receive financial aid receive it in the form of loans.
All top private universities meet "full need" (as defined by them) with grants.
I ran their NPCs, and with annual income of around 200K, there is money to be had.
I would not want to jeopardize my chances of getting a significant discount if my kids win the admission lottery there (and their stats thus far would allow them to purchase the game tickets).
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by markcoop »

Vulcan wrote: Fri Feb 15, 2019 2:25 pm The prioritization the way I see it for those for whom cash flowing college is feasible is:
- max out all available tax-advantaged space
- pay off mortgage (and other debt, if any)
- complete necessary major purchases before filing FAFSA/CSS (e.g. if you need a new car or your house needs a new roof)
When you guys say max out all available tax-advantaged space, is there any qualifier in there for the attractiveness of the plan? For example, let's say I have a great 401K and my wife has a lousy 401K (high fees, poor choices). Are you saying it still is preferable to max out out the lousy 401K before a 529 plan?

If the answer is yes, then I don't agree with you. If the answer is no, then we've opened up a whole new can of worms. How bad of a 401K plan is better than a 529 plan? (actually, I don't agree with you here either, but thought it is interesting)
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Re: Invest or 529 PLan

Post by GoldStar »

Vulcan wrote: Fri Feb 15, 2019 1:44 pm
GoldStar wrote: Fri Feb 15, 2019 12:43 pm Personally I don't get why folks seem to go out of there way to come up with reasons not to save for college.
When the problem is framed as "how do I save for college" it limits you in what solutions you would consider.

It is the typical case of mental accounting, a common behavioral error.

The question is more appropriately framed as "how do I save money to best position myself to pay for college".
Its not just mental accounting - if all your money is locked up in retirement accounts that can't be accessed and/or accounts with no tax-saving benefits you have cut yourself short with some of the rules-of-thumb folks are trying to sell here on Bogleheads which seems to be "Avoid 529s in favor of almost everything else". Folks will end up taking loans from the 401ks, or taking other very high interest loans in return. There is another thread where someone is trying to figure out how to pull from iBonds although he is over the income limit to pull from the iBonds tax-free for education. If I have more money locked in in retirement and other vehicles than I needed - and yet have to borrow to pay for college because I chose to avoid 529s like the plague - its hardly a behavior error.
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Re: Invest or 529 PLan

Post by livesoft »

markcoop wrote: Fri Feb 15, 2019 3:36 pmHow bad of a 401K plan is better than a 529 plan? (actually, I don't agree with you here either, but thought it is interesting)
My spouse had a particular craptacular 401(k) plan that she always maxed out. The expense ratio for a bond fund was about 2%. And that was the lowest expense ratio in the plan. Yes, she had a small match, so it could have probably been worse.

But we had enough income in those years to max out retirement plan contributions including that plan AND make some contributions to 529 plans. But it was also better to borrow $50K from the 401(k) plan (saving 2% outrageous expense ratio costs) and put that money into 529 plans. We get no state tax break for 529 plans. The borrowed money from the 401(k) ended up in a bond fund in the 529 plan, so no actual change in asset allocation.

And lo and behold, her company was sold before the 401(k) loan was paid off and the loan came due. But also she was able to rollover all her 401(k) money to an IRA, so all the money ended up in low-expense-ratio, passively-managed index funds. The new owners also had a decent 401(k) plan, so she continues to make maximum contributions.

So it was a benefit for her to contribute to the craptacular 401(k) plan because the money eventually ended up in a good place.

And we paid for 2 college educations through masters degrees using a smorgasbord of cash flow, tax credits, 529 plans, I bonds, and taxable account withdrawals, but no financial aid nor student loans while having taxable income in the mid-5-figures.
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Re: Invest or 529 PLan

Post by miamivice »

Vulcan wrote: Fri Feb 15, 2019 2:29 pm
miamivice wrote: Fri Feb 15, 2019 2:16 pm I think the idea that financial aid is beneficial is overblown. My perspective is that the majority of financial aid disbursed is in the form of loans which must be repaid and only the most needy of families qualify for grants and scholarships. Some will show a particular college to point out they only give scholarships, but I think most students at most colleges who receive financial aid receive it in the form of loans.
All top private universities meet "full need" (as defined by them) with grants.
I ran their NPCs, and with annual income of around 200K, there is money to be had.
I would not want to jeopardize my chances of getting a significant discount if my kids win the admission lottery there (and their stats thus far would allow them to purchase the game tickets).
When I say the majority, I am not referring just to top private schools. Those are a select group of colleges that only admit the best and brightest. Since we all don't have the best and brightest children, the majority of our kids will attend state schools that disburse plenty of loans.

I do not agree that the majority of parents should try to pursue financial need to pay for their children's education. That might work for some but is a losing strategy of many, since most financial aid is loans and not grants.
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Re: Invest or 529 PLan

Post by SmileyFace »

GoldStar wrote: Fri Feb 15, 2019 12:43 pm
Personally I don't get why folks seem to go out of there way to come up with reasons not to save for college.
I've been observing and in several of these discussions for a few years. Its usually one of the following:

1) They want to come up with reasons to not save for college so they can spend their money. Luxury cars and watches, pinball machines, etc. are easily enjoyed. :moneybag
2) No matter how much they are saving for retirement, it never seems to be enough. :?
3) They never took advantage of 529s themselves because they misunderstood the options and are now justifying their own decisions. :twisted:
4) They didn't take advantage of 529s because they felt there was too much risk with the 10% penalty if they had job-loss or some catastrophic event where they needed the money. Too risk averse for this program - don't want others to take the risk either. :shock:
5) They are hoping Uncle-Sam will kick in with hand-outs and/or their kids won't mind being strapped with debt. :annoyed
6) They struggled to put themselves through college and want their kids to have to do the same. :x
7) They never realized how much compounded growth actually provides over time and minimized the tax savings on such growth in their own minds so felt 529s weren't worth the effort. :oops:

OP: If you want to put your kids through college and save thousands in taxes doing so - 529 plans are a great option.
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Re: Invest or 529 PLan

Post by SchruteB&B »

miamivice wrote: Fri Feb 15, 2019 4:02 pm
Vulcan wrote: Fri Feb 15, 2019 2:29 pm
miamivice wrote: Fri Feb 15, 2019 2:16 pm I think the idea that financial aid is beneficial is overblown. My perspective is that the majority of financial aid disbursed is in the form of loans which must be repaid and only the most needy of families qualify for grants and scholarships. Some will show a particular college to point out they only give scholarships, but I think most students at most colleges who receive financial aid receive it in the form of loans.
All top private universities meet "full need" (as defined by them) with grants.
I ran their NPCs, and with annual income of around 200K, there is money to be had.
I would not want to jeopardize my chances of getting a significant discount if my kids win the admission lottery there (and their stats thus far would allow them to purchase the game tickets).
When I say the majority, I am not referring just to top private schools. Those are a select group of colleges that only admit the best and brightest. Since we all don't have the best and brightest children, the majority of our kids will attend state schools that disburse plenty of loans.

I do not agree that the majority of parents should try to pursue financial need to pay for their children's education. That might work for some but is a losing strategy of many, since most financial aid is loans and not grants.
They also deny a lot of the best and the brightest. I know many families with very talented, smart, driven kids who were denied.
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Re: Invest or 529 PLan

Post by markcoop »

livesoft wrote: Fri Feb 15, 2019 3:47 pm
markcoop wrote: Fri Feb 15, 2019 3:36 pmHow bad of a 401K plan is better than a 529 plan? (actually, I don't agree with you here either, but thought it is interesting)
My spouse had a particular craptacular 401(k) plan that she always maxed out. The expense ratio for a bond fund was about 2%. And that was the lowest expense ratio in the plan. Yes, she had a small match, so it could have probably been worse.

But we had enough income in those years to max out retirement plan contributions including that plan AND make some contributions to 529 plans. But it was also better to borrow $50K from the 401(k) plan (saving 2% outrageous expense ratio costs) and put that money into 529 plans. We get no state tax break for 529 plans. The borrowed money from the 401(k) ended up in a bond fund in the 529 plan, so no actual change in asset allocation.

And lo and behold, her company was sold before the 401(k) loan was paid off and the loan came due. But also she was able to rollover all her 401(k) money to an IRA, so all the money ended up in low-expense-ratio, passively-managed index funds. The new owners also had a decent 401(k) plan, so she continues to make maximum contributions.

So it was a benefit for her to contribute to the craptacular 401(k) plan because the money eventually ended up in a good place.

And we paid for 2 college educations through masters degrees using a smorgasbord of cash flow, tax credits, 529 plans, I bonds, and taxable account withdrawals, but no financial aid nor student loans while having taxable income in the mid-5-figures.
In my case, we maxed out my good 401K and 2 Roth IRAs for many years (the last couple of years have held back on the Roth). We never contributed to my wife's bad plan. She still has a bad plan over 20 years later. So, maybe it worked out for both of us. Of course, you never know. So, this is just one more variable adding to the risk of not funding money for college and instead putting it all in retirement accounts/pay down mortgage.

BTW - Are you saying no matter how bad the 401K plan, it should be funded before the 529 on the chance that you can do things like borrow against it or move the plan in the future?
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Re: Invest or 529 PLan

Post by livesoft »

markcoop wrote: Fri Feb 15, 2019 4:17 pmBTW - Are you saying no matter how bad the 401K plan, it should be funded before the 529 on the chance that you can do things like borrow against it or move the plan in the future?
Generally, one would know before starting to contribute to a 401(k) if it has a loan feature.

But no I am not saying no matter how bad the 401(k) plan is, but it would have to be pretty bad in my book.

Predicting the future is hard, especially predicting custodian/sponsor changes to a 401(k) plan.
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Re: Invest or 529 PLan

Post by KlangFool »

Folks,

1) Please stay on topic. OP did not max up his 401K/403B/457 and Roth IRAs. So, the choice is between those accounts and 529. It is not between the taxable account and 529.

2) OP's annual saving far exceed the 25K per year that he needs to pay for college education.

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Re: Invest or 529 PLan

Post by Vulcan »

KlangFool wrote: Fri Feb 15, 2019 5:51 pm 1) Please stay on topic. OP did not max up his 401K/403B/457 and Roth IRAs. So, the choice is between those accounts and 529. It is not between the taxable account and 529.

2) OP's annual saving far exceed the 25K per year that he needs to pay for college education.
True.
And for people who can afford to cash flow college talking about saving for it is like talking about saving for bread.
Both are necessities, and both can be paid off the current income.

Now, if there was a bread savings vehicle that would allow you to buy bread while reaping tax benefits that are at best equal to those of retirement accounts (but can potentially make your bead cost more) - would you shortchange your retirement accounts by diverting funds to the "bread fund"?
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by DIFAR31 »

KlangFool wrote: Fri Feb 15, 2019 5:51 pm 2) OP's annual saving far exceed the 25K per year that he needs to pay for college education.
This is all well and good if OP (and OP's kids) are content, when the time comes to apply to colleges, to stick with "State colleges in our area [which] are very strong and cost around $25,000 a year for room and board" (or something similar). It should go without saying that life is full of surprises. Saving for your kid's college in a 529 gives you, and your kid, the benefit of wider options, from a financial perspective. There's a chance that you'll over save in a 529 and turn would could have been tax-free earnings into tax-deferred earnings, potentially with an additional 10% tax. But there's also a chance that the tax-free earnings will allow you to afford a more expensive school that better meets your kid's educational needs (or desires). It really boils down to whether you're willing to trade the possibility of a less-than-optional investment decision for more college choices for your kid.
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Re: Invest or 529 PLan

Post by KlangFool »

DIFAR31 wrote: Fri Feb 15, 2019 6:23 pm
KlangFool wrote: Fri Feb 15, 2019 5:51 pm 2) OP's annual saving far exceed the 25K per year that he needs to pay for college education.
This is all well and good if OP (and OP's kids) are content, when the time comes to apply to colleges, to stick with "State colleges in our area [which] are very strong and cost around $25,000 a year for room and board" (or something similar). It should go without saying that life is full of surprises. Saving for your kid's college in a 529 gives you, and your kid, the benefit of wider options, from a financial perspective. There's a chance that you'll over save in a 529 and turn would could have been tax-free earnings into tax-deferred earnings, potentially with an additional 10% tax. But there's also a chance that the tax-free earnings will allow you to afford a more expensive school that better meets your kid's educational needs (or desires). It really boils down to whether you're willing to trade the possibility of a less-than-optional investment decision for more college choices for your kid.
DIFAR31,

<<Saving for your kid's college in a 529 gives you, and your kid, the benefit of wider options, from a financial perspective. >>

Not true. As compared to Roth IRAs in OP's situation. Besides the annual savings, OP has at least 100+K of Roth IRAs' contribution that he can withdraw for the college education if he chooses to.

529 can only be spent on college education. OP can use Roth IRA's contribution for any reason.

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Re: Invest or 529 PLan

Post by Vulcan »

DIFAR31 wrote: Fri Feb 15, 2019 6:23 pm
KlangFool wrote: Fri Feb 15, 2019 5:51 pm 2) OP's annual saving far exceed the 25K per year that he needs to pay for college education.
This is all well and good if OP (and OP's kids) are content, when the time comes to apply to colleges, to stick with "State colleges in our area [which] are very strong and cost around $25,000 a year for room and board" (or something similar). It should go without saying that life is full of surprises. Saving for your kid's college in a 529 gives you, and your kid, the benefit of wider options, from a financial perspective. There's a chance that you'll over save in a 529 and turn would could have been tax-free earnings into tax-deferred earnings, potentially with an additional 10% tax.
And unlike in taxable account, your gains will be taxed as regular income.
But there's also a chance that the tax-free earnings will allow you to afford a more expensive school that better meets your kid's educational needs (or desires). It really boils down to whether you're willing to trade the possibility of a less-than-optional investment decision for more college choices for your kid.
Those schools are more likely to offer need aid. Sheltering as much of your assets as possible may save a lot more than all the possible tax savings from 529.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Invest or 529 PLan

Post by vasaver »

Vulcan wrote: Fri Feb 15, 2019 2:25 pm
doss wrote: Fri Feb 15, 2019 2:08 pm This site has an investments prioritization wiki page....is it possible some of the gurus can do something similar for college planning/529s? Perhaps say things like "if you're income is above XXX, and you have maxed out your retirement accounts, then do THIS". The more I read about 529s and how families can be penalized with no financial aid because of the choices a family made together that goes against the status quo (so those that decide to spend $$ on a fancy car get financial aid --- but those that bought a used car and put off instant gratification for a healthy retirement, nope...you get to shoulder the burden of costs and you will help subsidize other people's children!).
The prioritization the way I see it for those for whom cash flowing college is feasible is:
- max out all available tax-advantaged space
- pay off mortgage (and other debt, if any)
- complete necessary major purchases before filing FAFSA/CSS (e.g. if you need a new car or your house needs a new roof)
If already maximizing all retirement 401k/TSP/HSA/Roth IRA plans should I use the Roth versions of the 401k/TSP instead of deductible before contributing to a 529 for even more tax advantaged space?

Additionally would it make sense to do in-plan conversions of deductible 401k dollars to roth before contributing to 529s?
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