529 - over saving?

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Meaty
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529 - over saving?

Post by Meaty » Wed Oct 30, 2019 8:44 am

Thanks in advance for the thoughts and wisdom. I have a 9 year old son and I plan to pay 100% of the college bill (tuition, room/board, books, food) at a 4 year in state school. I currently have $75,000 saved and contribute $200/month

Am I over saving for college. The various calculators I find online vary widely - everything from I have no need to save further to increasing contributions by hundreds per month.

Thoughts from the real world? If it’s helpful, I max all other deferred space and save substantially in taxable. I’ve considered hedging my bets by ceasing 529 contributions knowing I could pay any difference out of taxable but I’d like to get the tax free growth if possible

Thanks!
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tenkuky
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Re: 529 - over saving?

Post by tenkuky » Wed Oct 30, 2019 8:45 am

Depends on your state tax deduction (if any).
I would contribute at least to that amount.
You could always add more to taxable as it is less constrained, and can be very tax efficient if chosen wisely.

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Re: 529 - over saving?

Post by alfaspider » Wed Oct 30, 2019 8:53 am

Meaty wrote:
Wed Oct 30, 2019 8:44 am
Thanks in advance for the thoughts and wisdom. I have a 9 year old son and I plan to pay 100% of the college bill (tuition, room/board, books, food) at a 4 year in state school. I currently have $75,000 saved and contribute $200/month

Am I over saving for college. The various calculators I find online vary widely - everything from I have no need to save further to increasing contributions by hundreds per month.

Thoughts from the real world? If it’s helpful, I max all other deferred space and save substantially in taxable. I’ve considered hedging my bets by ceasing 529 contributions knowing I could pay any difference out of taxable but I’d like to get the tax free growth if possible

Thanks!
It entirely depends on where your kid wants to go to college. If your kid is planning on state school, you can almost certainly stop contributing. If your kid wants to go to an expensive private school or out of state, you may come up short. It also depends on whether you are interested in funding extended family members or grandchildren if there are funds remaining.

Personally, I've cut my kids 529 contributions off once the accounts reach $100k. It's enough to pay for state school. If they need more, I may be open to paying for it, but I'm not interested in seriously over funding the 529. If my grand kids need help, I can cross that bridge when I get to it several decades from now.

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Re: 529 - over saving?

Post by goodenyou » Wed Oct 30, 2019 8:56 am

Since you live in Texas, there is no state income tax, and therefore no deduction (good thing!). If you have your 529 in a balanced fund, I would contribute until the balance was about $120,000 (the all-in cost in about 10 years will be around $30,000 per year). That would include contributions and investment return. When I reached $120,000, I would put it all in FDIC. If your child was getting close to college age (junior/senior in high school), and you weren't fully funded for 4 years, I would put a significant portion in FDIC (2 years of college expenses) and let the balance try to eek out a return to meet the remainder 2 years over the 4 years of growth. I would be fully prepared to meet the deficiency, if any, with taxable cash flow when they got to be a junior in college.
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Re: 529 - over saving?

Post by 1789 » Wed Oct 30, 2019 10:00 am

We live in Oregon and we use state 529 plan (deductible). We are planning to stop contributing around 60k (this is the average 4 years of tuition for major public universities here) and then use the rest from Roth Ira contributions. Kid is 2.5 years old now and we have around 18k in that account.
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Re: 529 - over saving?

Post by cowdogman » Wed Oct 30, 2019 10:22 am

Depends on your cash availability.

I probably over-saved. Between my wife and me we put in about $150,000 per child (two sons) when they were very young--15-20 years ago. But we were assuming private college and possibly/hopefully graduate school.

But then the first son got a large scholarship (music) and I expect the second son will as well.

The money is still there for possible graduate school and so we'll see if it it gets used.

If it doesn't get used, we'll just leave it in the account and try to time the withdrawal for a low tax bracket year (and pay the 10% penalty). Another option is to transfer the account to grandkids when they're born.

So, if you have the cash availability a 529 is a good tax-deferred investment, especially if you think there is a good chance the money will be used for education (in which case it is a tax free investment--at least for the gains).

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willthrill81
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Re: 529 - over saving?

Post by willthrill81 » Wed Oct 30, 2019 10:24 am

How much are your son's anticipated education expenses? Four years of tuition and fees at our local, regional university is about $30k.

Unless he's planning on going to a pricey private institution, you've probably already got enough in the 529.
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Re: 529 - over saving?

Post by stoptothink » Wed Oct 30, 2019 10:44 am

willthrill81 wrote:
Wed Oct 30, 2019 10:24 am
How much are your son's anticipated education expenses? Four years of tuition and fees at our local, regional university is about $30k.

Unless he's planning on going to a pricey private institution, you've probably already got enough in the 529.
Appears as if OP is in Texas which has pretty reasonable in-state options.

Our two (really) local options are pretty close to the cheapest in the country at currently <$7k/yr for tuition and fees. Our kids are more than welcome to attend either of those pretty good universities (both <10 miles from my front door) and stay at home or they can fund the difference. So, we plan to hit $25k and just let it sit. Kids are 7 and 4 and should hit $25k in each account in 2021.

illumination
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Re: 529 - over saving?

Post by illumination » Wed Oct 30, 2019 10:48 am

I would just make sure you are saving enough for your own retirement first. You would be way better off with a shortfall in the education fund because your son could easily get a loan for the difference (or from you) and have an entire career to comfortably pay it back.

You can't really get a loan for your retirement. And you would probably feel obligated to give him the 529 surplus to another kid/grandkid rather than take the tax hit of drawing down the remaining funds.

I would much rather have overfunded my retirement and been a little short for the college fund than the other way around.

This is a decent college savings calculator to run some projections.

https://moneycalculator.org/SavingForCollege/

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Re: 529 - over saving?

Post by Afty » Wed Oct 30, 2019 10:56 am

Given your goal to fund all 4 years at a state school, I might aim to save up to slightly less than the current all-in 4-year cost and then stop contributions. You could roughly assume that tuition will grow at the same rate as the investments in the 529. I acknowledge that in the past tuition has grown faster than inflation, so this may be a conservative assumption.

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Re: 529 - over saving?

Post by willthrill81 » Wed Oct 30, 2019 10:59 am

stoptothink wrote:
Wed Oct 30, 2019 10:44 am
willthrill81 wrote:
Wed Oct 30, 2019 10:24 am
How much are your son's anticipated education expenses? Four years of tuition and fees at our local, regional university is about $30k.

Unless he's planning on going to a pricey private institution, you've probably already got enough in the 529.
Appears as if OP is in Texas which has pretty reasonable in-state options.

Our two (really) local options are pretty close to the cheapest in the country at currently <$7k/yr for tuition and fees. Our kids are more than welcome to attend either of those pretty good universities (both <10 miles from my front door) and stay at home or they can fund the difference. So, we plan to hit $25k and just let it sit. Kids are 7 and 4 and should hit $25k in each account in 2021.
Our plans are very similar. We will pay for our daughter to attend our local university. If she wants to go elsewhere, she'll be responsible for the difference. Due to the low cost, we're just planning to cash flow the cost. Since we have no state income tax and, as such, no deduction for 529 contributions, contributing to a 529 makes no sense for us, especially since we can stuff 50% of our gross income into other tax-advantaged accounts.
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Re: 529 - over saving?

Post by willthrill81 » Wed Oct 30, 2019 11:11 am

Afty wrote:
Wed Oct 30, 2019 10:56 am
Given your goal to fund all 4 years at a state school, I might aim to save up to slightly less than the current all-in 4-year cost and then stop contributions. You could roughly assume that tuition will grow at the same rate as the investments in the 529. I acknowledge that in the past tuition has grown faster than inflation, so this may be a conservative assumption.
Average tuition costs at four year public institutions have actually lagged inflation since 2012. Last year, nominal tuition costs fell by .4%. For many reasons, it seems doubtful that tuition costs will significantly outpace inflation over the next decade or two.
Last edited by willthrill81 on Wed Oct 30, 2019 11:25 am, edited 1 time in total.
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Re: 529 - over saving?

Post by inbox788 » Wed Oct 30, 2019 11:13 am

Meaty wrote:
Wed Oct 30, 2019 8:44 am
Thanks in advance for the thoughts and wisdom. I have a 9 year old son and I plan to pay 100% of the college bill (tuition, room/board, books, food) at a 4 year in state school. I currently have $75,000 saved and contribute $200/month

Am I over saving for college. The various calculators I find online vary widely - everything from I have no need to save further to increasing contributions by hundreds per month.

Thoughts from the real world? If it’s helpful, I max all other deferred space and save substantially in taxable. I’ve considered hedging my bets by ceasing 529 contributions knowing I could pay any difference out of taxable but I’d like to get the tax free growth if possible
Short answer is no.

If you continue $200/month, Fidelity says you'd be 110% funded and if you stopped now, you'd still be 90% funded. So you're close, but I'd aim to overshoot the goal.
https://www.fidelity.com/misc/college-s ... vings.html

Estimate some realistic college costs, build in some inflation, build in some growth, and hope you have most of it covered. Keep some additional flexible funds in case or the student can borrow some funds if needed to complete the degree. If you have another child or other that can use the 529 funds, overfund it a bit, otherwise underfunding a bit is fine.

Which calculators are you using? What is it calculating? Which one is giving you vastly different numbers?

There are lots of assumptions and variables to consider. Ask a slightly different question and get a completely different answer.

How much have parents saved for college?
"Parents have on average $18,000 saved for college, and that's still not nearly enough"
https://www.usatoday.com/story/money/pe ... 633279002/

What's the average 529 balance?
"The average balance in 529 accounts is $25,128"
https://www.marketwatch.com/story/ameri ... 2019-09-27

Some calculators are trying to encourage starters to invest, so small amounts are all that's needed. They may also assume public school and financial aid. Others are made by investment companies trying to maximize the amount you invest, so if you had $1M, they help you add more. Sample result from Fidelity:
Are you on track? College savings calculator Check to see if you're on track to meet your college savings goals.
Child's age 9 Annual cost of college $20,000/yr Amount intended to cover 100%
Current savings $500,000

You are on track to meet 800% of your college savings goal.

Congratulations!
You are currently saving $1000/month and exceeding your savings goal by 700%. Adjust your monthly savings below or change the parameters above to see the impact on your plan.

Keep up the great work and continue to save to meet your goal. Check out our Planning and Guidance Center for help in keeping your college savings on course.
The results have met the goal 8 times over and it's still encouraging to save more?!?

https://www.savingforcollege.com/calcul ... calculator

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Re: 529 - over saving?

Post by cowdogman » Wed Oct 30, 2019 11:19 am

illumination wrote:
Wed Oct 30, 2019 10:48 am
I would just make sure you are saving enough for your own retirement first. You would be way better off with a shortfall in the education fund because your son could easily get a loan for the difference (or from you) and have an entire career to comfortably pay it back.
Totally agree. Cover your expenses, max out your retirement savings accounts and then save some more before putting more than the minimum into a 529.

But I think the days of borrowing one's way thru college as an acceptable strategy are long gone. It worked when I went to college (when tuition,room and board at a private college was under $5,000 per year). It doesn't now. Ditto medical school and law school. I know people do it, but I wouldn't want my kids doing it. Plus, having to borrow money is going to be a disincentive to continuing an education.

My point is that, if you have the cash, over-saving in a 529 is OK. The downsides are minimal and the benefit/comfort of knowing the money is there is substantial.

I've been clear with my kids. The 529 money is for your education. If you don't use it for your education, don't be surprised to see a new Porsche in the driveway.

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Re: 529 - over saving?

Post by willthrill81 » Wed Oct 30, 2019 11:26 am

inbox788 wrote:
Wed Oct 30, 2019 11:13 am
If you continue $200/month, Fidelity says you'd be 110% funded and if you stopped now, you'd still be 90% funded. So you're close, but I'd aim to overshoot the goal.
Considering that you're limited with what you can spend 529 dollars with, I'd argue that your better off slightly undershooting your needs rather than overshooting them.
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Re: 529 - over saving?

Post by financiallycurious » Wed Oct 30, 2019 11:28 am

For my oldest, I saved up to the full cost of our flagship state school (all in cost of tuition, fees, room & board and books) by saving $14-15k per year (gift tax limit) starting from the year my oldest was born and ending in first grade when the balance slightly exceeded the full cost of 4 years of attendance at our state flagship school, at which point I changed the allocation from 100% equities to 50/50, hoping to just keep up with inflation at this point. A few months of no contributions, and then I turned them back on! I'm now contributing a small amount each month to that 529 account, because I can and we get a small state tax credit for the contributions, and it just feels wrong to stop contributing because I myself attended a more expensive school plus graduate school, both of which my parents covered.

I'm repeating the process with our second and final child, and hope that account will be fully funded by first grade as well, although I don't expect the market timing will work out as favorably as it did for the oldest.

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Re: 529 - over saving?

Post by psteinx » Wed Oct 30, 2019 11:37 am

Cost of attendance (in-state) at University of Texas:
https://finaid.utexas.edu/costs/

2019-2020 total is about $28K, but ~$4500 of that is stuff that is not a qualified expense for 529s (transportation, personal/miscellaneous). Let's call it $23K, times 4, or about $92K, at current prices.

Prices will go up, but if your investments are not too conservative, it's reasonable to expect them to go up too. Of course, there's more variability in investment returns than in college cost increases. The latter may range from +2% to +7% or so, averaging perhaps 3-4% over the years until your kid enters college. Equity invesments could easily be up OR down 20% or more in a year. Multi year averages would be unlikely to vary so widely, but could still surprise.

Also, I haven't checked if other in-state options are cheaper - they likely are. That said, I assume a Texas parent looking at in-state is probably hoping for UT or maybe A&M.

All that said, if you're at $75K now, adding about $2400/year, I'd say you're in a good pattern, for the time being, if not perhaps a bit ahead of the game. Re-evaluate about once a year based on changes in your 529, college costs, and your kid's academic performance. If it's clear he's a long shot for UT, then compare pricing for lower rated in-state colleges...

Keep in mind there are other possible sources of variation in college costs, both up and down. Your kid could decide not to go to college, or drop out after a semester or two. Or he could get a big scholarship. OTOH, your kid could go 5+ years, go to a private or out of state school, etc.

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Re: 529 - over saving?

Post by bligh » Wed Oct 30, 2019 11:55 am

Meaty wrote:
Wed Oct 30, 2019 8:44 am
Thanks in advance for the thoughts and wisdom. I have a 9 year old son and I plan to pay 100% of the college bill (tuition, room/board, books, food) at a 4 year in state school. I currently have $75,000 saved and contribute $200/month

Am I over saving for college. The various calculators I find online vary widely - everything from I have no need to save further to increasing contributions by hundreds per month.

Thoughts from the real world? If it’s helpful, I max all other deferred space and save substantially in taxable. I’ve considered hedging my bets by ceasing 529 contributions knowing I could pay any difference out of taxable but I’d like to get the tax free growth if possible

Thanks!
Do you get a state tax benefit? If so, it weighs in favor of being on the over funding side of the equation.

How much money you will actually need is an unknown. You are trying to predict the future costs 10 years in advance. Your guess is as good as anyone else's.

The plan I am using is this. I looked up the Tuition + Fees + books cost for both the flagship and good nearby campuses for my state university system. I will hold 4x that amount in the 529 plan per child each year. Each year I will look at the updated costs and the current balance. If there is an excess, no big deal.. if there is a short fall, I will make up the amount.

As an example. You current balance is $75K

You have a decent state university nearby. You look at its current year tuition + fees and such cost. You can include room and board if you like.. bottom line is you need to know how much the university is going to cost right now. Let's say you decide on $15K / year. Multiple this by the number of years you think they will need. Could be 4. Could be 6 (ie. cover some costs of grad school) .. could be 8 (medical school or you want a deep buffer). Let's say you decide on 4 years.

It says it is $15K for this year. So you look at your 529 balance. Is it over (4years x$15K =) $60K ? Yes.. contribute nothing.
You come along next year.. the market has gone no where and you made no contributions. You look at the new tuition + fees cost and it says $20K for this year. You look at your 529 balance. Is it over (4years x $20K =) $80K ? No .. it isn't. Re start contributing however much you can .. You can add up to $5K this year.
You come along the year after.. the market has gone down. You look at the tuition + fees cost and it says $20K for this year. You look at your 529 balance.. it is now $70K. You can contribute however much you can/want to this year. You can add up to $10K this year.


In short you are "tracking" the current cost of university expenses. You start contributing whenever you fall below and stop whenever you go above. If market returns take you over, great.. you let it ride.

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Re: 529 - over saving?

Post by cshell2 » Wed Oct 30, 2019 12:01 pm

I'd run the net price calculators on the school's websites to see where you stand now. If you're goal is just in-state at a state school, you're possibly close to being done, I'd probably aim for 100K and then move the money to something more conservative, any shortfall can be covered with taxable investments. The way the tax laws are now you're going to want to cashflow at least 4K/year for the credits anyhow.

There are still a lot of variables with 9 years to go. My older son is applying to colleges now and is getting quite a few scholarships, in fact, some out of state schools are coming up cheaper than in-state because of them. My first thought is I oversaved (which isn't a big deal for me as I also have a 9 year old to roll over any excess to), but now I'm hearing a lot about a 5th year being common in this program as well as semesters abroad, so maybe there won't actually be anything left.

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Re: 529 - over saving?

Post by illumination » Wed Oct 30, 2019 12:05 pm

cowdogman wrote:
Wed Oct 30, 2019 11:19 am
illumination wrote:
Wed Oct 30, 2019 10:48 am
I would just make sure you are saving enough for your own retirement first. You would be way better off with a shortfall in the education fund because your son could easily get a loan for the difference (or from you) and have an entire career to comfortably pay it back.
Totally agree. Cover your expenses, max out your retirement savings accounts and then save some more before putting more than the minimum into a 529.

But I think the days of borrowing one's way thru college as an acceptable strategy are long gone. It worked when I went to college (when tuition,room and board at a private college was under $5,000 per year). It doesn't now. Ditto medical school and law school. I know people do it, but I wouldn't want my kids doing it. Plus, having to borrow money is going to be a disincentive to continuing an education.
At some point, I think this hits a wall. Maybe it already has, but if the next 20 years are like the last 20 years with college tuition, it's going to be over a $1 million tuition average for a kid to go to college, and there will be an exodus out of higher education. At my state college, the tuition has almost literally gone up close to 1,000% in the last 20 years. It's not sustainable.

So if you can put a comfortable dent in it it with a 529 and fully fund your retirement, that seems a better bet than trying to pay for every cent of college if it's costing you retirement dollars. It's easier to go out of pocket for college than reverse overfunding a 529 for your retirement.

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Meaty
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Re: 529 - over saving?

Post by Meaty » Wed Oct 30, 2019 12:10 pm

As usual this is phenomenal feedback. It sounds like the prevailing wisdom is to shoot for 4 years expenses and then hold conservatively. Given UT Austin is about $25k/year in state (including room/board) I have a bit more to save.

I continue to be open to more thoughts and approaches to this item
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inbox788
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Re: 529 - over saving?

Post by inbox788 » Wed Oct 30, 2019 12:19 pm

willthrill81 wrote:
Wed Oct 30, 2019 11:26 am
inbox788 wrote:
Wed Oct 30, 2019 11:13 am
If you continue $200/month, Fidelity says you'd be 110% funded and if you stopped now, you'd still be 90% funded. So you're close, but I'd aim to overshoot the goal.
Considering that you're limited with what you can spend 529 dollars with, I'd argue that your better off slightly undershooting your needs rather than overshooting them.
For me, it's easier to slow down than to speed up. But a small error either way isn't significant. The marginal benefit of the last $1000 in the senior year of high school isn't much capital appreciation and the extra gain being penalized 10% and taxed at ordinary benefits isn't going to hurt much, especially if you have no college bills left.

One strategy at this stage might be to open up a second account if you think you might go over. This way, you can spend 100% of the gains tax-free that you have saved up and earned so far, and begin with a higher tax cost basis in the new account or program.

If you're accurate with your undershooting, that's fine, but I add a little more inflation (seems like education keeps outpacing general) and other potential higher costs. And as much as there's a chance the student drops out of college, he could also need an extra semester or year. Investment returns vary, and if you do overshoot and reach your target early, you can choose to stop contributing early or reduce the risk of the investments.

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Re: 529 - over saving?

Post by goodenyou » Wed Oct 30, 2019 12:31 pm

Meaty wrote:
Wed Oct 30, 2019 12:10 pm
As usual this is phenomenal feedback. It sounds like the prevailing wisdom is to shoot for 4 years expenses and then hold conservatively. Given UT Austin is about $25k/year in state (including room/board) I have a bit more to save.

I continue to be open to more thoughts and approaches to this item
Just be prepared that if your kid ends up in Austin, it will be very expensive to live there. Apartments around campus are $1200-1500+ per month for a one bedroom. Expect to pay $100/month for parking. Austin is expensive. And, MOST IMPORTANTLY, you cannot exceed the cost of attendance (about $11,000/year for R&B) as qualified distributions out of your 529. It will have to be cash flowed.
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Re: 529 - over saving?

Post by psteinx » Wed Oct 30, 2019 12:44 pm

Meaty wrote:
Wed Oct 30, 2019 12:10 pm
As usual this is phenomenal feedback. It sounds like the prevailing wisdom is to shoot for 4 years expenses and then hold conservatively. Given UT Austin is about $25k/year in state (including room/board) I have a bit more to save.

I continue to be open to more thoughts and approaches to this item
As I pointed out upthread, the portion of UT Austin cost that is considered a qualified expense for 529 is closer to $92K (based on simple 4x current levels). That's a bit less that $100K. (Yes, they'll likely grow, but your 529 investments will likely grow, too.) Some costs they show on their cost of attendance are not considered qualified expenses for 529 purposes. There's a chapter in IRS pub 970 on this stuff. Oddly, the chapter is entitled QTP (Qualified Tuition Program) or something like that, rather than the common "529" name that almost everyone else uses.

Perhaps I am a more aggressive investor than most, but I'm not of the opinion that one should necessarily get super-conservative in 529 investing as the kid approaches college. Assuming the parents have significant other financial resources (income and/or taxable savings), consider keeping the 529 money relatively aggressively invested. You can perhaps target a bit less than 100% of qualified expenses, then if the market has some good years, you get to 100%. If not, fill in the 529 and/or cover extra costs out of pocket. This is moreso the case for someone like you, where the state incentives on a 529 are likely not so compelling.

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Re: 529 - over saving?

Post by cowdogman » Wed Oct 30, 2019 12:51 pm

goodenyou wrote:
Wed Oct 30, 2019 12:31 pm
Just be prepared that if your kid ends up in Austin, it will be very expensive to live there. Apartments around campus are $1200-1500+ per month for a one bedroom. Expect to pay $100/month for parking. Austin is expensive. And, MOST IMPORTANTLY, you cannot exceed the cost of attendance (about $11,000/year for R&B) as qualified distributions out of your 529. It will have to be cash flowed.
Right, I have seen this too. I have used a surprising amount of 529 money paying non-529 expenses--international orchestra/band trips, summer internships, travel, extra spending money. I could of course have funded this out of our general funds, but one of the benefits of a 529 is that withdrawals for non-529 expenses are penalty free (but not tax free) for an amount up to scholarships granted for the year of the expenses.

Having the money in the 529 has taken a lot of stress out of paying these expenses.

"Dad, can I have $4,000 for a three-week band trip touring Australia?" Yes, but it's coming out of your 529.

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Re: 529 - over saving?

Post by goodenyou » Wed Oct 30, 2019 1:07 pm

cowdogman wrote:
Wed Oct 30, 2019 12:51 pm
goodenyou wrote:
Wed Oct 30, 2019 12:31 pm
Just be prepared that if your kid ends up in Austin, it will be very expensive to live there. Apartments around campus are $1200-1500+ per month for a one bedroom. Expect to pay $100/month for parking. Austin is expensive. And, MOST IMPORTANTLY, you cannot exceed the cost of attendance (about $11,000/year for R&B) as qualified distributions out of your 529. It will have to be cash flowed.
Right, I have seen this too. I have used a surprising amount of 529 money paying non-529 expenses--international orchestra/band trips, summer internships, travel, extra spending money. I could of course have funded this out of our general funds, but one of the benefits of a 529 is that withdrawals for non-529 expenses are penalty free (but not tax free) for an amount up to scholarships granted for the year of the expenses.

Having the money in the 529 has taken a lot of stress out of paying these expenses.

"Dad, can I have $4,000 for a three-week band trip touring Australia?" Yes, but it's coming out of your 529.
Rent is a year round expense. If your child takes summer classes, then summer session room and board will be considered a qualified expense and you can use 529 funds. Plus, you get the added benefit of getting your kid out of your house in the summer. Win-win!
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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