Use 529 funds or continue to pay out of pocket?

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TheMoneyRat
Posts: 36
Joined: Fri Apr 29, 2016 7:37 am

Use 529 funds or continue to pay out of pocket?

Post by TheMoneyRat »

Looking for perspectives on this question. I have approx. $160k saved in 529 plans. I have 1 kid through college, 1 with 2 years to go and 1 with 4 years to go. I will be able to afford to pay the remaining 6 years tuition out of pocket. Do I do that and keep the 529 funds invested, whether for potential grad school or grandkids' college tuition? Or does it make better financial sense to drain the 529s and use the out-of-pocket funds to feather my retirement funds? I'm having a hard time weighing the long-term tax advantages of 529 growth vs building up the retirement fund (for which I am slightly off target, I have approx $1mm in retirement accounts, $160k in cash and securities outside retirement accounts, said 529s, paid off primary home, vacation home worth $1.5mm with $850k mortgage -- age 52, plan to retire around 60 while wife continues to work until 65 or maybe even 67).
elle
Posts: 95
Joined: Thu Mar 13, 2014 3:13 pm

Re: Use 529 funds or continue to pay out of pocket?

Post by elle »

I'd run down the 529's and pad your retirement without more information.

What is your current age (how much longer until you retire?)
What are your annual expenses?
How much are you saving annually to retirement vehicles?
psteinx
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Joined: Tue Mar 13, 2007 2:24 pm

Re: Use 529 funds or continue to pay out of pocket?

Post by psteinx »

As a general concept, I'd lean towards using the 529s to educate the current generation, and letting the current generation pay for the education of the next generation (your possible grandkids). If you were swimming in money, it might be another story, but apparently you're not.

Grad school may not be needed and/or happen. If it does, and your kids need help with it, you can cashflow THAT (if the 529s are empty).
mrsgoldilocks
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Joined: Mon Jun 07, 2021 9:15 pm

Re: Use 529 funds or continue to pay out of pocket?

Post by mrsgoldilocks »

Honestly, paying all 3 kids' undergrad tuition is already a big big gift to them. Since you are behind on your retirement contribution, you should get back on track as soon as you can.
Jablean
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Re: Use 529 funds or continue to pay out of pocket?

Post by Jablean »

Use them now. Usually what 529s are allowed to be invested in won't have the growth factor that your other funds do. I use 529s because I get a state tax deduction for each 1000 I put in every year. The stock growth return itself has been abysmal.
SchruteB&B
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Re: Use 529 funds or continue to pay out of pocket?

Post by SchruteB&B »

Jablean wrote: Thu Jun 10, 2021 3:55 am Usually what 529s are allowed to be invested in won't have the growth factor that your other funds do. I use 529s because I get a state tax deduction for each 1000 I put in every year. The stock growth return itself has been abysmal.
I am puzzled by your statement that 529s won’t have the growth factor that other funds do. What funds does your state plan offer? Many 529s offer good low cost index funds like Vanguard Total Stock; my state does and the growth from that over the last 20 years has been the furthest thing from abysmal.
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SmileyFace
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Re: Use 529 funds or continue to pay out of pocket?

Post by SmileyFace »

Jablean wrote: Thu Jun 10, 2021 3:55 am Use them now. Usually what 529s are allowed to be invested in won't have the growth factor that your other funds do. I use 529s because I get a state tax deduction for each 1000 I put in every year. The stock growth return itself has been abysmal.
Sounds like you chose a bad plan - does your state require you to us a specific plan to get the deduction? There are lots of plans with similar options to what you can choose for investments outside a 529 (total stock market with low expenses).
OP: Since your retirement isn't fully funded - I would definitely spend down the 529 and focus excess on retirement.
Jablean
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Re: Use 529 funds or continue to pay out of pocket?

Post by Jablean »

SchruteB&B wrote: Thu Jun 10, 2021 6:13 am
Jablean wrote: Thu Jun 10, 2021 3:55 am Usually what 529s are allowed to be invested in won't have the growth factor that your other funds do. I use 529s because I get a state tax deduction for each 1000 I put in every year. The stock growth return itself has been abysmal.
I am puzzled by your statement that 529s won’t have the growth factor that other funds do. What funds does your state plan offer? Many 529s offer good low cost index funds like Vanguard Total Stock; my state does and the growth from that over the last 20 years has been the furthest thing from abysmal.
SmileyFace wrote: Thu Jun 10, 2021 6:18 am Sounds like you chose a bad plan - does your state require you to us a specific plan to get the deduction? There are lots of plans with similar options to what you can choose for investments outside a 529 (total stock market with low expenses).
Well it doesn't help that my first investment was in 2007, before the 2009 crash, and we really didn't have spare funds to add to it until more recently. Let's say that I saw lots of losses in the Aggressive option before any growth (last 10 year return history for Aggressive, which was best performing, is at 10.7% and that includes the 43% from last year. And since inception 2007, which is when I first invested, the history shows 7.5%). Those are ok returns but I was also doing my own blend so actual returns were lower.

To get state tax discount have to invest in the state authorized website/funds which consisted of 5 (now 10) categories from Aggressive to Money Market or choose an age-based one that adjusts as it reaches expected use date.
Pessimist55
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Re: Use 529 funds or continue to pay out of pocket?

Post by Pessimist55 »

Jablean wrote: Thu Jun 10, 2021 10:52 pm
SchruteB&B wrote: Thu Jun 10, 2021 6:13 am
Jablean wrote: Thu Jun 10, 2021 3:55 am Usually what 529s are allowed to be invested in won't have the growth factor that your other funds do. I use 529s because I get a state tax deduction for each 1000 I put in every year. The stock growth return itself has been abysmal.
I am puzzled by your statement that 529s won’t have the growth factor that other funds do. What funds does your state plan offer? Many 529s offer good low cost index funds like Vanguard Total Stock; my state does and the growth from that over the last 20 years has been the furthest thing from abysmal.
SmileyFace wrote: Thu Jun 10, 2021 6:18 am Sounds like you chose a bad plan - does your state require you to us a specific plan to get the deduction? There are lots of plans with similar options to what you can choose for investments outside a 529 (total stock market with low expenses).
Well it doesn't help that my first investment was in 2007, before the 2009 crash, and we really didn't have spare funds to add to it until more recently. Let's say that I saw lots of losses in the Aggressive option before any growth (last 10 year return history for Aggressive, which was best performing, is at 10.7% and that includes the 43% from last year. And since inception 2007, which is when I first invested, the history shows 7.5%). Those are ok returns but I was also doing my own blend so actual returns were lower.

To get state tax discount have to invest in the state authorized website/funds which consisted of 5 (now 10) categories from Aggressive to Money Market or choose an age-based one that adjusts as it reaches expected use date.
That's not true all 529 accounts have at least a s&p or all stock market type of fund. What state are you referring to? I am in CA and opened more than half a dozen from different states. Why don't you get the money out after the restriction period (for the deduction qualification)?
HopeToGolf
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Re: Use 529 funds or continue to pay out of pocket?

Post by HopeToGolf »

Pay tuition out of the 529. Paying undergraduate tuition is a wonderful gift to your kids. If there is money left over after you and your wife pass, I’m guessing you will leave it to your children and they can choose whether or not to use it to pay for your unborn grandchildren’s tuition. You also have the option to fund 529s for your grandchildren after they are born if you find that your retirement plans are funded and you have extra money. I cannot imagine being beyond well funded on retirement and funding tuition out of cash flow while saving 529 funds for unborn grandchildren for kids who are not even married. Regarding grad school, I guess I would think about paying that out of cash flow. Theoretically, the 529 should be in conservative vehicles which will lead to low returns so the tax benefits should be nil. As a result, saving the funds to cover grad school doesn’t provide much benefit over paying out of cash.
lazynovice
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Re: Use 529 funds or continue to pay out of pocket?

Post by lazynovice »

Not really enough information to tell how far you are from meeting your retirement goal. If you have a pension or two, maybe you are close. If not, people who own expensive second homes generally have lifestyles that require more than a million dollars to fund.

Taking you at your word that you are a little behind, I’d pay with the 529s. When everyone is done with undergrad, if there are funds left over, you can reassess if you are willing to pay for graduate school. Until your own retirement is very, very secure funding college for grandchildren is out of the question in my mind.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
Scotttheking
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Re: Use 529 funds or continue to pay out of pocket?

Post by Scotttheking »

Use the 529s now, then start funding new ones for grandkids if/when you feel appropriate.
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