Spending down 529 Money

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Fullhouse2007
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Spending down 529 Money

Post by Fullhouse2007 » Tue Apr 23, 2019 9:52 pm

Well the day that we have been planning and saving for is fast approaching. Our son has worked hard and has made his college decision (with our guidance) for next fall. The per year cost of this private college is more than a state school, but he put the hard work in to get good merit aid and we are in a position to pay for all of his education.

His 529 account, fully funded only us (not grandparents/other family) is at $160,000. His per year cost will be $40,000. The math works out that we have enough, but he has aspirations of getting his MD or PhD. We have been putting $6000 in his 529 accounts per year and also paying $8000 for private high school. We will plan to keep putting the $6000 in per year in the 529 as we go along, but I’m wondering if we should allocate the $8000 too, just to be safe. Our intentions would be to pay for all. The risk of having too much in the 529 plan is not really my question. I’m wondering what others have done to make education dollars last, some out of pocket and some 529 distribution? We were young adults during the recession, so the thought of a 30% correction is always on my mind as well.

delamer
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Re: Spending down 529 Money

Post by delamer » Tue Apr 23, 2019 10:46 pm

All of the money for your son’s undergrad — whether in the 529 or another account — should be in a money market fund or a stable value fund, given that it will be spent within the next 4 years.

Then a 30% correction is irrelevant to you.

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Ben Mathew
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Re: Spending down 529 Money

Post by Ben Mathew » Tue Apr 23, 2019 11:42 pm

Once you max out your state tax deduction (if you get any), there is no advantage I can think of for withdrawing and contributing to the 529 at the same time. Leaving the money in for grad school will be equivalent to taking it out for undergrad + putting some in for grad school. One strategy won't make the money last longer than the other.

ccieemeritus
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Re: Spending down 529 Money

Post by ccieemeritus » Tue Apr 23, 2019 11:49 pm

Summary:
You have $160k in the 529 plan.
Total estimated expenditure is $160k (assuming 4 years)
You have the ability to put in an additional $14k per year while maintaining your current lifestyle.

My DD already completed public school undergrad and is starting grad school (with money leftover thanks to public undergrad + growth). My DS is about to start undergrad...so I've spent down some 529/coverdell money.

I won't tell you what to do, but in your situation I would:
1) Not put more money in the 529 (unless med school is highly likely)
2) Withdraw the full eligible expenses from the 529 plan each year (odds are you will withdraw about $15-$20k in 2019 to pay for the fall semester..withdrawals must be the same calendar year as the expenses so make sure you withdraw before Dec 31). This will reduce your risk. You could withdraw the fall term $ today.
3) Put the $14k into a taxable account as a "rainy day fund with flexibility".
4) Keep the 529 money in a stock index fund to try to get additional growth (this is my personal preference having a high risk tolerance and other assets...you have other assets but have some risk worries so delamer's suggestion of a stable value fund may be your preference).

HereToLearn
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Re: Spending down 529 Money

Post by HereToLearn » Tue Apr 23, 2019 11:53 pm

Are you eligible for the AOTC? If so, you will want to spend $4000/year from non-529 funds.

https://www.irs.gov/credits-deductions/individuals/aotc

Iridium
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Re: Spending down 529 Money

Post by Iridium » Wed Apr 24, 2019 1:10 am

Fullhouse2007 wrote:
Tue Apr 23, 2019 9:52 pm
The math works out that we have enough, but he has aspirations of getting his MD or PhD.
A good PhD program will pay your son a stipend rather than take tuition. Since the funds need to be ready to be spent in 5 years, that would call for a conservative asset allocation, so the 529 shelter won't even help that much. The risk rewards points strongly in the 'put additional money into taxable' direction. Put it into a new account if you want to sperate it from your retirement assets, but don't accept the 529's inflexibility.

Also, don't count on the plan not changing. After 16 years of schooling, the last thing I wanted to do was pursue graduate school right after getting my BS. A few years later my job paid for my professional Master's. So, relatively minor tweaks can result in completely different funding needs.

Ideally, you have enough qualified expenses that you can take maximum advantage of any federal education tax breaks, deposit into the 529 the maximum state deduction (if applicable) and drain the 529 in four years. If not, then you should give the numbers and ask about which tax breaks you should focus on.

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beyou
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Re: Spending down 529 Money

Post by beyou » Wed Apr 24, 2019 1:53 am

We spent all down in undergrad, keeping a mix of short term and int term bonds even before college started.

I would not save more in 529.
If you can and want to help kids, you can do so without 529.

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gasdoc
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Re: Spending down 529 Money

Post by gasdoc » Wed Apr 24, 2019 8:02 am

I also wouldn't save any more in the 529- the future investment returns are just not that much better than a regular after tax account given the time frame. And as another poster remarked, plans can change. DD had a 529 of $250K at the beginning of college, with med school in mind. That hasn't changed, but almost on a weekly basis she calls home saying she is not sure she wants to go to medical school but might want to become an environmental attorney to "save the planet from humans." Phew. The change a bit when they enter academia.

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NotWhoYouThink
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Re: Spending down 529 Money

Post by NotWhoYouThink » Wed Apr 24, 2019 8:38 am

I'm not sure if anyone keeps track of the ratio of "pre-med" freshmen to future medical students, but it's probably pretty high. And, as was mentioned above, PhD programs pay you, you don't pay them. Students do pay for law school and business school, although financial aid and scholarships are often available for both.

If you have extra money lying around you can keep some of it in 529s for potential future professional school for your offspring, but I wouldn't (didn't). You have more flexibility investing in tax efficient low cost funds in your brokerage accounts, and can use the money as you deem appropriate, which might tend toward helping with a down payment or with a future business start-up.

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Fullhouse2007
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Re: Spending down 529 Money

Post by Fullhouse2007 » Wed Apr 24, 2019 8:40 am

Our family income means that we have very few ways to avoid taxes. My thought is that if we put the full $14,000 in the 529, we are saving any capital gains tax we would incur from a taxable account. Not a ton of money, for this purpose. We can also use these accounts (2 other kids in private school) to pay k-12 education, but at this time we do not do that. Maybe I’m just making it more complicated than it needs to be.

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Fullhouse2007
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Re: Spending down 529 Money

Post by Fullhouse2007 » Wed Apr 24, 2019 8:51 am

NotWhoYouThink wrote:
Wed Apr 24, 2019 8:38 am
I'm not sure if anyone keeps track of the ratio of "pre-med" freshmen to future medical students, but it's probably pretty high. And, as was mentioned above, PhD programs pay you, you don't pay them. Students do pay for law school and business school, although financial aid and scholarships are often available for both.

If you have extra money lying around you can keep some of it in 529s for potential future professional school for your offspring, but I wouldn't (didn't). You have more flexibility investing in tax efficient low cost funds in your brokerage accounts, and can use the money as you deem appropriate, which might tend toward helping with a down payment or with a future business start-up.
Actually, that was a question that we asked in the college search. My son has a top act score, takes rigorous classes and high GPA. Some schools were very much weeding out and I think that adds to the pressure that students feel. He ended up choosing a college that had a lower admit rate and selective criteria for this very reason. They didn’t see their ‘freshmen premeds’ as potential ‘former premeds’ like almost all other less selective schools did. I would have never thought a small LAC would be where we ended up. Sure, my kid may choose not to do medicine, but it won’t be because he felt like he was weeded out. (My rose glasses may be on about both my kid and his college).

I also think if we invest in a start up, it’s different than investing in our kids’ education somehow. That’s my own bias. I probably wouldn’t invest in a startup with family.

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gasdoc
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Re: Spending down 529 Money

Post by gasdoc » Wed Apr 24, 2019 9:12 am

Fullhouse2007 wrote:
Wed Apr 24, 2019 8:40 am
Our family income means that we have very few ways to avoid taxes. My thought is that if we put the full $14,000 in the 529, we are saving any capital gains tax we would incur from a taxable account. Not a ton of money, for this purpose. We can also use these accounts (2 other kids in private school) to pay k-12 education, but at this time we do not do that. Maybe I’m just making it more complicated than it needs to be.
The fact that you have other children that can use the money changes my response. I would then put it in the 529 for the reason you cited.

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gasdoc
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Re: Spending down 529 Money

Post by gasdoc » Wed Apr 24, 2019 9:20 am

Fullhouse2007 wrote:
Wed Apr 24, 2019 8:51 am
NotWhoYouThink wrote:
Wed Apr 24, 2019 8:38 am
I'm not sure if anyone keeps track of the ratio of "pre-med" freshmen to future medical students, but it's probably pretty high. And, as was mentioned above, PhD programs pay you, you don't pay them. Students do pay for law school and business school, although financial aid and scholarships are often available for both.

If you have extra money lying around you can keep some of it in 529s for potential future professional school for your offspring, but I wouldn't (didn't). You have more flexibility investing in tax efficient low cost funds in your brokerage accounts, and can use the money as you deem appropriate, which might tend toward helping with a down payment or with a future business start-up.
Actually, that was a question that we asked in the college search. My son has a top act score, takes rigorous classes and high GPA. Some schools were very much weeding out and I think that adds to the pressure that students feel. He ended up choosing a college that had a lower admit rate and selective criteria for this very reason. They didn’t see their ‘freshmen premeds’ as potential ‘former premeds’ like almost all other less selective schools did. I would have never thought a small LAC would be where we ended up. Sure, my kid may choose not to do medicine, but it won’t be because he felt like he was weeded out. (My rose glasses may be on about both my kid and his college).

I also think if we invest in a start up, it’s different than investing in our kids’ education somehow. That’s my own bias. I probably wouldn’t invest in a startup with family.
I mean no disrespect to you or your child- but no matter what the school, ACT scores, or GPA, the admission rate for med school is not very high. A school doesn't necessarily intend to "weed" out premeds, but the coursework in combination with the MCAT study does it for them. It is just a lot of work and competitive pressure and a lot of times, the student just finds something else they like better than multiple science classes with long afternoons in labs. And all of that is just to get to the interview stage. This is not to discourage- just plan accordingly. It is all about the numbers, and it seems like everyone wants to go into healthcare these days. At DD's college, nearly half the freshman class is at least considering premed.

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Fullhouse2007
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Re: Spending down 529 Money

Post by Fullhouse2007 » Thu Apr 25, 2019 9:51 am

Not offended at all, I have great interest in the medical education process and higher education in general. Totally off topic, but this year of selecting a college has been a great education for me. Schools publish their pre-med admit rates, or will usually tell you what they are. For many of the schools that we were looking at, it sounds something like this "70% of premeds with a GPA of 3.5 or higher were admitted to a medical school last year." Now this is a good statistic, but with the qualifier of GPA. I've heard it said that it's closer to 40% for overall. Some of these schools had their own medical school and had some limited preference for their undergrads. The benefit of this school specific statistic is that they give a GPA target, but it doesn't tell you how many students at the college applied and were actually admitted. But I think this statistic also says, we are going to only count the kids who hit our high standards for who should apply to medical school. My spouse is a physician, so there is some background understanding of the financial commitment and grit required.

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gasdoc
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Re: Spending down 529 Money

Post by gasdoc » Thu Apr 25, 2019 2:08 pm

Fullhouse2007 wrote:
Thu Apr 25, 2019 9:51 am
Not offended at all, I have great interest in the medical education process and higher education in general. Totally off topic, but this year of selecting a college has been a great education for me. Schools publish their pre-med admit rates, or will usually tell you what they are. For many of the schools that we were looking at, it sounds something like this "70% of premeds with a GPA of 3.5 or higher were admitted to a medical school last year." Now this is a good statistic, but with the qualifier of GPA. I've heard it said that it's closer to 40% for overall. Some of these schools had their own medical school and had some limited preference for their undergrads. The benefit of this school specific statistic is that they give a GPA target, but it doesn't tell you how many students at the college applied and were actually admitted. But I think this statistic also says, we are going to only count the kids who hit our high standards for who should apply to medical school. My spouse is a physician, so there is some background understanding of the financial commitment and grit required.
All true. And what they also leave out is the number of kids the advisors discourage from even applying because they believe, for whatever the reason, that they won't be admitted. When the undergrad schools market their med school admission rates, they are incentivized to limit those students who apply to those that have the greatest chance of being accepted. This sometimes does kids a disservice- My undergraduate college (a few years ago) claimed a 97% admission rate. I watched as anyone that didn't have a near perfect chance of getting in was discouraged even from trying. Good luck on the journey!

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miamivice
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Re: Spending down 529 Money

Post by miamivice » Thu Apr 25, 2019 2:25 pm

Fullhouse2007 wrote:
Tue Apr 23, 2019 9:52 pm
The math works out that we have enough, but he has aspirations of getting his MD or PhD.
Generally, the cost of getting a MD or PhD is borne by the student rather than the parents.

I got a masters degree, it was funded by my employer. I paid a grand total of about $300 for the degree.

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gasdoc
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Re: Spending down 529 Money

Post by gasdoc » Thu Apr 25, 2019 4:35 pm

miamivice wrote:
Thu Apr 25, 2019 2:25 pm
Fullhouse2007 wrote:
Tue Apr 23, 2019 9:52 pm
The math works out that we have enough, but he has aspirations of getting his MD or PhD.
Generally, the cost of getting a MD or PhD is borne by the student rather than the parents.

I got a masters degree, it was funded by my employer. I paid a grand total of about $300 for the degree.
A PhD can be gotten with a reasonable amount of debt. The MD degree generally results in hundreds of thousands of dollars debt, and pushes the student toward specific specialties. If I can help to some degree, I will be proud to do it. The original post was concerning whether this should come from a 529, and I would fully fund undergraduate studies, but leave MD funds in taxable accounts, It is hard to know exactly how much will be needed for undergraduate, so the remaining can go toward medical school, especially if the student chooses less expensive undergraduate options.

gasdoc

NotWhoYouThink
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Re: Spending down 529 Money

Post by NotWhoYouThink » Thu Apr 25, 2019 4:45 pm

Not all pre-meds "wash out" - as gasdoc said, many of them just decide to take a different path. That's not a bad thing, not everyone is interested in being a doctor, there is a big world out there and many good and worthwhile things to do in it. I'd have made a terrible doctor, but a helluvan engineer. (Side note, a large percentage of prospective engineers change majors too, and often go on to do different interesting and worthwhile things.)

And then there is NYU med school, now tuition free. And Wash U St. Louis Med School plans to be tuition free for about half the class.

No reason not to pay for your kids' med school if you choose, but I probably wouldn't plan to do it with 529 funds.

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Re: Spending down 529 Money

Post by bayview » Thu Apr 25, 2019 10:49 pm

miamivice wrote:
Thu Apr 25, 2019 2:25 pm
Fullhouse2007 wrote:
Tue Apr 23, 2019 9:52 pm
The math works out that we have enough, but he has aspirations of getting his MD or PhD.
Generally, the cost of getting a MD or PhD is borne by the student rather than the parents.

I got a masters degree, it was funded by my employer. I paid a grand total of about $300 for the degree.
My son-in-law went tuition- and fee-free through undergrad, masters, and PhD. Undergrad was with a full-ride scholarship from Eli Lilly, but masters and PhD were from working as a TA/RA. This is fortunate, as DD has (had) over a quarter-million in student loans for med school alone. :)

It was interesting to read above that students are back to wanting to go into medicine. When DD graduated from high school in the early 2000’s, the trend was the opposite, especially notable with advice from school friend physician parents to their sons and daughters to do anything other than go into medicine.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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gasdoc
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Re: Spending down 529 Money

Post by gasdoc » Fri Apr 26, 2019 7:01 am

bayview wrote:
Thu Apr 25, 2019 10:49 pm
miamivice wrote:
Thu Apr 25, 2019 2:25 pm
Fullhouse2007 wrote:
Tue Apr 23, 2019 9:52 pm
The math works out that we have enough, but he has aspirations of getting his MD or PhD.
Generally, the cost of getting a MD or PhD is borne by the student rather than the parents.

I got a masters degree, it was funded by my employer. I paid a grand total of about $300 for the degree.
My son-in-law went tuition- and fee-free through undergrad, masters, and PhD. Undergrad was with a full-ride scholarship from Eli Lilly, but masters and PhD were from working as a TA/RA. This is fortunate, as DD has (had) over a quarter-million in student loans for med school alone. :)

It was interesting to read above that students are back to wanting to go into medicine. When DD graduated from high school in the early 2000’s, the trend was the opposite, especially notable with advice from school friend physician parents to their sons and daughters to do anything other than go into medicine.
Everything cycles.

gasdoc

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Michael Patrick
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Re: Spending down 529 Money

Post by Michael Patrick » Fri Apr 26, 2019 7:22 am

We're at a point where we have enough in a 529 for our daughter to fully pay for her undergrad, with a small amount left over for if/when she chooses to go back for a masters. She's heading for a teaching degree, and for a teacher a masters can increase her pay.

Once it became clear that we had enough for her undergrad (once she settled on an in-state state university) we stopped putting money into her 529. While it is clear she's going to undergrad, it's not guaranteed that she'll go back for a masters. Probable, but not guaranteed. I switched from putting it into a 529 and instead I'm putting money into my Roth 457. I didn't want to tie the money up in a 529 in case life happens and she doesn't go to grad school. If she goes, I'll be retired by that time and the money will be available.

aristotelian
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Re: Spending down 529 Money

Post by aristotelian » Fri Apr 26, 2019 8:40 am

I don't see the upside of keeping money in the 529 at that point unless there is a state tax deduction in play. Even if you want to have some left over for grad school, you are going to want to invest conservatively. All you will be saving is taxes on a few hundred dollars in interest. At that point, I would value the flexibility and simplicity of saving in a taxable account. You can even do a muni bond fund or I bonds to minimize tax in the taxable account.

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Fullhouse2007
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Re: Spending down 529 Money

Post by Fullhouse2007 » Wed May 08, 2019 10:48 am

I'm back to thinking about the benefits of keeping educational dollars in our 529 accounts. I am going to continue contributions (enough for tax deduction at the very least and probably a little more). The earnings on 529 gains are tax free if used for education. My bucket for retirement is where it needs to be, (saving through 401ks, Roth IRAs and taxable accounts). We are not eligible for an HSA because of workplace insurance offering (the idea of missing out on triple tax benefit hurts). Our 529 buckets are nice and healthy for all 3 kids. Because there are very few ways to avoid the tax man, I think I'm going to keep on contributing to the 529 plan after we start drawing it down. I will consider it a wealth transfer to grandkids if there is still money left over. Yes, it's not MY tax savings that will be realized, but I'd rather have relatives (nieces, nephews, grandkids) be beneficiaries instead of the government through capital gains taxes if worst case scenario we decide to take money out of taxable accounts for more than we have saved. We aren't so rich that our families wont get the "step up basis" of our invested assets, but that is after we die.

I get a good feeling thinking about this inheritance for the next generation. We already pay 6 figures in taxes each year, so I don't feel bad trying to shelter a little bit. Very best case scenario, we still wouldn't be able to bankroll very many grandkids. And, if no grandkids, I know that our nieces and nephews are going to have student loans themselves.

Thoughts?

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