Best options for investing for kids?

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shm7454
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Best options for investing for kids?

Post by shm7454 »

Just found out my wife is pregnant with our first child and I want to get ahead of the game by investing for my son.

In particular, I'm curious about setting up a 529 account for future college expenses. I like the tax-free growth and distributions of a 529 plan, but unsure if there are better options like an UTMA that may provide more flexibility for how the funds are spent. I'm a Texas resident since I think that matters for tax purposes for a 529.

Any help would be appreciated. Thx
livesoft
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Re: Best options for investing for kids?

Post by livesoft »

Those are two common places for people to invest for their children.

A more common place is just to put additional money in your own joint taxable account and "say" it is for your kids. If you invest tax efficiently, then it won't cost you really anything in taxes unless you are in the very highest tax brackets. At some point in the future, you can give the investments to your children.
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hicabob
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Re: Best options for investing for kids?

Post by hicabob »

Clark Howard does a decent 529 comparison at his website.
https://clark.com/education/clarks-529-plan-guide/
MrJedi
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Re: Best options for investing for kids?

Post by MrJedi »

Are you already maxing out other tax advantaged accounts available to you? 401k, IRA, HSA, etc. The 529 is usually the last tax advantaged considered due to its inflexibility. Since Texas doesn't have a state income tax, there is not a big incentive that other states have in reducing state income taxes.
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retired@50
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Re: Best options for investing for kids?

Post by retired@50 »

livesoft wrote: Mon May 03, 2021 5:34 pm Those are two common places for people to invest for their children.

A more common place is just to put additional money in your own joint taxable account and "say" it is for your kids. If you invest tax efficiently, then it won't cost you really anything in taxes unless you are in the very highest tax brackets. At some point in the future, you can give the investments to your children.
+1 to using the taxable account approach.

Don't take this the wrong way, but you've got the kid attending college and he's not even been born yet. 529 plans don't offer a strong advantage in a state without income tax (and the typically related tax break). 529 money is hard to spend on anything but legitimate college expenses. What if your kid wants to be a carpenter?

Regards,
This is one person's opinion. Nothing more.
Fat Tails
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Re: Best options for investing for kids?

Post by Fat Tails »

retired@50 wrote: Mon May 03, 2021 6:11 pm
livesoft wrote: Mon May 03, 2021 5:34 pm Those are two common places for people to invest for their children.

A more common place is just to put additional money in your own joint taxable account and "say" it is for your kids. If you invest tax efficiently, then it won't cost you really anything in taxes unless you are in the very highest tax brackets. At some point in the future, you can give the investments to your children.
+1 to using the taxable account approach.

Don't take this the wrong way, but you've got the kid attending college and he's not even been born yet. 529 plans don't offer a strong advantage in a state without income tax (and the typically related tax break). 529 money is hard to spend on anything but legitimate college expenses. What if your kid wants to be a carpenter?

Regards,
+1, and the Vanguard Total Stock Market index fund is very tax efficient.

Cheers
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Northern Flicker
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Re: Best options for investing for kids?

Post by Northern Flicker »

shm7454 wrote: Mon May 03, 2021 5:31 pm Just found out my wife is pregnant with our first child and I want to get ahead of the game by investing for my son.

In particular, I'm curious about setting up a 529 account for future college expenses. I like the tax-free growth and distributions of a 529 plan, but unsure if there are better options like an UTMA that may provide more flexibility for how the funds are spent. I'm a Texas resident since I think that matters for tax purposes for a 529.

Any help would be appreciated. Thx
We used a 529, and the accounting headache once a student lives off campus is such that I would not even consider using one without a state tax credit for contributions.

Tax-efficient index funds in a taxable account for equities and i-bonds for fixed income is probably what I would do if I lived in a state without income tax. Savings bond interest is tax free if used for qualified educational expenses, perhaps using a 529 for fixed income assets contributed in the last 4 years. The latter could be consumed (mostly) during freshman year on campus and then the i-bonds would not have any early withdrawal penalty.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
dukeblue219
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Re: Best options for investing for kids?

Post by dukeblue219 »

I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?

No, the kid might not go to college but it's fair to assume he or she will, and I damn sure wouldn't want finances to be part of the decision. For me the 529 is my single most important investment account.

Remember that your timeline is probably shorter than your retirement, and as you get closer you really need to watch your asset allocation. You will have a very specific period of time to spend it down, so don't leave yourself open to a ton of equity risk once kiddo is in high school.
Northern Flicker
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Re: Best options for investing for kids?

Post by Northern Flicker »

dukeblue219 wrote: I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?
The 529 saves the long-term capital gains rate that should be levied on proceeds of an index fund in a taxable account, but takes the risk that the child does not attend college. And the fees may be higher in the plan. But the 529 is also a good option.

Quadrupling is an 8% return per year for 18 years. That is possible for early contributions. It is unlikely that later contributions will quadruple.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Wiggums
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Re: Best options for investing for kids?

Post by Wiggums »

We opened up a brokerage UTMA account for our children soon after they were born. Our friends all saved in taxable and the flexibility seemed like a good idea. The market was very good to us and the kids ended up with excess funds. It’s been a great teaching tool, because we have the kids pay their own bills out of their brokerage account.

If you go the 529 route, you might end up with a taxable account as well. It depends on how much you want to save and market conditions. We know at least 5 people that dropped out of college by the 2nd year. All very good kids. Our son went to summer school, an additional housing expense, to spread out his engineering work load. The future is unknown.

Congratulations and good luck to you.
StealthRabbit
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Re: Best options for investing for kids?

Post by StealthRabbit »

Wiggums wrote: Tue May 04, 2021 2:59 am We opened up a brokerage UTMA account for our children soon after they were born. Our friends all saved in taxable and the flexibility seemed like a good idea. The market was very good to us and the kids ended up with excess funds. It’s been a great teaching tool, because we have the kids pay their own bills out of their brokerage account.
..... The future is unknown.

Congratulations and good luck to you.
+1

Use the "teachable moments" you have your kids for a very short time.

Equip them well, moreso with holistic learning than things (free college). There are lots of free college options, and likely many more in 20 yrs. Have the funds if you need them, but don't anquish over it. Our kids each had over $80k in available equity by. college age. They made the choice to spend their assets on college (or not). They had a lot of skin-in-the-game.... 100%
KlangFool
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Re: Best options for investing for kids?

Post by KlangFool »

Northern Flicker wrote: Tue May 04, 2021 2:18 am
dukeblue219 wrote: I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?
The 529 saves the long-term capital gains rate that should be levied on proceeds of an index fund in a taxable account, but takes the risk that the child does not attend college. And the fees may be higher in the plan. But the 529 is also a good option.

Quadrupling is an 8% return per year for 18 years. That is possible for early contributions. It is unlikely that later contributions will quadruple.
+1,000.

For folks with 0% long-term capital gain tax rate, there is minimal tax savings. This is especially true for BH that max up all their tax-advantaged accounts.

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livesoft
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Re: Best options for investing for kids?

Post by livesoft »

Northern Flicker wrote: Tue May 04, 2021 1:33 am[...]Savings bond interest is tax free if used for qualified educational expenses, ....
This is a common misconception in that the full story is that the savings bond interest is tax-free if one has low enough income when they are cashed in and used for college. It is not tax-free for moderate and higher income families. That is, it is not tax-free for families that can afford to save for college. 529 plans are for families that are wealthy and that can afford to save for college.
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livesoft
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Re: Best options for investing for kids?

Post by livesoft »

dukeblue219 wrote: Tue May 04, 2021 1:55 am I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?
My response was about where to start saving NOW and not the ultimate end point. Eventually, for a wealthy family a 529 plan is a superb account to save for college. But there are other uses for one's money before then. And a taxable account does not mean that one pays taxes on the money and growth in the account. We haven't paid capital gains taxes in more than 2 decades.
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Re: Best options for investing for kids?

Post by dukeblue219 »

KlangFool wrote: Tue May 04, 2021 7:01 am For folks with 0% long-term capital gain tax rate, there is minimal tax savings. This is especially true for BH that max up all their tax-advantaged accounts.

KlangFool
Certainly true. How likely is it you'll be in a 0% LTCG bracket when you need to make those withdrawals, though, especially when you realize tens of thousands worth of cap gains to pay for a year of college? Tax gain harvesting would be a critical part of this plan.
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Re: Best options for investing for kids?

Post by dukeblue219 »

livesoft wrote: Tue May 04, 2021 7:35 am
dukeblue219 wrote: Tue May 04, 2021 1:55 am I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?
My response was about where to start saving NOW and not the ultimate end point. Eventually, for a wealthy family a 529 plan is a superb account to save for college. But there are other uses for one's money before then. And a taxable account does not mean that one pays taxes on the money and growth in the account. We haven't paid capital gains taxes in more than 2 decades.
OK, that's a reasonable statement, Livesoft. I still disagree, but I get what you're saying about reserving flexibility at the cost of possible taxes.

I think what surprises me is that BH, in general, despise ever paying tax, sometimes to a fault even. To casually dismiss a tax-advantaged account (even in a non income tax state) seems at odds with that stereotype.
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Re: Best options for investing for kids?

Post by New Providence »

dukeblue219 wrote: Tue May 04, 2021 1:55 am I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?

No, the kid might not go to college but it's fair to assume he or she will, and I damn sure wouldn't want finances to be part of the decision. For me the 529 is my single most important investment account.

Remember that your timeline is probably shorter than your retirement, and as you get closer you really need to watch your asset allocation. You will have a very specific period of time to spend it down, so don't leave yourself open to a ton of equity risk once kiddo is in high school.
I agree with your views. I find the efforts to optimize a 529 vs taxable to be waste of time as there are many variables and uncertainties about the future. The benefit of "flexibility", argued by some, is something I don't understand. Most people, the greatest majority of people, need to have more and not less tax deferred accounts.

So, I opened a 529, contribute to it automatically, and mostly do not think about it. This is the best part....I don't think about it. And as result In 10 yrs or so the 529 has accumulated over $100K. I don't know if taxable would have given me the same result. Maybe yes, or maybe not. But whatever happens in life the 529 is never to be touched as I consider it to be my kids dough. It is an additional protection for them.

Nobody knows how the future will play out, but in the future it will be a good problem to have a fully loaded 529 on top of a loaded taxable, and loaded 401k, etc, etc. I see this outcome of having many loaded accounts as giving me MORE and not LESS flexibility.
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Re: Best options for investing for kids?

Post by MrJedi »

dukeblue219 wrote: Tue May 04, 2021 8:52 am
livesoft wrote: Tue May 04, 2021 7:35 am
dukeblue219 wrote: Tue May 04, 2021 1:55 am I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?
My response was about where to start saving NOW and not the ultimate end point. Eventually, for a wealthy family a 529 plan is a superb account to save for college. But there are other uses for one's money before then. And a taxable account does not mean that one pays taxes on the money and growth in the account. We haven't paid capital gains taxes in more than 2 decades.
OK, that's a reasonable statement, Livesoft. I still disagree, but I get what you're saying about reserving flexibility at the cost of possible taxes.

I think what surprises me is that BH, in general, despise ever paying tax, sometimes to a fault even. To casually dismiss a tax-advantaged account (even in a non income tax state) seems at odds with that stereotype.
For me, it is due to inflexibility.

This is a little more extreme, but consider products like whole life or universal life insurance. Those have tax advantages but are very inflexible. It takes a special circumstances for that type of product to make financial sense. Most Bogleheads would probably suggest most people to run far, far away.

For a 529, I would have to be 95+% sure that my funds would be qualified. I get a small state tax deduction and I pay very little in dividends/CG taxes (nearly 0). In a no-income tax state, I would have to be even more certain since the state tax deduction benefit goes away.
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Re: Best options for investing for kids?

Post by KlangFool »

dukeblue219 wrote: Tue May 04, 2021 8:49 am
KlangFool wrote: Tue May 04, 2021 7:01 am For folks with 0% long-term capital gain tax rate, there is minimal tax savings. This is especially true for BH that max up all their tax-advantaged accounts.

KlangFool
Certainly true. How likely is it you'll be in a 0% LTCG bracket when you need to make those withdrawals, though, especially when you realize tens of thousands worth of cap gains to pay for a year of college? Tax gain harvesting would be a critical part of this plan.
dukeblue219,

1) If you are employed and you max up all your tax-advantaged accounts, it will be 0%. The tax bracket is adjusted upward by inflation annually.

2) If you are employed, you may not need to sell anything. You can pay it via your annual savings that usually goes into the taxable account.

3) If you are unemployed, it is definitely not a problem.

I "cash flowed" my kids' college education via my annual savings.

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Re: Best options for investing for kids?

Post by dukeblue219 »

KlangFool wrote: Tue May 04, 2021 9:41 am 1) If you are employed and you max up all your tax-advantaged accounts, it will be 0%.
The MFJ AGI threshold is "only" $80k. I know that's above median, but especially in a HCOL area its not hard to be in the 15% LTCG box without anyone needing to be a lawyer/doctor/banker. There's only so much tax advantaged space available.
Chris K Jones
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Re: Best options for investing for kids?

Post by Chris K Jones »

Congratulations on the pregnancy!

I had UTMA accounts for my kids. The youngest is now 20. I would not do this again. I would either use 529 plans or just keep the money in my account. If you have a kid that has a gambling or substance abuse or other problem, they get the money when they are 21 with an UTMA account. Best wishes for your family.
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Re: Best options for investing for kids?

Post by KlangFool »

dukeblue219 wrote: Tue May 04, 2021 10:49 am
KlangFool wrote: Tue May 04, 2021 9:41 am 1) If you are employed and you max up all your tax-advantaged accounts, it will be 0%.
The MFJ AGI threshold is "only" $80k. I know that's above median, but especially in a HCOL area its not hard to be in the 15% LTCG box without anyone needing to be a lawyer/doctor/banker. There's only so much tax advantaged space available.
dukeblue219,

If the annual savings is high enough, why the person needs to sale anything in the taxable account to pay for college education? At the high end of college education funding, it is 80K per year.

Pick an annual saving and we can go through the numbers and explain why it is not a problem.

KlangFool

P.S.: On top of that, the person could receive $2,500 AOTC tax credit. Why would the person pays any tax?
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Re: Best options for investing for kids?

Post by dukeblue219 »

KlangFool wrote: Tue May 04, 2021 10:57 am

If the annual savings is high enough, why the person needs to sale anything in the taxable account to pay for college education? At the high end of college education funding, it is 80K per year.

Pick an annual saving and we can go through the numbers and explain why it is not a problem.
Let's suppose the couple MFJ gross $160k and each max a plain vanilla 401k. They also max a Roth. They save $12k per year into a 529 and do not have state income tax (I do, but this thread was about a tax free state). Is there any way they would be close to 0% LTCG? Growth in equities is the only way they'd be able to pay for a couple of college educations as their income cannot cash flow two kids in college overlapping for two years.

I'm struggling with the BH mentality of locking up huge chunks of income in a 401k but not wanting to lock up cash in a 529 for a shorter period of time.
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Re: Best options for investing for kids?

Post by KlangFool »

dukeblue219 wrote: Tue May 04, 2021 11:42 am
KlangFool wrote: Tue May 04, 2021 10:57 am

If the annual savings is high enough, why the person needs to sale anything in the taxable account to pay for college education? At the high end of college education funding, it is 80K per year.

Pick an annual saving and we can go through the numbers and explain why it is not a problem.
Let's suppose the couple MFJ gross $160k and each max a plain vanilla 401k. They also max a Roth. They save $12k per year into a 529 and do not have state income tax (I do, but this thread was about a tax free state). Is there any way they would be close to 0% LTCG? Growth in equities is the only way they'd be able to pay for a couple of college educations as their income cannot cash flow two kids in college overlapping for two years.

I'm struggling with the BH mentality of locking up huge chunks of income in a 401k but not wanting to lock up cash in a 529 for a shorter period of time.
dukeblue219,

That means the person saves 39K + 12K + 12K= 53K 63K per year.

<<Growth in equities is the only way they'd be able to pay for a couple of college educations as their income cannot cash flow two kids in college overlapping for two years. >>

That statement is fundamentally false. The money has to come from somewhere. The money in 529 means that no money for everything else. At the annual saving of 53K 63K per year, this person cannot afford to pays for 2 kids with 80K per year of college expense. It equals to 2 X4 X 80K = 640K. A reasonable number would be 40K per kid per year. Then, it is within the annual savings.

12K per year over 18 year plus doubling the money = 432K. It is not enough for 80K per kid per year. It is only enough for 40K per kid per year. And that number is within the annual savings.

KlangFool
Last edited by KlangFool on Tue May 04, 2021 3:10 pm, edited 2 times in total.
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Re: Best options for investing for kids?

Post by Northern Flicker »

dukeblue219 wrote: Tue May 04, 2021 8:49 am
KlangFool wrote: Tue May 04, 2021 7:01 am For folks with 0% long-term capital gain tax rate, there is minimal tax savings. This is especially true for BH that max up all their tax-advantaged accounts.

KlangFool
Certainly true. How likely is it you'll be in a 0% LTCG bracket when you need to make those withdrawals, though, especially when you realize tens of thousands worth of cap gains to pay for a year of college? Tax gain harvesting would be a critical part of this plan.
The amount of savings and amount of gain depends if you are saving for a private university or in-state public university.

If your income is higher at college time so that LTCG are taxable, you also may be contributing savings to taxable space, and can just use the dollars to be saved to pay tuition and earmark that dollar value of appreciated index shares as non-college savings. Between that, and the part of withdrawals from fixed income, and the part of equity withdrawals that are return of principal, the realized capital gains likely will be about 1/8 of a full year if funding a state school. Tax gain harvesting may lower it further. Living in a HCOL may reduce 0% LTCG headroom, however.

A 529 is also good, but they have downsides. When a student is living off-campus, it is unlikely the student will save a receipt for every slice of pizza purchased somewhere for cost of living reimbursement. The IRS may accept an estimated off-campus cost of living based on dormitory costs, but there is no guidance published for doing that. One solution is just to target tuition, books, and 1st year dormitory costs, and maybe off-campus rent in the 529, and target other off campus living expenses and with taxable index funds, a good hybrid solution.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Best options for investing for kids?

Post by KlangFool »

Northern Flicker wrote: Tue May 04, 2021 12:34 pm
dukeblue219 wrote: Tue May 04, 2021 8:49 am
KlangFool wrote: Tue May 04, 2021 7:01 am For folks with 0% long-term capital gain tax rate, there is minimal tax savings. This is especially true for BH that max up all their tax-advantaged accounts.

KlangFool
Certainly true. How likely is it you'll be in a 0% LTCG bracket when you need to make those withdrawals, though, especially when you realize tens of thousands worth of cap gains to pay for a year of college? Tax gain harvesting would be a critical part of this plan.
The amount of savings and amount of gain depends if you are saving for a private university or in-state public university.

If your income is higher at college time so that LTCG are taxable, you also may be contributing savings to taxable space, and can just use the dollars to be saved to pay tuition and earmark that dollar value of appreciated index shares as non-college savings. Between that, and the part of withdrawals from fixed income, and the part of equity withdrawals that are return of principal, the realized capital gains likely will be about 1/8 of a full year if funding a state school. Tax gain harvesting may lower it further. Living in a HCOL may reduce 0% LTCG headroom, however.

A 529 is also good, but they have downsides. When a student is living off-campus, it is unlikely the student will save a receipt for every slice of pizza purchased somewhere for cost of living reimbursement. The IRS may accept an estimated off-campus cost of living based on dormitory costs, but there is no guidance published for doing that. One solution is just to target tuition, books, and 1st year dormitory costs, and maybe off-campus rent in the 529, and target other off campus living expenses and with taxable index funds, a good hybrid solution.
Northern Flicker,

I saved 1 year of expense every year. If I did not gamble on Telecom Stock and lost 50% of my portfolio during Telecom Bust, I would had early retired before my kid goes to college. So, for someone with a very high saving rate (max up all tax-advantaged accounts), the possibility of early retirement is high. It does not make sense to tie up the money in 529 and reduce need-based financial aid eligibility.

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SmileyFace
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Re: Best options for investing for kids?

Post by SmileyFace »

I am not in a top tax bracket and I saved thousands by using 529 rather than a taxable account. I continue to be surprused at the number of folks recommending taxable over an option that gives you 20+ years of tax-free growth. Someone also said accounting being a problem with 529s - don't get this either - simply jot down the numbers as taxfree withdraws are made and save receipts in case of audit - nothing to report.
Some boggleheads go thru crazy steps to TLH and track TLHs and multiple years of Cap Gain offsets then seem to think tracking annual college costs for 529 withdraws is too much trouble to track.
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Re: Best options for investing for kids?

Post by dukeblue219 »

KlangFool wrote: Tue May 04, 2021 12:23 pm dukeblue219,

That means the person saves 39K + 12K + 12K= 53K per year.

<<Growth in equities is the only way they'd be able to pay for a couple of college educations as their income cannot cash flow two kids in college overlapping for two years. >>

That statement is fundamentally false. The money has to come from somewhere. The money in 529 means that no money for everything else. At the annual saving of 53K per year, this person cannot afford to pays for 2 kids with 80K per year of college expense. It equals to 2 X4 X 80K = 640K. A reasonable number would be 40K per kid per year. Then, it is within the annual savings.

12K per year over 18 year plus doubling the money = 432K. It is not enough for 80K per kid per year. It is only enough for 40K per kid per year. And that number is within the annual savings.

KlangFool
If I'm following you here, you're suggesting stopping retirement contributions to pay college out of pocket, which is reasonable. But then you have an opportunity cost to account for somewhere, in that your retirement accounts are less.

I don't see any scenario in which I would be better off saving in taxable than a 529, other than a scenario in which I lose my job and end up needing the funds, and I don't plan around worst case events (and I am certain you, Klang, will disagree there). In the unlikely event of an emergency, or what I consider the unlikely event my children do not attend college, I will pay the penalty. Then again, I also live in a state with a modest income tax break for 529s, so I'm inherently biased a bit.
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Re: Best options for investing for kids?

Post by KlangFool »

dukeblue219 wrote: Tue May 04, 2021 1:38 pm
KlangFool wrote: Tue May 04, 2021 12:23 pm dukeblue219,

That means the person saves 39K + 12K + 12K= 53K per year.

<<Growth in equities is the only way they'd be able to pay for a couple of college educations as their income cannot cash flow two kids in college overlapping for two years. >>

That statement is fundamentally false. The money has to come from somewhere. The money in 529 means that no money for everything else. At the annual saving of 53K per year, this person cannot afford to pays for 2 kids with 80K per year of college expense. It equals to 2 X4 X 80K = 640K. A reasonable number would be 40K per kid per year. Then, it is within the annual savings.

12K per year over 18 year plus doubling the money = 432K. It is not enough for 80K per kid per year. It is only enough for 40K per kid per year. And that number is within the annual savings.

KlangFool
If I'm following you here, you're suggesting stopping retirement contributions to pay college out of pocket, which is reasonable. But then you have an opportunity cost to account for somewhere, in that your retirement accounts are less.
dukeblue219,

Why do you need to stop tax-advantaged account contribution? You can spend down your taxable account while contributing to your retirement account.

If you like tax-free growth of 529 over 10+ years, you would like tax-free growth of tax-advantaged accounts over 20 to 30 years.

<< But then you have an opportunity cost to account for somewhere, in that your retirement accounts are less. >>

Actually, the opportunity cost is reversed. You gain the flexibility of the taxable account plus longer term tax-free growth of the tax-advantaged accounts.

I do not call them as "retirement accounts". You can get the money out tax-free and penalty free before 59 1/2 years old. They are tax-advantaged accounts.

KlangFool

P.S.: This plan works regardless of whether you are fully-employed continuously, unemployed a few times, or early retired. The money in the taxable account provides you with maximum flexibility. This does not exists with the 529.
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dboeger1
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Re: Best options for investing for kids?

Post by dboeger1 »

Chris K Jones wrote: Tue May 04, 2021 10:53 am I would either use 529 plans or just keep the money in my account. If you have a kid that has a gambling or substance abuse or other problem, they get the money when they are 21 with an UTMA account.
Like OP, we also have our first on the way, and I've been going back and forth between the various options. This is one thing that keeps coming to mind. On the one hand, UTMAs are flexible in the sense that they simply belong to the kid and can be used for any purpose without penalty, which is great if the kid excels. However, there are circumstances like the ones you pointed out where this is undesirable. 529 plans are flexible in that they can be reassigned to other beneficiaries and provide significant cost benefits in some cases. And of course, keeping the money in the parent's non-529 accounts provides maximum flexibility but may run into gifting restrictions or other cost drag over time.

As much as I thought I would jump on the opportunity to superfund 529s and/or UTMAs when my future children arrived, the closer I get, the less certain I am that it's the right choice. UTMAs assume a generally positive outcome long before one is guaranteed, and can be extremely detrimental as a negative influence for some kids. I've also had experience with a brother squandering his scholarship-funded education by getting into trouble, so I'm not sure earmarking funds for education is good even when the student has a good shot at succeeding if they don't have the right temperament. I realize 529s have great cost benefits, but to the extent they might guide spending to where it's not desirable, it can be quite negative. I may end up just under-funding a 529 to get some of the benefits without going all in.
SchruteB&B
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Re: Best options for investing for kids?

Post by SchruteB&B »

Northern Flicker wrote: Tue May 04, 2021 1:33 am
We used a 529, and the accounting headache once a student lives off campus is such that I would not even consider using one without a state tax credit for contributions.
I have used our 529 for off campus rent and living expenses and it was not an accounting headache for me.

If we had saved in a taxable account for college instead of a 529, the considerable gains would now be coming out at 20% LTCG + 3.8% NIIT + 4.95% state tax = 28.75% Glad I am not losing almost 1/3 of my gains to taxes! And of course those rates could also go higher, my state tax was a lot lower when we first opened the 529.
lazynovice
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Re: Best options for investing for kids?

Post by lazynovice »

shm7454 wrote: Mon May 03, 2021 5:31 pm Just found out my wife is pregnant with our first child and I want to get ahead of the game by investing for my son.

In particular, I'm curious about setting up a 529 account for future college expenses. I like the tax-free growth and distributions of a 529 plan, but unsure if there are better options like an UTMA that may provide more flexibility for how the funds are spent. I'm a Texas resident since I think that matters for tax purposes for a 529.

Any help would be appreciated. Thx
We don’t know a lot about your situation. First thing is to make sure you have a good emergency fund, no high interest rate debt and are adequately funding your own retirement- then think about college. Life happens and not every kid, even of successful wealthy parents, goes to college. I would be careful not to overfund the 529. Texas has relatively inexpensive public colleges so I would aim for cost of attendance for those and put the rest in taxable.
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Northern Flicker
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Re: Best options for investing for kids?

Post by Northern Flicker »

SmileyFace wrote: Tue May 04, 2021 12:54 pm I am not in a top tax bracket and I saved thousands by using 529 rather than a taxable account. I continue to be surprused at the number of folks recommending taxable over an option that gives you 20+ years of tax-free growth. Someone also said accounting being a problem with 529s - don't get this either - simply jot down the numbers as taxfree withdraws are made and save receipts in case of audit - nothing to report.
Some boggleheads go thru crazy steps to TLH and track TLHs and multiple years of Cap Gain offsets then seem to think tracking annual college costs for 529 withdraws is too much trouble to track.
The college student does most of the tracking.
Student lives off campus. Cost of living reimbursement for every purchase would require the student saving every receipt. Student buys a slice of pizza and a beer. Pizza is reimbursable, beer is not. Receipt is where? Student shares an apartment. Electric bill is in roommate's name. Receipt is in roommate's name. etc.

529's are beneficial. We did use one. They do have downsides. I guess I just would not go overboard with it and it should be fine. Covering tuition, books, dormitory is fine. Major off-campus living expenses like rent should be fine.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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SmileyFace
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Re: Best options for investing for kids?

Post by SmileyFace »

Northern Flicker wrote: Tue May 04, 2021 4:58 pm
SmileyFace wrote: Tue May 04, 2021 12:54 pm I am not in a top tax bracket and I saved thousands by using 529 rather than a taxable account. I continue to be surprused at the number of folks recommending taxable over an option that gives you 20+ years of tax-free growth. Someone also said accounting being a problem with 529s - don't get this either - simply jot down the numbers as taxfree withdraws are made and save receipts in case of audit - nothing to report.
Some boggleheads go thru crazy steps to TLH and track TLHs and multiple years of Cap Gain offsets then seem to think tracking annual college costs for 529 withdraws is too much trouble to track.
The college student does most of the tracking.
Student lives off campus. Cost of living reimbursement for every purchase would require the student saving every receipt. Student buys a slice of pizza and a beer. Pizza is reimbursable, beer is not. Receipt is where? Student shares an apartment. Electric bill is in roommate's name. Receipt is in roommate's name. etc.

529's are beneficial. We did use one. They do have downsides. I guess I just would not go overboard with it and it should be fine. Covering tuition, books, dormitory is fine. Major off-campus living expenses like rent should be fine.
If you want to pull every dollar (slice of pizza, etc) because you have funded more than tuition and rent/board have student use a specific credit card for ALL living expenses along with books and other education needs (laptop, etc.). Year end credit card statement serves as your receipt / proof of expenses.
Last edited by SmileyFace on Tue May 04, 2021 5:51 pm, edited 1 time in total.
hi_there
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Re: Best options for investing for kids?

Post by hi_there »

Northern Flicker wrote: Tue May 04, 2021 2:18 am
dukeblue219 wrote: I do not understand why BH prefers saving for college in taxable over 529. You've got 18 years for that money to potentially quadruple. Why would you keep that in a taxable account?
The 529 saves the long-term capital gains rate that should be levied on proceeds of an index fund in a taxable account, but takes the risk that the child does not attend college. And the fees may be higher in the plan. But the 529 is also a good option.

Quadrupling is an 8% return per year for 18 years. That is possible for early contributions. It is unlikely that later contributions will quadruple.
To this point, why not simply contribute the maximum you can to the 529 in early years, and stop contributing when you consider that the time to college has become too short? OP is concerned with his immediate budget, after all.
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