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

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

Post by hi_there »

For high net worth individuals, I would propose that you maintain a 529 balance that is some percentage of net worth, even if that far exceeds your children's likely education cost. If you intend to bequeath net worth in the future, then you might as well have some of that in tax advantaged dollars for future generations as well.
mr_brightside
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by mr_brightside »

that's a nice sum set aside for a two year old. i would cease future contributions and direct investments toward other goals.

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

Post by Retired Bill »

Personally, I don't like to see things like this happen as doesn't pass my smell test, but did have a tax client once use this approach to use up some of that overfunded 529 plan. Take some ocean cruises that offer college credits for a class during the cruise. I thought this a stretch at the time, but could not find any court decisions that would have clearly stated no can do!
SanAntionetta
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by SanAntionetta »

UConn is currently $28K/year including room and board, so we are aiming for $130K/ea which would cover that plus some inflation. We will still be working when the kids are in school so anticipate being able to cash flow some of it. I mean we were able to handle $24K/year in daycare so what's a little college tuition? :P My kids are 1.5 and 4, we are just putting in an amount we are comfortable with monthly and will see how things go.

It's really hard to plan out 20 years in advance! I remember when I was a kid my parents saying, jeez when you go to school at this rate it will be 40K/year (shocked!) and that was true. But how long can educational inflation outpace normal inflation? Its unsustainable.
jarjarM
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by jarjarM »

hi_there wrote: Tue Sep 14, 2021 12:49 pm For high net worth individuals, I would propose that you maintain a 529 balance that is some percentage of net worth, even if that far exceeds your children's likely education cost. If you intend to bequeath net worth in the future, then you might as well have some of that in tax advantaged dollars for future generations as well.
This is my view as well but my concern is that future legislation could reduce the effectiveness of this (see current proposed roth conversion impact). I guess one can only deal with the current known and let the chips fall where they'll be.
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cowdogman
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by cowdogman »

Retired Bill wrote: Wed Sep 15, 2021 12:54 pm Personally, I don't like to see things like this happen as doesn't pass my smell test, but did have a tax client once use this approach to use up some of that overfunded 529 plan. Take some ocean cruises that offer college credits for a class during the cruise. I thought this a stretch at the time, but could not find any court decisions that would have clearly stated no can do!
www.SemesterAtSea.org
JayDee37
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by JayDee37 »

I am also in CA, so no state tax exemption.

I am in the (somewhat unusual for a Boglehead) situation of not being totally sure that I will be able to fund my current lifestyle in retirement, so there is opportunity cost for me in funding 529s--every dollar that I put into them is a dollar that I can't put towards my own retirement (I do max out my 457 and Roth IRA each year, with excess going into 529s and taxable). Every financial advisor I have ever talked to has emphasized this to me--there are many ways to manage college expenses, and fewer options for supporting yourself in retirement. So for me it feels more important to avoid overfunding than it does to avoid underfunding.

All that said, I want to support my kids as much as I can without jeopardizing my ability to retire. I don't want them to have to take out huge student loans for undergrad.

Based on this set of reasons and emotions, I ended up using a 529 target of 50% of my expected contribution towards 4 years full freight expenses at an in-state public flagship, and building up the other 50% in taxable. That way if not all of the earmarked $ are needed (e.g. kids gets some sort of scholarship or choose a cheaper option), the dollars in taxable can be redirected towards my retirement without any fuss. If the kids have their hearts set on something much more expensive than what I have planned for, they will need to work during college or (ugh) take out loans. They are on their own for graduate or professional school.

I am pleased to report that as of now it is looking like this plan is working out--I have enough between the 529s and taxable to cover my projected college costs for DD#1 (who is a HS senior this year and who plans to attend a UC). Barring a large and extended market crash I should also be able to cover DD#2 (currently in 8th grade) without decimating my retirement savings.

That has been my thought process and how I handled the 529 vs. taxable question.
Tell me, what do you plan to do with your one wild and precious life? | ~Mary Oliver
typical.investor
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by typical.investor »

VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm
Yes. The penalties are clear. Non qualified distributions have earnings taxed as income plus a 10% penalty. Instead of a brokerage account just being capital gains. So the risk is overfunding and not having anyone to spend educational dollars on. This can happen in the below:

1) Your kids get scholarships. (Merit or athletic)
In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you’ll have to pay income tax on the earnings

https://www.savingforcollege.com/articl ... -529-plans
VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm 2) Your kids don’t attend college. (Trade school, handicapped, start their own business)
529 plans can be used to pay for postsecondary education at any eligible institution, including trade schools.

https://www.savingforcollege.com/articl ... ade-school

You may be able to withdraw the money for non-qualified expenses without penalty (taxes on earnings still apply) if your son meets the IRS’s specific definition of disability.

https://www.kiplinger.com/article/colle ... llege.html

You can roll the 529 into a 529a (ABLE) account
States can offer ABLE accounts to help people who become disabled before age 26 and their families save and pay for disability-related expenses. These expenses include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services. Though contributions aren’t deductible for Federal tax purposes, distributions, including earnings, are tax-free to the beneficiary, as long as they are used to pay qualified disability expenses.
VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm 3) Your kids do not live to 18 to attend college. (Terrible to even say, but it happens)
Donate to someone else in their name.

So I guess that leaves the case of your child starting a business ... fine yeah ... they might want to work on a degree over time though.

Anyway, I super funded $144k when young and then stopped contributions. It's $310k now, child is disabled, and we are rolling out the 529a limit of $15k/year to a fund he can spend from without tax consequence. Hopefully, that rule allowing the transfer gets renewed or we have to pay taxes on earnings (no penalty though). Son is trying community college but progress is difficult.
mnnice
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by mnnice »

I probably would have quit sooner especially if kiddo remains an only. :wink: Too many variables about how college funding works. Too many variables with the personalities and desires of offspring.

Maybe I am influenced by the recent experience of having my older child decide at 15 that he hated high school and had little interest in attending a four year college. He ended up working on a two year associates and not having any out of pocket tuition. The paltry 529 money we had will end up covering his rent and utilities for two years just fine. The remaining expenses (food, gas) have been cash flowed from his earnings plus a couple minor “grandma grants” or small (three figures) gifts from grandparents.
hoffse
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by hoffse »

We have a 3YO and one on the way. Between us and grandparents, we collectively contribute $14,000/year per child. So we do have a sibling we can pass extra money to, but I intend to keep the accounts separate for each kid until we know my oldest is done with schooling. I sort of view his money as his and her money as hers. I don't want to raid the account of my oldest to fund the education of my youngest if she chooses a much more expensive school than he does. We have a lot of time to figure that out there!

At the moment we are significantly overfunding for state school but slightly underfunding private school (not by a huge margin though - the difference would be cash flow-able). I'm happy being in that range for now, and I check every year against actual cost of attendance and projected cost of attendance to see that we are on track.

I don't have a crystal ball to know where my kids will end up, but I'm fairly certain at least some - if not all - of the money will be used. Literally every single adult in my children's extended family has at least a master's degree or higher, including both grandmothers (which is somewhat rare for women in their late 60's and early 70's). It's inconceivable that our kids won't go to college at all. If we have any money leftover in those accounts, I'm happy to save it for grandkids.

We are going to keep funding at this level until we see how our kids perform in real school. We can always increase or decrease contributions at a later date based on performance/aptitude.
Stick5vw
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Stick5vw »

Following. Been thinking of this exact topic lately myself!

529 #1 (4 year old) = $85k
529 #2 (newborn) = $50k

Both are 100% equities which also feels a bit aggressive to me. No real science behind it, but was hoping to get both up to roughly $150-200k and call it quits. Ideally will pay for college for both kids.
mikejuss
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by mikejuss »

I think you should stop contributing once you've invested $200,000. That amount will likely be worth $100,000-$150,000 more when you begin to withdraw (assuming a return of around 3%). The goal here is to not overfund the 529, to use cash for whatever the 529 won't cover.
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alexp
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by alexp »

We have decided to stop this year. Will still honor small contributions coming from grandparents on special occasions.
Daughter 1 (12yr): 100K
Daughter 2 (3yr): 55K

100K fully funds instate flagship for us. If they decide to go out of state, 25K per year can easily be cash flowed from income or taxable.


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

Post by mass_biker »

Our goal was 100k contributed by year 5 per kid - and let it ride...
Vihoo
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by Vihoo »

SanAntionetta wrote: Wed Sep 15, 2021 1:32 pm UConn is currently $28K/year including room and board, so we are aiming for $130K/ea which would cover that plus some inflation. We will still be working when the kids are in school so anticipate being able to cash flow some of it. I mean we were able to handle $24K/year in daycare so what's a little college tuition? :P My kids are 1.5 and 4, we are just putting in an amount we are comfortable with monthly and will see how things go.

It's really hard to plan out 20 years in advance! I remember when I was a kid my parents saying, jeez when you go to school at this rate it will be 40K/year (shocked!) and that was true. But how long can educational inflation outpace normal inflation? Its unsustainable.
$28k must be in-state. I definitely recall my parents paying more than that for me out-of l-state when I went there and that was nearly 2 decades ago. I think my wife was well under that having been in-state.

As for us my target is to have $40k in each account before they start Kindergarten, and will allow time to do the rest.

So currently:
6 month old (529 of $10k so far + $500/month)
4 yr old (529 of $30k and paused contributions)
VoiceOfReason
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by VoiceOfReason »

typical.investor wrote: Thu Sep 16, 2021 3:13 am
VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm
Yes. The penalties are clear. Non qualified distributions have earnings taxed as income plus a 10% penalty. Instead of a brokerage account just being capital gains. So the risk is overfunding and not having anyone to spend educational dollars on. This can happen in the below:

1) Your kids get scholarships. (Merit or athletic)
In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you’ll have to pay income tax on the earnings

https://www.savingforcollege.com/articl ... -529-plans
VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm 2) Your kids don’t attend college. (Trade school, handicapped, start their own business)
529 plans can be used to pay for postsecondary education at any eligible institution, including trade schools.

https://www.savingforcollege.com/articl ... ade-school

You may be able to withdraw the money for non-qualified expenses without penalty (taxes on earnings still apply) if your son meets the IRS’s specific definition of disability.

https://www.kiplinger.com/article/colle ... llege.html

You can roll the 529 into a 529a (ABLE) account
States can offer ABLE accounts to help people who become disabled before age 26 and their families save and pay for disability-related expenses. These expenses include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services. Though contributions aren’t deductible for Federal tax purposes, distributions, including earnings, are tax-free to the beneficiary, as long as they are used to pay qualified disability expenses.
VoiceOfReason wrote: Mon Sep 13, 2021 9:59 pm 3) Your kids do not live to 18 to attend college. (Terrible to even say, but it happens)
Donate to someone else in their name.

So I guess that leaves the case of your child starting a business ... fine yeah ... they might want to work on a degree over time though.

Anyway, I super funded $144k when young and then stopped contributions. It's $310k now, child is disabled, and we are rolling out the 529a limit of $15k/year to a fund he can spend from without tax consequence. Hopefully, that rule allowing the transfer gets renewed or we have to pay taxes on earnings (no penalty though). Son is trying community college but progress is difficult.
1) No penalty, great, but paying at income tax rate is a huge loss and negates the purpose of the account and makes it markedly worse than a regular taxable brokerage account.

2) Trade schools do not cost $300k+, overfunding is a huge risk. Income tax and penalty in play.

3) Yes, you can always donate. This is a very different purpose than when you originally started the account. What if you do not have anyone to donate to? What if you didn't want to donate? No flexibility.


The entire purpose of this account is to have tax free growth. Any scenario where you pay income tax on growth is a massive loss that makes the 529 WORSE than a taxable brokerage account. The 10% penalty is just salt in the wound of a financial mistake.
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dziuniek
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by dziuniek »

Kiddos:

Age 6: $ 27.0k
Age 3: $ 19.5k

Adding $50/ week / kiddo.

I figure it will get us somewhere between 50%-100% of the cost and the remainder we'll either cashflow or student loans it is.

Current public flagship is almost $ 18k / year in tuition only.
Get rich or die tryin'
SanAntionetta
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Re: At what amount would you cap a 529 for an only child (2-years old)?

Post by SanAntionetta »

Vihoo wrote: Thu Sep 16, 2021 11:02 pm
SanAntionetta wrote: Wed Sep 15, 2021 1:32 pm UConn is currently $28K/year including room and board, so we are aiming for $130K/ea which would cover that plus some inflation. We will still be working when the kids are in school so anticipate being able to cash flow some of it. I mean we were able to handle $24K/year in daycare so what's a little college tuition? :P My kids are 1.5 and 4, we are just putting in an amount we are comfortable with monthly and will see how things go.

It's really hard to plan out 20 years in advance! I remember when I was a kid my parents saying, jeez when you go to school at this rate it will be 40K/year (shocked!) and that was true. But how long can educational inflation outpace normal inflation? Its unsustainable.
$28k must be in-state. I definitely recall my parents paying more than that for me out-of l-state when I went there and that was nearly 2 decades ago. I think my wife was well under that having been in-state.

As for us my target is to have $40k in each account before they start Kindergarten, and will allow time to do the rest.

So currently:
6 month old (529 of $10k so far + $500/month)
4 yr old (529 of $30k and paused contributions)
Yes we live in CT so would be in-state. If they choose to go out of state we will figure it out. My backup plan is to get them their EU citizenship (entitled through grandparents) and so learn abroad. At our kids ages knows how they will turn out or what they will want to do?
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