At what amount would you cap a 529 for an only child (2-years old)?

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Trying2learn
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At what amount would you cap a 529 for an only child (2-years old)?

Post by Trying2learn »

I have an only child who is two years old with about 80k in a 529 account. I'm expecting to fund tuition, room and board, etc. for a 4-year degree and likely graduate school too, just based on the fact that both of child's parents have graduate degrees. Public or private school, who knows, I went to public and I am doing well, but would consider private schools if there is an excellent fit. At what amount would you cap the 529 for a two-year-old considering there are no younger siblings to pass on the funds? IOW, at what amount would you, given my circumstances, stop funding the 529 and contribute instead into a taxable brokerage account for said child? We are expecting no financial aid.
lazynovice
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by lazynovice »

I would figure out what the cost of that is in today’s dollars- using your state’s flagship, assume a reasonable rate of return and back into what you need today. I would recheck it every year and increase as needed.
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stupidkid
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by stupidkid »

I'm in the exact same scenario - 2 year old with $80k. It would seem with that amount already invested finances aren't a driving concern, so it's just how much you want to fund.

For us, I think I'll contribute for one more year up to the max state tax deduction and then let it sit. But I don't know, our child could always pass it down to their child many years in the future - but who knows what 529s will mean by then
ZMonet
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by ZMonet »

We have a similar outlook/expectations and only one child. We are at over $300k in a 529 and intend to keep going at about $5k/year. If there is extra after schooling is paid for, and that would be great, then we'd have money leftover for grandchildren (if there are any). In the alternative, a 10% penalty on the earnings + normal taxes isn't that big a deal.
secondcor521
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by secondcor521 »

What I always did was to figure out a target budget amount, figure out how much whatever I had in the 529 would grow to when the kid was in college, figure out if I were in an overfunded or underfunded situation, and then adjust as needed.

For me, I chose the average 4 year university tuition, room, board, and fees as outlined in the College Board's annual report. You could choose whatever Harvard charges, or the local university or whatever. The point is to have a target number.

How much one has in the 529 and how much it grows to is very simple to model in Excel. I used a 6% growth rate in the cost of college, a 10% growth on stocks, and a 4% growth on bonds, but you can use whatever assumptions you want.

How long until the kid is in college is easy to figure out. I modeled them going 4 years straight out of high school at age 18, but you can model 5 years starting at 19, or whatever.

You can add in grad school if you like as well in similar fashion.

Mostly I was underfunded early on, so I just kept funding it and funding it.

Now that my kids are in college, and they got scholarships and some grants, I'm now in an overfunded situation, so I look for tax-efficient ways to deal with the excess. You can leave it for grad school, grandkids' college, your own education, or distribute it and pay taxes and a 10% penalty on the earnings. If they received scholarships in undergrad that can avoid the 10% penalty.

I would add that I monitored things over time and adjusted as changes happened - kids switching schools, changing majors, gaining or losing scholarships, taking a COVID gap year, etc. Being flexible and staying on top of things helps a lot, since you can course correct along the way.

I also spent some time thinking about if I would rather be underfunded or overfunded. Since I ended up retiring when my kids were in high school, I think I erred on the overfunding side a bit because I didn't want to end up short. But if you were planning on working until they were in college or grad school and would be willing and able to make up a shortfall, then underfunding by some measure could make sense.
fourwheelcycle
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by fourwheelcycle »

I monitor a benchmark average for tuition, room, and board at three solid but not famous or top-rated private colleges in the northeast, based on this website https://phillips-scholarship.org/new-ap ... lege-list/. For fall 2021, their average cost is $76K per year, or $304K for four years. Not including grad school, I think $300K, adjusted annually for the schools' actual charge increases, which run higher than US inflation, would be a reasonable 529 cap.
psteinx
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by psteinx »

There's a HUGE delta between extremes on 529 eligible costs.

At one extreme, your kid goes to an in-state public, with scholarships* covering most of it, and is done in <= 4 years, no grad school. Or maybe doesn't even go to college.

At the other extreme, you cover years of private K-12, then 4 years of no-scholarship private college (~75K/year today, much more in the future), then perhaps law school thereafter.

You have to guess some, and way the benefits of putting $ into a 529 versus the risks/costs of overuse, and also how the money going into the 529 otherwise impacts your savings or lifestyle.

If you get significant state tax benefits, you may want to put $ into the 529 up to the limit of the state benefit, but no more unless you find yourself falling behind projections a decade or so from now.

That said, $80K for a 2 year old sounds pretty impressive.

* Yes, you can withdraw without the 10% penalty in the case of scholarships, but there's still taxes on the gains.
Trader Joe
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Trader Joe »

Trying2learn wrote: Sun Sep 12, 2021 6:45 pm I have an only child who is two years old with about 80k in a 529 account. I'm expecting to fund tuition, room and board, etc. for a 4-year degree and likely graduate school too, just based on the fact that both of child's parents have graduate degrees. Public or private school, who knows, I went to public and I am doing well, but would consider private schools if there is an excellent fit. At what amount would you cap the 529 for a two-year-old considering there are no younger siblings to pass on the funds? IOW, at what amount would you, given my circumstances, stop funding the 529 and contribute instead into a taxable brokerage account for said child? We are expecting no financial aid.
$2,000.00. USD.
Topic Author
Trying2learn
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Trying2learn »

psteinx wrote: Sun Sep 12, 2021 9:10 pm There's a HUGE delta between extremes on 529 eligible costs.

At one extreme, your kid goes to an in-state public, with scholarships* covering most of it, and is done in <= 4 years, no grad school. Or maybe doesn't even go to college.

At the other extreme, you cover years of private K-12, then 4 years of no-scholarship private college (~75K/year today, much more in the future), then perhaps law school thereafter.

You have to guess some, and way the benefits of putting $ into a 529 versus the risks/costs of overuse, and also how the money going into the 529 otherwise impacts your savings or lifestyle.

If you get significant state tax benefits, you may want to put $ into the 529 up to the limit of the state benefit, but no more unless you find yourself falling behind projections a decade or so from now.

That said, $80K for a 2 year old sounds pretty impressive.

* Yes, you can withdraw without the 10% penalty in the case of scholarships, but there's still taxes on the gains.
Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
BernardShakey
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by BernardShakey »

Trying2learn wrote: Sun Sep 12, 2021 6:45 pm I have an only child who is two years old with about 80k in a 529 account. I'm expecting to fund tuition, room and board, etc. for a 4-year degree and likely graduate school too, just based on the fact that both of child's parents have graduate degrees. Public or private school, who knows, I went to public and I am doing well, but would consider private schools if there is an excellent fit. At what amount would you cap the 529 for a two-year-old considering there are no younger siblings to pass on the funds? IOW, at what amount would you, given my circumstances, stop funding the 529 and contribute instead into a taxable brokerage account for said child? We are expecting no financial aid.
I'd take your top state school, include room and board, for four years. Consider that a minimum. Then as the child gets closer you can save more if you think graduate or professional school is in the cards. I'm assuming no K-12 funding.

Saving $4-6k per year for the next 15 years, plus what you have already saved might be a decent target. You can ramp it up depending on circumstances, inflation, etc. You are off to an incredible start. Lucky kid!
An important key to investing is having a well-calibrated sense of your future regret.
NYC_Guy
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by NYC_Guy »

I make a $75k contribution for my newborn granddaughter last year, 100% equities. I coupled that with a promise to my daughter that I would fund four years of undergrad at whatever school she wants to attend. Hope that helps.
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dziuniek
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by dziuniek »

I never reached it, but I would cap it at the annual state deduction max if one is available.
I believe CT is $ 10k/ yr.

But either way, 80k seems nuts for a 2 yr old. :)

If you keep going though, you could fund the kiddo's private k-12 maybe, if that's your intent.
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Zombies
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Zombies »

We have over $300k, one child, very young. Did the 5-year superfunding and then the market took off.

We’re not contributing actively but I’m considering it — I figure it can be used for graduate school too, or given to nieces, nephews, or even grand kids eventually. Having to not worry about paying for school is a huge gift that many can’t have, so if family members can benefit from that, even if not immediate family, it feels worth it since it’s not any trouble for us to contribute.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by marcopolo »

We saved enough to pay for a top-tier private school. We wanted to be able to pay for their education if they got into MIT or Stanford.
For better or worse, neither child won the admissions lottery. They both ended up going to our in-state flagship school.
With all the AP classes they took, the first child graduated in 3 years, the second will do the same this coming spring.
The older one got most of his master's degree paid for by his employer. We may have to foot the bill for the younger one if they decide to go to grad school.

The difference between 3 years of in-state tuition and 4 years of expensive private is quite substantial. So, we have a lot of left over in the 529 plans. We are fine with that, as it will be a nice start for the next generation.

Even if your child has no siblings, unless you need the money, there is no need to pay the taxes and penalties on the leftover money. If you are going to pass money to the next generation, tax-free education money is pretty nice way to do some of it.
Once in a while you get shown the light, in the strangest of places if you look at it right.
FandangoDave5010
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by FandangoDave5010 »

Thanks for talking about capping a 529 account. I have $250 K in my 10 year old granddaughter's account and add $1k every month from my checking account. That should be sufficient. Her parents should put some money into her college education, too, people tell me. I sometimes feel that children and grandchildren don't appreciate "free money." But then the alternative is for them work through college or take out outrageous student loans that last for decades because of high interest rates.

Meanwhile, DW and I can spend 5 days in Los Cabo for $4K that don't go into her 529.
Leaving Sept. 27. Adios.
NS_Bane
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by NS_Bane »

Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
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hand
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by hand »

There are a couple of key variables:
1) State tax benefits?
2) Retirement savings maxed out?
3) Is this for the first kid or last kid?
4) Grad / professional school on the horizon?

Given that a married couple can contribute $30k / yr and there are a number of unknowns in terms of final cost (cost of college, scholarships etc.) the approach I'm taking for the last kid is to target between $100-$150k less than max need in the 529 and supplement with last minute contributions at $30k/yr over the 5 calendar years where actual cost is known.
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cowdogman
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by cowdogman »

We did 4 years tuition, room and board at the most expensive private school at the time of final funding. We did the max initial 5-year contribution x 2 (mom and dad) and then maxed out the yearly contribution limits until we hit the goal. That was in the late 90s to the 00s. The hope was that the gains would keep pace with college inflation and they have. Our youngest starts college next fall, and has of course chosen one of the most expensive schools in the US--he'll empty the accounts in 4 years (altho he hopes to do a five year program).

And so, as as of today, about $340,000.

I can tell you that having a well funded 529 takes A LOT of stress out school selection and having to write checks.
financiallycurious
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by financiallycurious »

I often see folks referencing the 5-year super funding option as if it is some kind of limit on the amount that any one person or couple can put into one child's 529 plan. My understanding is that there is no limit (other than the maximum account balance, which is state specific), so if I want to contribute $200k this year as an individual to an infant's 529 plan, I can do it, but I have to fill out the applicable tax forms and a portion of what I contribute will count against my lifetime gift tax exemption.

As to the original question, I started out planning to contribute enough to pay for 4 years at our state flagship U, but my spouse and I both went to private undergraduate and graduate schools, so I moved the goal post to an amount equal to 4 years at my alma mater.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by CoastLawyer2030 »

Trying2learn wrote: Sun Sep 12, 2021 6:45 pm I have an only child who is two years old with about 80k in a 529 account. I'm expecting to fund tuition, room and board, etc. for a 4-year degree and likely graduate school too, just based on the fact that both of child's parents have graduate degrees. Public or private school, who knows, I went to public and I am doing well, but would consider private schools if there is an excellent fit. At what amount would you cap the 529 for a two-year-old considering there are no younger siblings to pass on the funds? IOW, at what amount would you, given my circumstances, stop funding the 529 and contribute instead into a taxable brokerage account for said child? We are expecting no financial aid.
I'm planning on having about $15k per kid by the time they are five and then calling it quits.
VoiceOfReason
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

CoastLawyer2030 wrote: Mon Sep 13, 2021 11:44 am
Trying2learn wrote: Sun Sep 12, 2021 6:45 pm I have an only child who is two years old with about 80k in a 529 account. I'm expecting to fund tuition, room and board, etc. for a 4-year degree and likely graduate school too, just based on the fact that both of child's parents have graduate degrees. Public or private school, who knows, I went to public and I am doing well, but would consider private schools if there is an excellent fit. At what amount would you cap the 529 for a two-year-old considering there are no younger siblings to pass on the funds? IOW, at what amount would you, given my circumstances, stop funding the 529 and contribute instead into a taxable brokerage account for said child? We are expecting no financial aid.
I'm planning on having about $15k per kid by the time they are five and then calling it quits.
I'd recommend something like this.

Over funding is the biggest risk to 529's, especially without other children to give it to.

Figure out your target number, and when you reach the "coast" point where you will reach the target figure by a certain age of the child without contributing any more $, stop funding.
CoastLawyer2030
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by CoastLawyer2030 »

VoiceOfReason wrote: Mon Sep 13, 2021 12:00 pm
CoastLawyer2030 wrote: Mon Sep 13, 2021 11:44 am
Trying2learn wrote: Sun Sep 12, 2021 6:45 pm I have an only child who is two years old with about 80k in a 529 account. I'm expecting to fund tuition, room and board, etc. for a 4-year degree and likely graduate school too, just based on the fact that both of child's parents have graduate degrees. Public or private school, who knows, I went to public and I am doing well, but would consider private schools if there is an excellent fit. At what amount would you cap the 529 for a two-year-old considering there are no younger siblings to pass on the funds? IOW, at what amount would you, given my circumstances, stop funding the 529 and contribute instead into a taxable brokerage account for said child? We are expecting no financial aid.
I'm planning on having about $15k per kid by the time they are five and then calling it quits.
I'd recommend something like this.

Over funding is the biggest risk to 529's, especially without other children to give it to.

Figure out your target number, and when you reach the "coast" point where you will reach the target figure by a certain age of the child without contributing any more $, stop funding.
What people underestimate is that there are a myriad of other ways to fund college. To lock significant funds into a 529 without thinking of the pretty notable risks involved is an oversight.
absolute zero
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by absolute zero »

NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
To elaborate, if you include not just the 10% penalty but also the increase in tax rate from LTCG to ordinary income, the "effective penalty" on the earnings portion of non-qualified withdrawals can be anywhere from 17% to 30%, depending upon the person's marginal tax rate. That's a pretty steep penalty.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by CoastLawyer2030 »

NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I am extremely glad to see people posting this, because I normally get frowned upon as a scrooge for not being crazy about 529s. This is one of the biggest, if not the biggest, reasons for my opinion.
VoiceOfReason
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

CoastLawyer2030 wrote: Mon Sep 13, 2021 1:18 pm
NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I am extremely glad to see people posting this, because I normally get frowned upon as a scrooge for not being crazy about 529s. This is one of the biggest, if not the biggest, reasons for my opinion.
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by cowdogman »

VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
CoastLawyer2030 wrote: Mon Sep 13, 2021 1:18 pm
NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I am extremely glad to see people posting this, because I normally get frowned upon as a scrooge for not being crazy about 529s. This is one of the biggest, if not the biggest, reasons for my opinion.
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
I've often advocated on this forum a blend of 529 accounts and a dedicated investment account for college savings for a couple different reasons:

1. To avoid 529 over-funding (tho there are a lot of ways to deal with over-funding other than a simple non-qualified withdrawal--lots of Bogleheads threads on this issue).

2. A lot of expenses a parent incurs in connection with college will not be qualified 529 expenses (airfare, summer programs, clothes, school trips, monthly allowance, etc.) and a non-529 investment account gives the parent a fund to hit for those expenses.

529s are great IMO, but if you are concerned about over-funding the solution is not "don't do 529s" or "don't save." The solution is put some of the money in a dedicated investment account and try to minimize expenses and realized gains in that account before you need the money. And be very disciplined to not touch that money before college. The inability to withdraw 529 money without adverse tax consequences (except for qualified expenses) is also a benefit of 529s.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by marcopolo »

VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
CoastLawyer2030 wrote: Mon Sep 13, 2021 1:18 pm
NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I am extremely glad to see people posting this, because I normally get frowned upon as a scrooge for not being crazy about 529s. This is one of the biggest, if not the biggest, reasons for my opinion.
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
1) One should never invest in products they do not understand. In case you are not aware, 401k's and IRA's work the same way.

2) I rarely see anyone advocate funding a 529 instead of a retirement account. The suggestions is to first max out any tax-advantaged accounts and then only using 529s to save for anticipated college expenses.
Once in a while you get shown the light, in the strangest of places if you look at it right.
VoiceOfReason
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

marcopolo wrote: Mon Sep 13, 2021 2:18 pm
VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
CoastLawyer2030 wrote: Mon Sep 13, 2021 1:18 pm
NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I am extremely glad to see people posting this, because I normally get frowned upon as a scrooge for not being crazy about 529s. This is one of the biggest, if not the biggest, reasons for my opinion.
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
1) One should never invest in products they do not understand. In case you are not aware, 401k's and IRA's work the same way.

2) I rarely see anyone advocate funding a 529 instead of a retirement account. The suggestions is to first max out any tax-advantaged accounts and then only using 529s to save for anticipated college expenses.
I don't use 529's.

However, just to clarify, 401k's and tradIRA's do not work the same way. Those are getting pre-tax dollars and getting taxed as income on the way out. 529's are having federal after taxed dollars put in and then not taxed if used for education or taxed as income if not used for education. They are not the same at all.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by cowdogman »

VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
The main benefits of 529s are tax-free growth of investments and tax-free sale and withdrawal of investments (for qualified expenses). If a 529 is fully funded as soon as possible after a child is born, the invested amount has years to (fingers crossed) grow. My youngest son's accounts have more than doubled, and I strongly suspect will be used 100% for qualified 529 expenses--so all that gain will be tax free.

The secondary benefit is that once the money goes in to a 529 most parents will not be tempted to withdraw it other than for college.

The tertiary benefit is peace of mind for parents as their kids get close to college age.

If a parent is confident a child will go to college, I do think a 529 is a no-brainer. The level of funding is the real issue.

529 vs. retirement account? I suspect retirement account would win in most cases, but for most people the decision won't be either/or.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by stoptothink »

CoastLawyer2030 wrote: Mon Sep 13, 2021 11:44 am
Trying2learn wrote: Sun Sep 12, 2021 6:45 pm I have an only child who is two years old with about 80k in a 529 account. I'm expecting to fund tuition, room and board, etc. for a 4-year degree and likely graduate school too, just based on the fact that both of child's parents have graduate degrees. Public or private school, who knows, I went to public and I am doing well, but would consider private schools if there is an excellent fit. At what amount would you cap the 529 for a two-year-old considering there are no younger siblings to pass on the funds? IOW, at what amount would you, given my circumstances, stop funding the 529 and contribute instead into a taxable brokerage account for said child? We are expecting no financial aid.
I'm planning on having about $15k per kid by the time they are five and then calling it quits.
We hit $28k for both our kids last year (at 9 and 6) and called it quits. That is slightly above the current cost of 4yrs of tuition + fees at the local U. If they end up going somewhere else, we'll have plenty of assets in more accessible forms to help them (if we so choose).
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by marcopolo »

VoiceOfReason wrote: Mon Sep 13, 2021 2:30 pm
marcopolo wrote: Mon Sep 13, 2021 2:18 pm
VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
CoastLawyer2030 wrote: Mon Sep 13, 2021 1:18 pm
NS_Bane wrote: Mon Sep 13, 2021 4:54 am

You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I am extremely glad to see people posting this, because I normally get frowned upon as a scrooge for not being crazy about 529s. This is one of the biggest, if not the biggest, reasons for my opinion.
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
1) One should never invest in products they do not understand. In case you are not aware, 401k's and IRA's work the same way.

2) I rarely see anyone advocate funding a 529 instead of a retirement account. The suggestions is to first max out any tax-advantaged accounts and then only using 529s to save for anticipated college expenses.
I don't use 529's.

However, just to clarify, 401k's and tradIRA's do not work the same way. Those are getting pre-tax dollars and getting taxed as income on the way out. 529's are having federal after taxed dollars put in and then not taxed if used for education or taxed as income if not used for education. They are not the same at all.
You are right about about 401k and tIRA going in tax free. But, on the other hand, those get taxed later no matter what they are used for.
529 are more like a Roth (which everyone seems to love), in that you don't get a tax break going in (except possibly state tax break), but the withdrawal, assuming they are used for education, are tax free.

They are definitely not for everyone. But, if you have exhausted your other tax-advantaged space, and you have a high probability of incurring educational expenses, they are an exceptional tax-free option, a Roth type account without the low contribution limits.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by marcopolo »

cowdogman wrote: Mon Sep 13, 2021 2:51 pm
VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
The main benefits of 529s are tax-free growth of investments and tax-free sale and withdrawal of investments (for qualified expenses). If a 529 is fully funded as soon as possible after a child is born, the invested amount has years to (fingers crossed) grow. My youngest son's accounts have more than doubled, and I strongly suspect will be used 100% for qualified 529 expenses--so all that gain will be tax free.

The secondary benefit is that once the money goes in to a 529 most parents will not be tempted to withdraw it other than for college.

The tertiary benefit is peace of mind for parents as their kids get close to college age.

If a parent is confident a child will go to college, I do think a 529 is a no-brainer. The level of funding is the real issue.

529 vs. retirement account? I suspect retirement account would win in most cases, but for most people the decision won't be either/or.
I largely agree with you. But, by most people, perhaps you mean "most people on this forum", or maybe even "most people that i know". Because i doubt most people in general are able to max out all their available tax-advantaged retirement accounts and also make use of 529 plans on top of that.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by FiveFactor »

I did this exercise 5 years ago. There is too much variability in return rates and education inflation to really pin down a number. We picked $100k. It’s now sitting at $160k and contributes to her private grade school tuition so it doesn’t get too big.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by cowdogman »

marcopolo wrote: Mon Sep 13, 2021 6:07 pm
cowdogman wrote: Mon Sep 13, 2021 2:51 pm 529 vs. retirement account? I suspect retirement account would win in most cases, but for most people the decision won't be either/or.
I largely agree with you. But, by most people, perhaps you mean "most people on this forum", or maybe even "most people that i know". Because i doubt most people in general are able to max out all their available tax-advantaged retirement accounts and also make use of 529 plans on top of that.
Yes, I thought about using "many" rather than "most," but I could see some people not maxing out retirement savings and opting to share available savings between retirement and 529. So, for those people, it would not be an either/or decision. One of the worst courses of action is not saving in a 529 and then using retirement savings for college. That would be throwing money away. So, splitting savings between 529 and retirement savings can be seen as helping save for retirement.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Retired Bill »

If in doubt about how much, make sure all retirement accounts fully funded first imho. And remember the beneficiary can be changed as often as needed. If you take a college course, could change beneficiary to yourself as needed! Can even name other relatives, future grandchildren?, the neighbors kids, etc.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Wannaretireearly »

NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I don't think I knew this. Thanks. Perhaps Justification to use 529 $ in k thru 12 school, if going private...and overfunded!
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Wannaretireearly »

FiveFactor wrote: Mon Sep 13, 2021 6:22 pm I did this exercise 5 years ago. There is too much variability in return rates and education inflation to really pin down a number. We picked $100k. It’s now sitting at $160k and contributes to her private grade school tuition so it doesn’t get too big.
Thinking about doing similar. Only thing is I predict kids will need some kind of grad degree after bachelor's.

Plus, it may prove a good incentive/nudge to get a grad degree. There is a strong tendency to start working for most before getting a grad degree, strongly motivated by earning $. Having a bucket in the 529 could be an incentive to finish grad school. Ask me how I know... DW and I consider ourselves lucky to be where we are, without a masters degree. We both talk as if it's tablestakes for our kids!
Last edited by Wannaretireearly on Mon Sep 13, 2021 7:28 pm, edited 1 time in total.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Wannaretireearly »

cowdogman wrote: Mon Sep 13, 2021 2:02 pm
VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
CoastLawyer2030 wrote: Mon Sep 13, 2021 1:18 pm
NS_Bane wrote: Mon Sep 13, 2021 4:54 am
Trying2learn wrote: Sun Sep 12, 2021 9:51 pm Yes, all the reasons you listed are exactly the reason for my question. We are too far out to make any reliable projections. I was trying to gauge other's thought process. The risk of overuse would be the 10% penalty on earnings. If/once we cap the 529, I plan to allocate to a taxable brokerage account (earmarked for child's future/other use) so no major impact on lifestyle. I'm in CA, no state tax deduction.
You may already know this, but I didn't learn this until fairly recently so I assume other people may be similarly clueless as I was. But the risk of overfunding a 529 is not just the 10% penalty on earnings. The earnings portion of non-qualified withdrawals from a 529 are taxed as income. If you had instead invested that money in the stock market, those earnings would have been taxed as capital gains. Depending on your tax bracket, you could be paying much more than a 10% penalty because you overfunded your 529.
I am extremely glad to see people posting this, because I normally get frowned upon as a scrooge for not being crazy about 529s. This is one of the biggest, if not the biggest, reasons for my opinion.
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
I've often advocated on this forum a blend of 529 accounts and a dedicated investment account for college savings for a couple different reasons:

1. To avoid 529 over-funding (tho there are a lot of ways to deal with over-funding other than a simple non-qualified withdrawal--lots of Bogleheads threads on this issue).

2. A lot of expenses a parent incurs in connection with college will not be qualified 529 expenses (airfare, summer programs, clothes, school trips, monthly allowance, etc.) and a non-529 investment account gives the parent a fund to hit for those expenses.

529s are great IMO, but if you are concerned about over-funding the solution is not "don't do 529s" or "don't save." The solution is put some of the money in a dedicated investment account and try to minimize expenses and realized gains in that account before you need the money. And be very disciplined to not touch that money before college. The inability to withdraw 529 money without adverse tax consequences (except for qualified expenses) is also a benefit of 529s.
Great advice above.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

cowdogman wrote: Mon Sep 13, 2021 2:51 pm
VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
The main benefits of 529s are tax-free growth of investments and tax-free sale and withdrawal of investments (for qualified expenses). If a 529 is fully funded as soon as possible after a child is born, the invested amount has years to (fingers crossed) grow. My youngest son's accounts have more than doubled, and I strongly suspect will be used 100% for qualified 529 expenses--so all that gain will be tax free.

The secondary benefit is that once the money goes in to a 529 most parents will not be tempted to withdraw it other than for college.

The tertiary benefit is peace of mind for parents as their kids get close to college age.

If a parent is confident a child will go to college, I do think a 529 is a no-brainer. The level of funding is the real issue.

529 vs. retirement account? I suspect retirement account would win in most cases, but for most people the decision won't be either/or.
Any benefit that promotes behavior (not tempted to touch it, peace of mind etc) is nonsense IMO and not really relevant to this board.

The only real benefits are potentially state income tax benefits initially (irrelevant in the no tax state I live) and no tax on growth if used for education. But the risk of being taxed as income if it’s not used for educational expenses changes the equation.

How much do you actually need in a 529 for college? How much are you actually saving on the growth vs capital gains on that amount back the risk of paying it out as income? I’ve never been a fan of these accounts.

To clarify, I think my comment about retirement accounts and 529’s is being misunderstood. 99.9% of the public should be contributing to retirement accounts and HSAs (if available) without much thought and regardless of situation because of the huge advantages they provide across the board.

529’s on the other hand have many situations where they are not a good choice however the broad advice people like to give about them is that they are the right move 99.9% of the time when they most certainly are not.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by aj44 »

I only put cash gifts from others in my sons 529, I'll cover two years of community college and two years of a state/private school to get his bachelors. That or a trade school. If he wants 4 years of state/private it would need to be on a scholarship.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by marcopolo »

VoiceOfReason wrote: Mon Sep 13, 2021 8:37 pm
cowdogman wrote: Mon Sep 13, 2021 2:51 pm
VoiceOfReason wrote: Mon Sep 13, 2021 1:43 pm
I did not know this. I always knew there were risks of overfunding, and I largely never saw the benefits to 529's, but not this specifically.

Funding a 529 is not as much of a no brainer as a retirement account, I think people view it as such.
The main benefits of 529s are tax-free growth of investments and tax-free sale and withdrawal of investments (for qualified expenses). If a 529 is fully funded as soon as possible after a child is born, the invested amount has years to (fingers crossed) grow. My youngest son's accounts have more than doubled, and I strongly suspect will be used 100% for qualified 529 expenses--so all that gain will be tax free.

The secondary benefit is that once the money goes in to a 529 most parents will not be tempted to withdraw it other than for college.

The tertiary benefit is peace of mind for parents as their kids get close to college age.

If a parent is confident a child will go to college, I do think a 529 is a no-brainer. The level of funding is the real issue.

529 vs. retirement account? I suspect retirement account would win in most cases, but for most people the decision won't be either/or.
Any benefit that promotes behavior (not tempted to touch it, peace of mind etc) is nonsense IMO and not really relevant to this board.

The only real benefits are potentially state income tax benefits initially (irrelevant in the no tax state I live) and no tax on growth if used for education. But the risk of being taxed as income if it’s not used for educational expenses changes the equation.

How much do you actually need in a 529 for college? How much are you actually saving on the growth vs capital gains on that amount back the risk of paying it out as income? I’ve never been a fan of these accounts.

To clarify, I think my comment about retirement accounts and 529’s is being misunderstood. 99.9% of the public should be contributing to retirement accounts and HSAs (if available) without much thought and regardless of situation because of the huge advantages they provide across the board.

529’s on the other hand have many situations where they are not a good choice however the broad advice people like to give about them is that they are the right move 99.9% of the time when they most certainly are not.
Can you provide a few examples of this.
What I hear is that they can be very advanrageous. But, you should only consider them after you have maxed out all other tax-advantaged accounts, and expect to spend it for qualified educational expenses. A lot of people do not meet these two criteria, they should not be investing in 529 plans.

There were a couple of threads suggesting using a 529 as another retirement account, but I don't think there have be a broad sentiment that they should be used in 99% of situations.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Haledom »

I am struggling with that question too. We max out our 401(k) and Backdoor Roth accounts before funding the 529 accounts. We have 8 and 6 year olds and chose to superfund their 529's early on to take advantage of the compounding. We got lucky with the timing and as of now we have $540,000 in both their accounts combined.

We do get a state tax benefit and from here on out I only plan putting in the minimum to get the deduction but I feel that we may be overfunded already. It's not a bad problem to have in the larger scheme of things but it was helpful for me to learn that the distributions (if not used for educational expenses) would be taxed at ordinary income (and not the LTCG rates) in addition to the 10% penalty.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

marcopolo wrote: Mon Sep 13, 2021 9:35 pm
VoiceOfReason wrote: Mon Sep 13, 2021 8:37 pm
Any benefit that promotes behavior (not tempted to touch it, peace of mind etc) is nonsense IMO and not really relevant to this board.

The only real benefits are potentially state income tax benefits initially (irrelevant in the no tax state I live) and no tax on growth if used for education. But the risk of being taxed as income if it’s not used for educational expenses changes the equation.

How much do you actually need in a 529 for college? How much are you actually saving on the growth vs capital gains on that amount back the risk of paying it out as income? I’ve never been a fan of these accounts.

To clarify, I think my comment about retirement accounts and 529’s is being misunderstood. 99.9% of the public should be contributing to retirement accounts and HSAs (if available) without much thought and regardless of situation because of the huge advantages they provide across the board.

529’s on the other hand have many situations where they are not a good choice however the broad advice people like to give about them is that they are the right move 99.9% of the time when they most certainly are not.
Can you provide a few examples of this.
Yes. The penalties are clear. Non qualified distributions have earnings taxed as income plus a 10% penalty. Instead of a brokerage account just being capital gains. So the risk is overfunding and not having anyone to spend educational dollars on. This can happen in the below:

1) Your kids get scholarships. (Merit or athletic)

2) Your kids don’t attend college. (Trade school, handicapped, start their own business)

3) Your kids do not live to 18 to attend college. (Terrible to even say, but it happens)

To me there are so many variables associated with this that are impossible to know until your kids are much older and well after you’ve committed to the 529. An HSA for example, when not used for healthcare costs, turns into a retirement account for tax purposes. Until they do the same for 529’s both in terms of federal tax deductible and non qualified distributions, the risks will far outweigh the benefits for me.

This does not mean don’t save to help your kids with college. It just means a 529 isn’t necessarily the way you should do it.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by solarcub »

If your kids get scholarships I believe you are allowed to withdraw that amount from the 529 without penalty.
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by marcopolo »

VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm
marcopolo wrote: Mon Sep 13, 2021 9:35 pm
VoiceOfReason wrote: Mon Sep 13, 2021 8:37 pm
Any benefit that promotes behavior (not tempted to touch it, peace of mind etc) is nonsense IMO and not really relevant to this board.

The only real benefits are potentially state income tax benefits initially (irrelevant in the no tax state I live) and no tax on growth if used for education. But the risk of being taxed as income if it’s not used for educational expenses changes the equation.

How much do you actually need in a 529 for college? How much are you actually saving on the growth vs capital gains on that amount back the risk of paying it out as income? I’ve never been a fan of these accounts.

To clarify, I think my comment about retirement accounts and 529’s is being misunderstood. 99.9% of the public should be contributing to retirement accounts and HSAs (if available) without much thought and regardless of situation because of the huge advantages they provide across the board.

529’s on the other hand have many situations where they are not a good choice however the broad advice people like to give about them is that they are the right move 99.9% of the time when they most certainly are not.
Can you provide a few examples of this.
Yes. The penalties are clear. Non qualified distributions have earnings taxed as income plus a 10% penalty. Instead of a brokerage account just being capital gains. So the risk is overfunding and not having anyone to spend educational dollars on. This can happen in the below:

1) Your kids get scholarships. (Merit or athletic)

2) Your kids don’t attend college. (Trade school, handicapped, start their own business)

3) Your kids do not live to 18 to attend college. (Terrible to even say, but it happens)

To me there are so many variables associated with this that are impossible to know until your kids are much older and well after you’ve committed to the 529. An HSA for example, when not used for healthcare costs, turns into a retirement account for tax purposes. Until they do the same for 529’s both in terms of federal tax deductible and non qualified distributions, the risks will far outweigh the benefits for me.

This does not mean don’t save to help your kids with college. It just means a 529 isn’t necessarily the way you should do it.
You misunderstood my question.

You stated that there was broad advice that a 529 is the right move 99.9% of the time. What I was asking was some examples of people making that claim.

You clearly dislike 529 plans, that is fine, but you are arguing against a position that most are not claiming.

I believe that is referred to as a "straw man" argument.

Take a look at the position I stated above. I think that is closer to the broad position that those advocating 529 plans take. Do you disagree with that?
Once in a while you get shown the light, in the strangest of places if you look at it right.
VoiceOfReason
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

solarcub wrote: Mon Sep 13, 2021 10:07 pm If your kids get scholarships I believe you are allowed to withdraw that amount from the 529 without penalty.
I think that’s partially true. Gotta define penalty.

No 10% penalty on earnings in that situation, but you will still pay income tax on earnings instead of LTCG. That is a penalty to me.
VoiceOfReason
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

marcopolo wrote: Mon Sep 13, 2021 10:10 pm
VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm
marcopolo wrote: Mon Sep 13, 2021 9:35 pm
VoiceOfReason wrote: Mon Sep 13, 2021 8:37 pm
Any benefit that promotes behavior (not tempted to touch it, peace of mind etc) is nonsense IMO and not really relevant to this board.

The only real benefits are potentially state income tax benefits initially (irrelevant in the no tax state I live) and no tax on growth if used for education. But the risk of being taxed as income if it’s not used for educational expenses changes the equation.

How much do you actually need in a 529 for college? How much are you actually saving on the growth vs capital gains on that amount back the risk of paying it out as income? I’ve never been a fan of these accounts.

To clarify, I think my comment about retirement accounts and 529’s is being misunderstood. 99.9% of the public should be contributing to retirement accounts and HSAs (if available) without much thought and regardless of situation because of the huge advantages they provide across the board.

529’s on the other hand have many situations where they are not a good choice however the broad advice people like to give about them is that they are the right move 99.9% of the time when they most certainly are not.
Can you provide a few examples of this.
Yes. The penalties are clear. Non qualified distributions have earnings taxed as income plus a 10% penalty. Instead of a brokerage account just being capital gains. So the risk is overfunding and not having anyone to spend educational dollars on. This can happen in the below:

1) Your kids get scholarships. (Merit or athletic)

2) Your kids don’t attend college. (Trade school, handicapped, start their own business)

3) Your kids do not live to 18 to attend college. (Terrible to even say, but it happens)

To me there are so many variables associated with this that are impossible to know until your kids are much older and well after you’ve committed to the 529. An HSA for example, when not used for healthcare costs, turns into a retirement account for tax purposes. Until they do the same for 529’s both in terms of federal tax deductible and non qualified distributions, the risks will far outweigh the benefits for me.

This does not mean don’t save to help your kids with college. It just means a 529 isn’t necessarily the way you should do it.
You misunderstood my question.

You stated that there was broad advice that a 529 is the right move 99.9% of the time. What I was asking was some examples of people making that claim.

You clearly dislike 529 plans, that is fine, but you are arguing against a position that most are not claiming.

I believe that is referred to as a "straw man" argument.

Take a look at the position I stated above. I think that is closer to the broad position that those advocating 529 plans take. Do you disagree with that?
I did misunderstand. And I agree with your initial point.

But Haledom just posted after you and it exemplifies why I don’t like 529 and this disconnect with them among so many people. Having >$500k in a 529 with your kids at young ages is very likely not a good situation.
softwaregeek
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by softwaregeek »

One more point which is forgotten.

For tax purposes, the 529 belongs to the beneficiary, not the donor. So it is exempt from the estate tax, and the generation skipping tax. Estate tax and GST are both 40%. Plus some states have inheritance taxes. I'm not sure how they stack, but well over 65% can be lost to taxes.

So if grandpa is desirous of removing dollars from his estate, he can donate to a 529 plan.
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cowdogman
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by cowdogman »

VoiceOfReason wrote: Mon Sep 13, 2021 8:37 pm
Any benefit that promotes behavior (not tempted to touch it, peace of mind etc) is nonsense IMO and not really relevant to this board.

The only real benefits are potentially state income tax benefits initially (irrelevant in the no tax state I live) and no tax on growth if used for education. But the risk of being taxed as income if it’s not used for educational expenses changes the equation.

How much do you actually need in a 529 for college? How much are you actually saving on the growth vs capital gains on that amount back the risk of paying it out as income? I’ve never been a fan of these accounts.

To clarify, I think my comment about retirement accounts and 529’s is being misunderstood. 99.9% of the public should be contributing to retirement accounts and HSAs (if available) without much thought and regardless of situation because of the huge advantages they provide across the board.

529’s on the other hand have many situations where they are not a good choice however the broad advice people like to give about them is that they are the right move 99.9% of the time when they most certainly are not.
A few points:

1. As to promoting behavior, Bogleheads are not financial machines* and sometimes self-imposing barriers to bad financial behavior is a good idea. And separately, peace of mind is very much something that should be taken into account in making financial decisions. Appetite for risk varies substantially among Bogleheads.

2. I haven't looked at my youngest son's 529 accounts in detail for years. I just keep tabs on the aggregate amount. I put his investments in an age-adjusted portfolio where the investments automatically become more conservative over the years, and then I paid no further attention. This discussion prompted me to look at the accounts in more detail and I was very happy to see that his accounts have over $209,000 in gains. Given his college plans, we will use up 100% of his 529 money on qualified 529 expenses. And so that is $209,000 of gains that will be totally tax free--and of course we have paid no tax on dividends/cap gains over the years.

3. As to retirement savings vs. 529, yes, retirement (especially pre-tax) savings and HSAs will pencil out as more advantageous, but how do you explain that to your child when it comes time for college? If you say I'll pay out of my taxable account, then you have really lost on out on the benefit of having a 529. If you say my child can just borrow/work or not go to college or work/go to community college part-time, that's your choice.

I do think 529s are the right choice for most people, but getting the funding level right is important.


* Altho I did recently read with amusement an article about a theory that the internet (and by extension bogleheads.org) is just a large AI scam. https://www.theatlantic.com/technology/ ... ue/619937/
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cowdogman
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by cowdogman »

VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm
marcopolo wrote: Mon Sep 13, 2021 9:35 pm
VoiceOfReason wrote: Mon Sep 13, 2021 8:37 pm
Any benefit that promotes behavior (not tempted to touch it, peace of mind etc) is nonsense IMO and not really relevant to this board.

The only real benefits are potentially state income tax benefits initially (irrelevant in the no tax state I live) and no tax on growth if used for education. But the risk of being taxed as income if it’s not used for educational expenses changes the equation.

How much do you actually need in a 529 for college? How much are you actually saving on the growth vs capital gains on that amount back the risk of paying it out as income? I’ve never been a fan of these accounts.

To clarify, I think my comment about retirement accounts and 529’s is being misunderstood. 99.9% of the public should be contributing to retirement accounts and HSAs (if available) without much thought and regardless of situation because of the huge advantages they provide across the board.

529’s on the other hand have many situations where they are not a good choice however the broad advice people like to give about them is that they are the right move 99.9% of the time when they most certainly are not.
Can you provide a few examples of this.
Yes. The penalties are clear. Non qualified distributions have earnings taxed as income plus a 10% penalty. Instead of a brokerage account just being capital gains. So the risk is overfunding and not having anyone to spend educational dollars on. This can happen in the below:

1) Your kids get scholarships. (Merit or athletic)

2) Your kids don’t attend college. (Trade school, handicapped, start their own business)

3) Your kids do not live to 18 to attend college. (Terrible to even say, but it happens)

To me there are so many variables associated with this that are impossible to know until your kids are much older and well after you’ve committed to the 529. An HSA for example, when not used for healthcare costs, turns into a retirement account for tax purposes. Until they do the same for 529’s both in terms of federal tax deductible and non qualified distributions, the risks will far outweigh the benefits for me.

This does not mean don’t save to help your kids with college. It just means a 529 isn’t necessarily the way you should do it.
I think the factors you cite are good factors to consider in the level of funding for 529s, but not really for whether or not to use a 529.

My wife and I have 18 years of college/university between us, and so it was inconceivable to us that our kids would not at least get a bachelors degree and most likely from a private college or university--and so we funded our 529s accordingly.

When parents think about funding of a 529 they should definitely consider:

Likelihood of going to college.
Potential merit scholarships.
Potential need-based aid (and the effect 529 money may have on that).
In-state public school vs. others.
Likelihood of graduate or professional school (doctor and lawyer parents will assume their kids are going to professional school).
How many children they are funding--because if one child has money left over, the others will likely use it.

Personally, in making financial decisions I would not take into account the possibility my child dying or becoming handicapped--I have, in fact, until this moment never considered that possibility in connection with financial planning.

BTW tuition, room and board, etc. are 529 qualified expenses for a lot of "trade school" programs. https://www.savingforcollege.com/articl ... ade-school
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