"Why 97% of People Don't Use 529 College Savings Plans."

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richard37
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by richard37 » Fri Jan 13, 2017 4:44 pm

I went back and forth on this but ended up opening two NY 529s for our kids (age 2 and 4). I work in NY and live in NJ so get some sort of tax break. We are fortunate enough to max out both our 401ks and Roth IRAs and contribute monthly into both 529s. We also are fortunate enough to have a family member contribute 10K annually into each 529.

We currently have around 150K combined in the two 529 accounts and my plan was to stop contributions when each account reaches the 100K mark and then start putting the contributions into taxable accounts for the kids. That way the 529s can continue to (hopefully) grow for the next 14 and 16 years until the kids go to school. Hopefully the 529s will have enough to pay for school at that point and the kids will have a good chunk of change in taxable investment accounts.

My concern (a very nice one to have) was that we may end up with too much in the 529s and would be hit with penalties.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Grt2bOutdoors » Fri Jan 13, 2017 7:57 pm

richard37 wrote:
My concern (a very nice one to have) was that we may end up with too much in the 529s and would be hit with penalties.
There is no time limitation on a 529 plan, you don't pay taxes unless you make a non qualified withdrawal. If there is any excess in the plan, it could be used for graduate school or you can change the beneficiary name to yourself and use it to take a cooking class at the local community college or you can leave the account alone to compound over time that the grandchildren can use for higher education. The 529 plan is versatile.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by A440 » Sat Jan 14, 2017 10:02 am

livesoft wrote:I just read this article which has a tidbit about the GAO report on these plans.

Basically, the answer to the question posed in the title is simple: 97% of people are not wealthy enough.

Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.
"Wealthy" can be a subjective term, and I'm not sure we would qualify (I am a teacher and the only breadwinner for our family of 4), although I do feel like we are "richly blessed". By living well below our means (but living well), we have been able to max out our Roth IRA's each year and contribute $4,000 annually to my 403(b)7. After the "oxygen masks" are on us, we do take care of our kids next by contributing monthly to their 529 accounts, which we have done since they were born. We approach the 529's in the same manner as our retirement accounts: Start early, keep an eye on expenses, pay yourself first (whatever your budget will allow), and allow time and the magic of compounding to do the rest.

Both 529's to date have earnings of at least a free year of an in-state college (about $30k). Using Vanguard's College planner, each child should have enough to cover 4 years at a state public school. If they want private or out of state, they will need to cover the difference. If, by the grace of God, they don't need all the money for undergraduate school, it can be applied to graduate school. Or, because we are the account holders, it can remain and compound for grandchildren someday. Imagine the compounding on that! Worst case scenario, we need the money in retirement and we pay the fees to Uncle Sam.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by trueblueky » Sun Jan 15, 2017 3:53 pm

We used 529 because our state encouraged it with a tax break on state income tax. We found they allowed us to add new money the same year we were taking it out, so really no-brainer to save 8.8%.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by novemberrain » Sat May 19, 2018 1:52 am

bigred77 wrote:
Wed Jan 11, 2017 1:36 pm
I'm really shocked at how controversial 529 plan seem to be on this board. To me, as Livesoft points out, it's mainly a tax break for the wealthy. They can still be a great tool for high income parents. They offer the most benefit if you can contribute to them early.

If paying for your kids college education is something you want and plan to do, AND you have a high enough income early in their lives (post maxing out retirement space, buying a house if that's a goal of yours, and generally meeting all of your other financial goals/obligations) then of course 529 plans make sense. They can grow for a decade or two tax free and be withdrawn tax free. If your state offers an income tax deduction then that's just icing on the cake. That would impact my decision on which state's 529 plan to use and how to time my contributions, not tip the scales on whether or not to invest in one in the first place.

I have absolutely 0 worries about the account growing "too large". Please give me some of those problems in my life. If you have too much you can simply withdraw the money and pay some penalties and tax on the gains. Or you can spend it on another kid. Or you can earmark it for a grandchild. Or the same child can use it for grad school. It will be fine. You can always optimize the use of excess funds in the future should that occur.

97% of people don't use 529s because your income has to be in pretty darn high, early in your career, for them to make sense. Plus you need to be pretty on top of things financially (saving early and often, having kids after your already established in your career, paying off your own education debts, buying the house you may want, etc). There are a number of 30+ yr old bogleheads who are becoming first time parents where 529 plan will absolutely make sense. That 3% of the population is going to be VERY over represented on this board.

Bingo !!

Your last paragraph pretty much describes my situation. The OP does list out some valid negative aspects of 529 plans. But I felt they dont apply to me,. Reason being.
I have already maxed out 401k, IRA, mortgage, cash balance, etc. I still have plenty monies left over. Yes of course I can and do put a good chunk of that into S&P index funds and other mutual funds / stocks. But I don't see a reason why I shouldnt put a small part of that into 529s. My kids are only 4 and 0 years old . I think a 529 would make sense for them.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by bling » Sat May 19, 2018 7:14 am

richard37 wrote:
Fri Jan 13, 2017 4:44 pm
I work in NY and live in NJ so get some sort of tax break.
if you made 100k and contributed the max, NY will tax you on 90k of income but you still need to report it as 100k to NJ.

it ends up being close to a wash. i say close because NY has higher tax rates, so you still come out ahead, but it's negligible.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 9:05 am

livesoft wrote:
Tue Sep 09, 2014 3:21 pm
Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.
:thumbsup

I don't understand why some financial pundits recommend that people contribute to 529 plans when they are not maxing out their 401k, IRAs, etc.

My plan is to just pay for college expenses when/if they arise, reducing/suspending our retirement contributions if needed to do so.
Last edited by willthrill81 on Sat May 19, 2018 9:53 am, edited 1 time in total.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by trueblueky » Sat May 19, 2018 9:13 am

In our state at the time, we could contribute in 2010 and take the state tax break. Withdraw that in 2011 tax-free while also contributing for 2011 and getting another state tax break. Top rate 8.8%. You bet we contributed every year while two children went through college.

I didn't see any downside.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 9:18 am

novemberrain wrote:
Sat May 19, 2018 1:52 am
The OP does list out some valid negative aspects of 529 plans. But I felt they dont apply to me,. Reason being.
I have already maxed out 401k, IRA, mortgage, cash balance, etc. I still have plenty monies left over. Yes of course I can and do put a good chunk of that into S&P index funds and other mutual funds / stocks. But I don't see a reason why I shouldnt put a small part of that into 529s. My kids are only 4 and 0 years old . I think a 529 would make sense for them.
If you are reasonably sure that you'll incur college expenses down the road, then it certainly makes sense to contribute at least somewhat to a 529 over a brokerage (taxable) account.

However,I have a concern even with this approach. What if my child(ren) doesn't go to college, for any number of reasons? I have an uncle who diligently saved in his state's pre-paid college tuition plan, but it's looking like at least one, possibly both, of his two sons will not attend. I believe that he can get his money back but with no interest and a big opportunity cost to boot. A 529 plan where the penalty must be paid will very likely be inferior to a brokerage (i.e. taxable) account.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by neurosphere » Sat May 19, 2018 9:37 am

willthrill81 wrote:
Sat May 19, 2018 9:05 am
livesoft wrote:
Tue Sep 09, 2014 3:21 pm
Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.
:thumbsup

I don't understand why some financial pundits recommend that people contribute to 529 plans when they are [neuro: I assume you meant to add a "not" here?] maxing out their 401k, IRAs, etc.

My plan is to just pay for college expenses when/if they arise, reducing/suspending our retirement contributions if needed to do so.
What about parents with existing student loans, who may otherwise be maxing out tax-advantaged accounts? I have so many friends/colleagues contributing to 529s for their young kids even when they have existing student debt of their own. They are freaked out about their own very high student loan debt, so worry about their kids having the same, and don't think rationally, in my opinion. With the exception of perhaps a rock-bottom interest rate on existing loans, and/or a state tax deduction on the 529, this doesn't make sense to me. They haven't yet paid for their own previous schooling and are worried about their children's future schooling. Pay off your own debt first, and then use the future cash flow when that's paid off to save for your children's. Right?
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 9:54 am

neurosphere wrote:
Sat May 19, 2018 9:37 am
willthrill81 wrote:
Sat May 19, 2018 9:05 am
livesoft wrote:
Tue Sep 09, 2014 3:21 pm
Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.
:thumbsup

I don't understand why some financial pundits recommend that people contribute to 529 plans when they are [neuro: I assume you meant to add a "not" here?] maxing out their 401k, IRAs, etc.

My plan is to just pay for college expenses when/if they arise, reducing/suspending our retirement contributions if needed to do so.
What about parents with existing student loans, who may otherwise be maxing out tax-advantaged accounts? I have so many friends/colleagues contributing to 529s for their young kids even when they have existing student debt of their own. They are freaked out about their own very high student loan debt, so worry about their kids having the same, and don't think rationally, in my opinion. With the exception of perhaps a rock-bottom interest rate on existing loans, and/or a state tax deduction on the 529, this doesn't make sense to me. They haven't yet paid for their own previous schooling and are worried about their children's future schooling. Pay off your own debt first, and then use the future cash flow when that's paid off to save for your children's. Right?
Agreed. :beer

As Paul Merriman says, "When it comes to money, food, and s__, people don't think rationally."
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Broken Man 1999 » Sat May 19, 2018 10:01 am

I am hardly wealthy, but I do like the 529 plans. Money growing tax-free is a pretty powerful tool.

I have 529 plans for our four grandchildren, oldest soon to be ten years old. I started them with my state (Florida) 529 plan, then, as the individual plans reached $3000, I transferred them to Vanguard's 529 plan. In fact, started the transfer process for the youngest grandchild last week. Very nice to see all our financial accounts on one page.

We receive no tax benefits for 529 plans from the state, as there is no state income tax.

Next month I will start adding to the 529 plans for all, though modestly. Other sets of grandparents are contributing to 529 plans as well.

I don't imagine the balances of all my 529 plans will be such that I need to worry about the final disposition of unused funds. The grandchildren already have prepaid tuition plans that are completely paid for, and that ensures them of having no tuition burden at the most expensive state university, at the very least.

If fate smiles and some/all of the grandchildren get merit scholarships to more expensive colleges/universities, at least their existing prepaid plans and 529 plans will shave off some portion of the higher costs at private schools. Given their parents incomes, I can't see any $$$ help that isn't really a loan. Not sure if much merit based help is even available in today's college environment.

If they choose state schools, perhaps the remaining balances could be used for graduate programs.


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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by DaftInvestor » Sat May 19, 2018 10:05 am

willthrill81 wrote:
Sat May 19, 2018 9:18 am
novemberrain wrote:
Sat May 19, 2018 1:52 am
The OP does list out some valid negative aspects of 529 plans. But I felt they dont apply to me,. Reason being.
I have already maxed out 401k, IRA, mortgage, cash balance, etc. I still have plenty monies left over. Yes of course I can and do put a good chunk of that into S&P index funds and other mutual funds / stocks. But I don't see a reason why I shouldnt put a small part of that into 529s. My kids are only 4 and 0 years old . I think a 529 would make sense for them.
If you are reasonably sure that you'll incur college expenses down the road, then it certainly makes sense to contribute at least somewhat to a 529 over a brokerage (taxable) account.

However,I have a concern even with this approach. What if my child(ren) doesn't go to college, for any number of reasons? I have an uncle who diligently saved in his state's pre-paid college tuition plan, but it's looking like at least one, possibly both, of his two sons will not attend. I believe that he can get his money back but with no interest and a big opportunity cost to boot. A 529 plan where the penalty must be paid will very likely be inferior to a brokerage (i.e. taxable) account.
Novemberrain has 2 kids - if he is concerned that 1 child may not go to college he can save 50% for each and if one doesn't go he can fully fund the other. I guess you have to decide what the risk/reward is for you. Personally - I'm enjoying paying for college with money that has grown tax free for 20+ years but if you decide not to go with 529 and your kids go to college (more likely than not these days) - great - as a US citizen I thank you for the extra taxes you will have to pay in your taxable account. :)

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willthrill81
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 10:13 am

DaftInvestor wrote:
Sat May 19, 2018 10:05 am
willthrill81 wrote:
Sat May 19, 2018 9:18 am
novemberrain wrote:
Sat May 19, 2018 1:52 am
The OP does list out some valid negative aspects of 529 plans. But I felt they dont apply to me,. Reason being.
I have already maxed out 401k, IRA, mortgage, cash balance, etc. I still have plenty monies left over. Yes of course I can and do put a good chunk of that into S&P index funds and other mutual funds / stocks. But I don't see a reason why I shouldnt put a small part of that into 529s. My kids are only 4 and 0 years old . I think a 529 would make sense for them.
If you are reasonably sure that you'll incur college expenses down the road, then it certainly makes sense to contribute at least somewhat to a 529 over a brokerage (taxable) account.

However,I have a concern even with this approach. What if my child(ren) doesn't go to college, for any number of reasons? I have an uncle who diligently saved in his state's pre-paid college tuition plan, but it's looking like at least one, possibly both, of his two sons will not attend. I believe that he can get his money back but with no interest and a big opportunity cost to boot. A 529 plan where the penalty must be paid will very likely be inferior to a brokerage (i.e. taxable) account.
Novemberrain has 2 kids - if he is concerned that 1 child may not go to college he can save 50% for each and if one doesn't go he can fully fund the other. I guess you have to decide what the risk/reward is for you. Personally - I'm enjoying paying for college with money that has grown tax free for 20+ years but if you decide not to go with 529 and your kids go to college (more likely than not these days) - great - as a US citizen I thank you for the extra taxes you will have to pay in your taxable account. :)
I don't dispute that if you're already maxed out other tax-advantaged accounts and you have a child attend college that a 529 is a good plan. But there is definitely risk associated with it, such as my uncle's experience I noted above.

Another factor rarely discussed is whether the current model of 'everyone with the means to do so should attend college' will continue into the future. Before the G.I. bill, a university education was normally only available to the elite classes and far from necessary in order to gain good employment. I wonder if/when this will change again going forward; the assumption of continuity going forward may not hold.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by letsgobobby » Sat May 19, 2018 10:18 am

willthrill81 wrote:
Sat May 19, 2018 9:05 am
livesoft wrote:
Tue Sep 09, 2014 3:21 pm
Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.
:thumbsup

I don't understand why some financial pundits recommend that people contribute to 529 plans when they are not maxing out their 401k, IRAs, etc.

My plan is to just pay for college expenses when/if they arise, reducing/suspending our retirement contributions if needed to do so.
another consideration for ubersavers is they may not have the income to cash flow college expenses in their 50s or 60s because they will already be retired.

we are big 529 cheerleaders, even with no state tax break.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by sc9182 » Sat May 19, 2018 10:32 am

letsgobobby wrote:
Sat May 19, 2018 10:18 am
another consideration for ubersavers is they may not have the income to cash flow college expenses in their 50s or 60s because they will already be retired.

we are big 529 cheerleaders, even with no state tax break.
You could take loans for education, cash-flow "afterwards" with kids earnings, and your own cash-flow. Also, keeps kids skin in the college education (ensuing timely completion, and job-reward). Of course, if /future/ high-interest rates play devils with you, hard to plot this plan.

Started a strategy thread to tackle high College costs without/insufficient 529 Linky: viewtopic.php?f=2&t=249835
Last edited by sc9182 on Sat May 19, 2018 12:29 pm, edited 1 time in total.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by amitb00 » Sat May 19, 2018 10:43 am

If you wish to pay for college expenses for the Kids, and if you have ability to contribute to 529, it just does not make sense to not do 529s. If you have money, even over funding it is not an issue. You can pass it on to grand kids /siblings etc.
Any state tax benefit is extra bonus. But even without any break tax free growth is a great benefit. Again all this assumes you have funded retirement for yourself.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 11:49 am

amitb00 wrote:
Sat May 19, 2018 10:43 am
If you wish to pay for college expenses for the Kids, and if you have ability to contribute to 529, it just does not make sense to not do 529s. If you have money, even over funding it is not an issue. You can pass it on to grand kids /siblings etc.
Any state tax benefit is extra bonus. But even without any break tax free growth is a great benefit. Again all this assumes you have funded retirement for yourself.
That can be a really big assumption.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by ncbill » Sat May 19, 2018 12:11 pm

sc9182 wrote:
Sat May 19, 2018 10:32 am
letsgobobby wrote:
Sat May 19, 2018 10:18 am
another consideration for ubersavers is they may not have the income to cash flow college expenses in their 50s or 60s because they will already be retired.

we are big 529 cheerleaders, even with no state tax break.
You could take loans for education, cash-flow "afterwards" with kids earnings, and your own cash-flow. Also, keeps kids skin in the college education (ensuing timely completion, and job-reward). Of course, if /future/ high-interest rates play devils with you, hard to plot this plan.

Hoping to start a new thread with a strategy and will post a link to it in future.
I did know some grandparents who got incredible bargains on pre-paid plans, much better deals for their money than saving in a 529 plan.

Sadly, we never had the financial ability to save in a 529 plan.

But my kids were able to attend their $$$ private schools thanks to:

http://www.cadetcommand.army.mil/scholarships.aspx

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by sc9182 » Sat May 19, 2018 12:31 pm

Started a strategy thread to tackle high College costs without/insufficient 529 Linky: viewtopic.php?f=2&t=249835

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by dziuniek » Sat May 19, 2018 1:32 pm

livesoft wrote:
Tue Sep 09, 2014 4:57 pm
@JonnyDVM, It is relatively rare to have hundreds of thousands of dollars of loans for an undergraduate degree, but perhaps you meant in aggregrate. My son's college education (4 year degree) will not cost 6-figures.
Whereas state school in CT is right now $14,400/year (UCONN, CCSU is similar). This is only tuition.

My daughter is 2.

At the rate things are going, her 4 year college will be way above $100k.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by wilked » Sat May 19, 2018 1:59 pm

willthrill81 wrote:
Sat May 19, 2018 9:18 am
novemberrain wrote:
Sat May 19, 2018 1:52 am
The OP does list out some valid negative aspects of 529 plans. But I felt they dont apply to me,. Reason being.
I have already maxed out 401k, IRA, mortgage, cash balance, etc. I still have plenty monies left over. Yes of course I can and do put a good chunk of that into S&P index funds and other mutual funds / stocks. But I don't see a reason why I shouldnt put a small part of that into 529s. My kids are only 4 and 0 years old . I think a 529 would make sense for them.

If you are reasonably sure that you'll incur college expenses down the road, then it certainly makes sense to contribute at least somewhat to a 529 over a brokerage (taxable) account.

However,I have a concern even with this approach. What if my child(ren) doesn't go to college, for any number of reasons? I have an uncle who diligently saved in his state's pre-paid college tuition plan, but it's looking like at least one, possibly both, of his two sons will not attend. I believe that he can get his money back but with no interest and a big opportunity cost to boot. A 529 plan where the penalty must be paid will very likely be inferior to a brokerage (i.e. taxable) account.

I have a friend who had to replace their engine on a Honda Accord at 85k miles.

Therefore I will never buy a Honda

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by bling » Sat May 19, 2018 2:50 pm

i don't understand why 529 threads always end up being so long.

if you can max out your 401k, that alone puts you in the top 90th percentile of americans. add in maxing the IRA, probably bumps your into 95th percentile. add in maxing a HSA (stealth IRA) and yep, you're 97th percentile now.

so if you're in the fortunate top 3% that can afford to put money into a 529, it's a no brainer -- do it.

worst case scenario your kids don't go to college, they don't get married, don't have kids, no nieces/nephews, and you have no interest taking a community cooking class for yourself, so pay a penalty! how bad can it be?

let's assume you contribute 5k yearly for 18 years, 7% return. you'll have about $170k. your contributions were $90k. a 10% penalty on the earnings amounts to $8k, or about 4.7% of the total value.

considering markets easily move 5% monthly on a regular basis i don't really see it as that big of a problem.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Grt2bOutdoors » Sat May 19, 2018 2:54 pm

bling wrote:
Sat May 19, 2018 2:50 pm
i don't understand why 529 threads always end up being so long.

if you can max out your 401k, that alone puts you in the top 90th percentile of americans. add in maxing the IRA, probably bumps your into 95th percentile. add in maxing a HSA (stealth IRA) and yep, you're 97th percentile now.

so if you're in the fortunate top 3% that can afford to put money into a 529, it's a no brainer -- do it.

worst case scenario your kids don't go to college, they don't get married, don't have kids, no nieces/nephews, and you have no interest taking a community cooking class for yourself, so pay a penalty! how bad can it be?

let's assume you contribute 5k yearly for 18 years, 7% return. you'll have about $170k. your contributions were $90k. a 10% penalty on the earnings amounts to $8k, or about 4.7% of the total value.

considering markets easily move 5% monthly on a regular basis i don't really see it as that big of a problem.
Most folks are not earning 7% on a 529 plan, probably 5% is a more reasonable number.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by bling » Sat May 19, 2018 3:00 pm

Grt2bOutdoors wrote:
Sat May 19, 2018 2:54 pm
bling wrote:
Sat May 19, 2018 2:50 pm
i don't understand why 529 threads always end up being so long.

if you can max out your 401k, that alone puts you in the top 90th percentile of americans. add in maxing the IRA, probably bumps your into 95th percentile. add in maxing a HSA (stealth IRA) and yep, you're 97th percentile now.

so if you're in the fortunate top 3% that can afford to put money into a 529, it's a no brainer -- do it.

worst case scenario your kids don't go to college, they don't get married, don't have kids, no nieces/nephews, and you have no interest taking a community cooking class for yourself, so pay a penalty! how bad can it be?

let's assume you contribute 5k yearly for 18 years, 7% return. you'll have about $170k. your contributions were $90k. a 10% penalty on the earnings amounts to $8k, or about 4.7% of the total value.

considering markets easily move 5% monthly on a regular basis i don't really see it as that big of a problem.
Most folks are not earning 7% on a 529 plan, probably 5% is a more reasonable number.
in that case it ends up being less (since the total portfolio is less). assuming 5% returns, you'll have 140k after 18 years. 10% penalty on the earnings would be $5k, or just 3.6% of the total portfolio.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by am » Sat May 19, 2018 3:03 pm

bling wrote:
Sat May 19, 2018 2:50 pm
i don't understand why 529 threads always end up being so long.

if you can max out your 401k, that alone puts you in the top 90th percentile of americans. add in maxing the IRA, probably bumps your into 95th percentile. add in maxing a HSA (stealth IRA) and yep, you're 97th percentile now.

so if you're in the fortunate top 3% that can afford to put money into a 529, it's a no brainer -- do it.

worst case scenario your kids don't go to college, they don't get married, don't have kids, no nieces/nephews, and you have no interest taking a community cooking class for yourself, so pay a penalty! how bad can it be?

let's assume you contribute 5k yearly for 18 years, 7% return. you'll have about $170k. your contributions were $90k. a 10% penalty on the earnings amounts to $8k, or about 4.7% of the total value.

considering markets easily move 5% monthly on a regular basis i don't really see it as that big of a problem.
Most of that 3% aren’t “rich”. I’m probably closer to 1-2%. I put 20k total in 529 every year for 3, max out all accounts, but still live modestly and budget. Drive cars >10 yrs, send kids to good public schools, vacation but in average joe type set ups, have a house in the median for my area.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by CnC » Sat May 19, 2018 3:15 pm

Lysander wrote:
Tue Sep 09, 2014 4:28 pm
I myself am anticipating a major shakeup in higher education that cuts costs. At some point it makes more sense to give your children a duplex that they can live in and get a sinecure from than pay for $300,000-$400,000 worth of college.
Yep.

College costs are just sickening and they keep going up because people mindlessly funnel money in to them.

I'll just use my taxable account. Seems like a big risk to take without a huge upside. Not only do you risk your money on the question of if you child will go to college, you also are guessing they will need money for college.


I ask boggleheads how you accept the high level of risk vs reward that accompanies 529 plans?

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by abuss368 » Sat May 19, 2018 3:19 pm

We opened college 529 plans many years ago with our state. We eventually moved the assets to Vanguard and selected a simple all in one target fund. Vanguard has continued to lower the cost of the plan. From a planning aspect, I like having the funds allocated and invested for the specific purpose of college. The added benefit is the asset is removed from the estate and not subject to creditors. In review this has worked well.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by CedarWaxWing » Sat May 19, 2018 4:00 pm

JonnyDVM wrote:
Tue Sep 09, 2014 4:55 pm
Lysander wrote:I myself am anticipating a major shakeup in higher education that cuts costs. At some point it makes more sense to give your children a duplex that they can live in and get a sinecure from than pay for $300,000-$400,000 worth of college.
I second that. Surely the model needs a major overhaul. You can't keep burdening all these kids with hundreds in thousands in federal loans that they won't ever be able to pay back. Step one is for the government to stop the lending insane amounts to 18 year old kids that don't comprehend what kind of debt that is. If the schools can't get federal loan money, tuition costs will have to drop.

Regardless, I do plan to start investing in a 529 as soon as we have kids. Thought about starting one now in my wife's name and could transfer it later but decided that was a little silly. It's a nice state tax break after retirement is maxed out.
1+ Rest of post deleted by poster. Off topic. Sorry.
Last edited by CedarWaxWing on Sat May 19, 2018 5:23 pm, edited 1 time in total.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 4:13 pm

Please be careful not to derail this thread and get it locked with conjecture about the future of higher education.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by marcopolo » Sat May 19, 2018 4:27 pm

willthrill81 wrote:
Sat May 19, 2018 9:54 am
neurosphere wrote:
Sat May 19, 2018 9:37 am
willthrill81 wrote:
Sat May 19, 2018 9:05 am
livesoft wrote:
Tue Sep 09, 2014 3:21 pm
Also missing from the article was the mantra that a family should not contribute to a 529 plan unless they have made the maximum contributions to retirement plans first.
:thumbsup

I don't understand why some financial pundits recommend that people contribute to 529 plans when they are [neuro: I assume you meant to add a "not" here?] maxing out their 401k, IRAs, etc.

My plan is to just pay for college expenses when/if they arise, reducing/suspending our retirement contributions if needed to do so.
What about parents with existing student loans, who may otherwise be maxing out tax-advantaged accounts? I have so many friends/colleagues contributing to 529s for their young kids even when they have existing student debt of their own. They are freaked out about their own very high student loan debt, so worry about their kids having the same, and don't think rationally, in my opinion. With the exception of perhaps a rock-bottom interest rate on existing loans, and/or a state tax deduction on the 529, this doesn't make sense to me. They haven't yet paid for their own previous schooling and are worried about their children's future schooling. Pay off your own debt first, and then use the future cash flow when that's paid off to save for your children's. Right?
Agreed. :beer

As Paul Merriman says, "When it comes to money, food, and s__, people don't think rationally."
One should not borrow from a loan shark to put money in a 529 either. You guys are doing a great job knocking down straw men.

I don't see too many people advocating for 529 contributions in these types of scenarios. What i see discussions about is AFTER you have maxed out tax-advantaged space, does it make sense to save in 529, or are you better off putting it in taxable investments and "cash-flowing" college expenses when they occur. in that scenario, 529 make a lot of sense.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by perl » Sat May 19, 2018 4:49 pm

These discussions about the need to max retirement accounts tend not to notice that some people have a lot of tax deferred space. We could contribute over $130k annually to tax deferred and tax free between the IRA, 401a, 403b, 457, and HSA. We don't need all of that, and will probably never hit the max.

Our state doesn't cap the 529 amount eligible for a state income tax deduction and has good low-cost plans. It's a nice way to lower state income taxes and get tax free growth.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 5:17 pm

marcopolo wrote:
Sat May 19, 2018 4:27 pm
One should not borrow from a loan shark to put money in a 529 either. You guys are doing a great job knocking down straw men.

I don't see too many people advocating for 529 contributions in these types of scenarios.
While people aren't advocating for it here, I absolutely here people on these call-in financial shows who are doing just that and being recommended to do so by the host(s).
marcopolo wrote:
Sat May 19, 2018 4:27 pm
What i see discussions about is AFTER you have maxed out tax-advantaged space, does it make sense to save in 529, or are you better off putting it in taxable investments and "cash-flowing" college expenses when they occur. in that scenario, 529 make a lot of sense.
After other tax-advantaged accounts have been maxed out, then a 529 makes a lot of sense apart from the issue of how certain you are to actually spend that money.
perl wrote:
Sat May 19, 2018 4:49 pm
These discussions about the need to max retirement accounts tend not to notice that some people have a lot of tax deferred space. We could contribute over $130k annually to tax deferred and tax free between the IRA, 401a, 403b, 457, and HSA. We don't need all of that, and will probably never hit the max.
We're in a similar situation. Our total tax-advantaged space comprises 62% of my gross income, including the employer match on the 401(a) and $1.4k they contribute to our family HSA.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by CedarWaxWing » Sat May 19, 2018 5:23 pm

willthrill81 wrote:
Sat May 19, 2018 4:13 pm
Please be careful not to derail this thread and get it locked with conjecture about the future of higher education.
My apologies. Deleted by me.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by CedarWaxWing » Sat May 19, 2018 5:46 pm

We did contribute to a the Washington State GET program, a slightly different type of 529 that allows one to buy tuition credits ahead of time, and keep up with inflation without being subject to the market ups and downs. If tuition stays the same one actually gets a slight disadvantage from the program. We did not max out that program.


https://www.get.wa.gov/howgetworks?gcli ... TTEALw_wcB

However, we also maxed all possible tax deferred savings and retirement plans, and had a taxable investment account. Since we had two incomes and a modest lifestyle we also felt we could pay state tuition as we went and be ok as long as we stayed healthy and employed.

As a backup plan we had life insurance on each of us, and also bought some rental houses early in the game before I became more educated on mutual funds and how indexing and low cost funds have advantages imho to rental properties.

If we had had a simple 529, rather than the GET program, we would have seen a big drop in the investment values since my eldest started college in 2008 at age 18. The next two started at 2010 and 2012, so things would have improved a bit by then. If the Great Recession had not interfered not having a traditional 529 would have been more regretful than it was. Part of my reticence was the penalty factor in case my kids decided to not attend college. I felt the advantages of a 529 for us did not create a slam dunk "win" as it did not come into effect until my eldest was 6 years of age or so, and the sequence of returns could, if they did as they did, obliterate much of the potential advantage. So we simply saved, invested in all other forms, and paid off all debts as early as possible but minimized 529 "risk" by only doing the GET program for Washington State.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by DaftInvestor » Sat May 19, 2018 6:17 pm

CedarWaxWing wrote:
Sat May 19, 2018 5:23 pm
willthrill81 wrote:
Sat May 19, 2018 4:13 pm
Please be careful not to derail this thread and get it locked with conjecture about the future of higher education.
My apologies. Deleted by me.
Since the thread started in 2014 - I wouldn't worry about derailing...

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by neurosphere » Sat May 19, 2018 6:18 pm

marcopolo wrote:
Sat May 19, 2018 4:27 pm
One should not borrow from a loan shark to put money in a 529 either. You guys are doing a great job knocking down straw men.

I don't see too many people advocating for 529 contributions in these types of scenarios. What i see discussions about is AFTER you have maxed out tax-advantaged space, does it make sense to save in 529, or are you better off putting it in taxable investments and "cash-flowing" college expenses when they occur. in that scenario, 529 make a lot of sense.
I really wasn't trying to create a strawman, nor debate advice previously given. I was just sharing my experience that (If I had to guess) probably 50% of people in my circle (mostly physicians) are funding 529 accounts but not maxing out retirement accounts, or have substantial student loans themselves at non-trivial interest rates. I'm not at all knocking 529 plans, but pointing out that a lot of people are not using them optimally. Or stated differently, even if 529 plans did not exist, I think some people are psychologically conditioned to designate or contribute to a separate pot of money "for college", even if that's not the optimal thing to do.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by marcopolo » Sat May 19, 2018 6:49 pm

neurosphere wrote:
Sat May 19, 2018 6:18 pm
marcopolo wrote:
Sat May 19, 2018 4:27 pm
One should not borrow from a loan shark to put money in a 529 either. You guys are doing a great job knocking down straw men.

I don't see too many people advocating for 529 contributions in these types of scenarios. What i see discussions about is AFTER you have maxed out tax-advantaged space, does it make sense to save in 529, or are you better off putting it in taxable investments and "cash-flowing" college expenses when they occur. in that scenario, 529 make a lot of sense.
I really wasn't trying to create a strawman, nor debate advice previously given. I was just sharing my experience that (If I had to guess) probably 50% of people in my circle (mostly physicians) are funding 529 accounts but not maxing out retirement accounts, or have substantial student loans themselves at non-trivial interest rates. I'm not at all knocking 529 plans, but pointing out that a lot of people are not using them optimally. Or stated differently, even if 529 plans did not exist, I think some people are psychologically conditioned to designate or contribute to a separate pot of money "for college", even if that's not the optimal thing to do.
That is a fair observation. I misread the intent of your post.
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: "Why 97% of People Don't Use 529 College Savings Plans."

Post by wrongfunds » Sat May 19, 2018 8:07 pm

perl wrote:
Sat May 19, 2018 4:49 pm
These discussions about the need to max retirement accounts tend not to notice that some people have a lot of tax deferred space. We could contribute over $130k annually to tax deferred and tax free between the IRA, 401a, 403b, 457, and HSA. We don't need all of that, and will probably never hit the max.

Our state doesn't cap the 529 amount eligible for a state income tax deduction and has good low-cost plans. It's a nice way to lower state income taxes and get tax free growth.
Do people really mean the $130K when they say maximize tax deferred space? I thought it included TIRA/401K/HSA only.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by marcopolo » Sat May 19, 2018 8:27 pm

wrongfunds wrote:
Sat May 19, 2018 8:07 pm
perl wrote:
Sat May 19, 2018 4:49 pm
These discussions about the need to max retirement accounts tend not to notice that some people have a lot of tax deferred space. We could contribute over $130k annually to tax deferred and tax free between the IRA, 401a, 403b, 457, and HSA. We don't need all of that, and will probably never hit the max.

Our state doesn't cap the 529 amount eligible for a state income tax deduction and has good low-cost plans. It's a nice way to lower state income taxes and get tax free growth.
Do people really mean the $130K when they say maximize tax deferred space? I thought it included TIRA/401K/HSA only.
I think people say tax-advantaged. So, it would also include Roth. So, a working couple could do $110k in 401k, $13k in IRA, and almost $7k in HSA. That is just about $130k. I think some have 457 plans on top of that.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 8:30 pm

wrongfunds wrote:
Sat May 19, 2018 8:07 pm
perl wrote:
Sat May 19, 2018 4:49 pm
These discussions about the need to max retirement accounts tend not to notice that some people have a lot of tax deferred space. We could contribute over $130k annually to tax deferred and tax free between the IRA, 401a, 403b, 457, and HSA. We don't need all of that, and will probably never hit the max.

Our state doesn't cap the 529 amount eligible for a state income tax deduction and has good low-cost plans. It's a nice way to lower state income taxes and get tax free growth.
Do people really mean the $130K when they say maximize tax deferred space? I thought it included TIRA/401K/HSA only.
I'm the single earner in our household and have over $72k of tax-advantaged space annually, including my wife's spousal IRA.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by marcopolo » Sat May 19, 2018 8:38 pm

willthrill81 wrote:
Sat May 19, 2018 8:30 pm
wrongfunds wrote:
Sat May 19, 2018 8:07 pm
perl wrote:
Sat May 19, 2018 4:49 pm
These discussions about the need to max retirement accounts tend not to notice that some people have a lot of tax deferred space. We could contribute over $130k annually to tax deferred and tax free between the IRA, 401a, 403b, 457, and HSA. We don't need all of that, and will probably never hit the max.

Our state doesn't cap the 529 amount eligible for a state income tax deduction and has good low-cost plans. It's a nice way to lower state income taxes and get tax free growth.
Do people really mean the $130K when they say maximize tax deferred space? I thought it included TIRA/401K/HSA only.
I'm the single earner in our household and have over $72k of tax-advantaged space annually, including my wife's spousal IRA.
Same here. As a 50+ single earner i was putting about $75k/yr into tax advantaged accounts until recently. Dual earners obviously can have even more options.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by bling » Sat May 19, 2018 9:38 pm

i was unaware that government employees had so much tax advantaged space....

in the private sector all we get is the 401k ($18,500) + IRA ($5500) + HSA ($6900) = $30,900.

and even then, the HSA may not be available to some, so really, the majority of americans only get $24k space each year. certain 401k administrators allow the "mega backdoor", but that is also rare.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by marcopolo » Sat May 19, 2018 9:47 pm

bling wrote:
Sat May 19, 2018 9:38 pm
i was unaware that government employees had so much tax advantaged space....

in the private sector all we get is the 401k ($18,500) + IRA ($5500) + HSA ($6900) = $30,900.

and even then, the HSA may not be available to some, so really, the majority of americans only get $24k space each year. certain 401k administrators allow the "mega backdoor", but that is also rare.
Nothing to do with government employee. I worked in private sector. 401k can go up to $55K. Spousal IRA adds another 5500, or 6500 if over 50.
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: "Why 97% of People Don't Use 529 College Savings Plans."

Post by bling » Sat May 19, 2018 9:55 pm

marcopolo wrote:
Sat May 19, 2018 9:47 pm
bling wrote:
Sat May 19, 2018 9:38 pm
i was unaware that government employees had so much tax advantaged space....

in the private sector all we get is the 401k ($18,500) + IRA ($5500) + HSA ($6900) = $30,900.

and even then, the HSA may not be available to some, so really, the majority of americans only get $24k space each year. certain 401k administrators allow the "mega backdoor", but that is also rare.
Nothing to do with government employee. I worked in private sector. 401k can go up to $55K. Spousal IRA adds another 5500, or 6500 if over 50.
it's 55k only if the plan administrator allows it. most do not.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by marcopolo » Sat May 19, 2018 9:57 pm

bling wrote:
Sat May 19, 2018 9:55 pm
marcopolo wrote:
Sat May 19, 2018 9:47 pm
bling wrote:
Sat May 19, 2018 9:38 pm
i was unaware that government employees had so much tax advantaged space....

in the private sector all we get is the 401k ($18,500) + IRA ($5500) + HSA ($6900) = $30,900.

and even then, the HSA may not be available to some, so really, the majority of americans only get $24k space each year. certain 401k administrators allow the "mega backdoor", but that is also rare.
Nothing to do with government employee. I worked in private sector. 401k can go up to $55K. Spousal IRA adds another 5500, or 6500 if over 50.
it's 55k only if the plan administrator allows it. most do not.
That is true, but it has nothing to do with government vs private sector.
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: "Why 97% of People Don't Use 529 College Savings Plans."

Post by willthrill81 » Sat May 19, 2018 10:40 pm

bling wrote:
Sat May 19, 2018 9:38 pm
i was unaware that government employees had so much tax advantaged space....

in the private sector all we get is the 401k ($18,500) + IRA ($5500) + HSA ($6900) = $30,900.

and even then, the HSA may not be available to some, so really, the majority of americans only get $24k space each year. certain 401k administrators allow the "mega backdoor", but that is also rare.
You can thank the public sector employees in Congress for that. :wink:

Seriously, some people in the private sector have 457 plans (same $18.5k limit to employee contributions), which can be superior to a 401k plan in some regards. One of these advantages is that you can make withdrawals prior to age 59.5 with no penalties after you separate from service to that employer, which makes it a great account for those of us planning retiring early. The catch is that many private-sector 457 plans have ridiculously high fees. From my perspective as a plan participant, the opposite is true; there is an S&P 500 fund in mine with an expense ratio of .003%, .3 of one basis point. The expense ratios in my 401a plan aren't bad at all, but they're definitely not that low.

The other advantage I have is that I actually have a 401a plan, which mandates that I contribute a percentage of my salary to the plan. Mandatory contributions do not count toward the $18.5k voluntary contribution limit, so that creates additional tax-advantaged space. When I learned that, it was better than a birthday present. :D
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Bacchus01 » Sun May 20, 2018 8:13 am

JonnyDVM wrote:
Tue Sep 09, 2014 4:55 pm
Lysander wrote:I myself am anticipating a major shakeup in higher education that cuts costs. At some point it makes more sense to give your children a duplex that they can live in and get a sinecure from than pay for $300,000-$400,000 worth of college.
I second that. Surely the model needs a major overhaul. You can't keep burdening all these kids with hundreds in thousands in federal loans that they won't ever be able to pay back. Step one is for the government to stop the lending insane amounts to 18 year old kids that don't comprehend what kind of debt that is. If the schools can't get federal loan money, tuition costs will have to drop.

Regardless, I do plan to start investing in a 529 as soon as we have kids. Thought about starting one now in my wife's name and could transfer it later but decided that was a little silly. It's a nice state tax break after retirement is maxed out.
Why do people post this stuff? Why do people believe this?

The average student loan debt is between $30k and $37k depending on which report your read. Those numbers are not remotely absurd in my mind. Grad school adds to that and medical school is the highest usually.

The problem isn’t the cost or the loan practices in general, the problem is the poor choices people make. They believe that going to a liberal arts school and getting a history degree is going to make them huge sums of money. They pay $250K to then get a job that might pay $40K and then complain constantly about the system being broken. You made a bad choice!

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Bacchus01 » Sun May 20, 2018 8:19 am

Grt2bOutdoors wrote:
Sat May 19, 2018 2:54 pm
bling wrote:
Sat May 19, 2018 2:50 pm
i don't understand why 529 threads always end up being so long.

if you can max out your 401k, that alone puts you in the top 90th percentile of americans. add in maxing the IRA, probably bumps your into 95th percentile. add in maxing a HSA (stealth IRA) and yep, you're 97th percentile now.

so if you're in the fortunate top 3% that can afford to put money into a 529, it's a no brainer -- do it.

worst case scenario your kids don't go to college, they don't get married, don't have kids, no nieces/nephews, and you have no interest taking a community cooking class for yourself, so pay a penalty! how bad can it be?

let's assume you contribute 5k yearly for 18 years, 7% return. you'll have about $170k. your contributions were $90k. a 10% penalty on the earnings amounts to $8k, or about 4.7% of the total value.

considering markets easily move 5% monthly on a regular basis i don't really see it as that big of a problem.
Most folks are not earning 7% on a 529 plan, probably 5% is a more reasonable number.
I disagree. Ours have returned much higher than 7% over the last 10 years.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by amitb00 » Sun May 20, 2018 8:28 am

529 returns depend on market and your bond equity ratio. They are no different from other investments you make. So you can get 10% or 5% or lose money, depending on choices you make and how market is behaving

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