529 strategy for paying K-12 private school-edit new info

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jeremyl
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529 strategy for paying K-12 private school-edit new info

Post by jeremyl »

Our child will be starting at a K-12 private school next year and we are going to be using funds from our 529 to pay our portion of the tuition.

There are multiple ways to pay (monthly, semi-annually, and annually).

My thoughts were to pay monthly so the majority of the funds have a chance to continue growing as they're invested in a total market fund instead of taking 1 or 2 lump sums out on the semi-annual or annual payments.

The annual payment offers a discount.

Correction on the discount for paying full year. It's only 1.5% off the total tuition amount.

Not sure it's worth the big withdrawal when it can mostly be left to grow.

Am I thinking about this in the right way?
Last edited by jeremyl on Sun Feb 11, 2024 8:56 am, edited 1 time in total.
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slow n steady
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Re: 529 strategy for paying K-12 private school

Post by slow n steady »

I go monthly but there is no price break to pay annually.

In your case, I think it's a no brainer to pay annually because of the discount.

Let's say your one month discount comes out to an 8% discount. The market HAS to make more than 8% to come out ahead.

Some people would say money you know your going to spend in the next couple years should be in safe investments. Even with our higher rates these days, nothing is going to beat the guaranteed 8% the discount would get you.
sergio
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Re: 529 strategy for paying K-12 private school

Post by sergio »

Our older one goes to a private HS. The discount for paying upfront is 2%... the 529 MM fund pays around 3-4% nowadays, so there is zero incentive to pay upfront. Tuition is charged on the 26th of each month, and we take a reimbursement from the 529 on the 27th of the same month to make sure there are no issues with "timing".

Be careful keeping the 529 in a total market fund if you are relying on the 529 for tuition payments... if the market takes a dump and takes a few years to recover, hopefully you're not forced to sell at a loss. It may be better to move to a more conservative asset mix.

In your case, an 8.3% discount is very sizeable and from a strict financial point of view - I'd take it over whatever 529 investment gains I'd get. However, I'd still be nervous about paying all that money upfront. What if the school is forced to close? What if the school breaches the agreement you sign? What if your kid hates the school (some schools allow withdrawals with refunds)?

I'm always nervous about prepaying and losing the leverage to stop making payments. Even worse, I hate hounding and having to chase down refunds.

Good luck!
toddthebod
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Re: 529 strategy for paying K-12 private school

Post by toddthebod »

jeremyl wrote: Sat Feb 10, 2024 5:22 pm Our child will be starting at a K-12 private school next year and we are going to be using funds from our 529 to pay our portion of the tuition.

There are multiple ways to pay (monthly, semi-annually, and annually).

My thoughts were to pay monthly so the majority of the funds have a chance to continue growing as they're invested in a total market fund instead of taking 1 or 2 lump sums out on the semi-annual or annual payments.

The annual payment offers a discount that amounts to 1 monthly payment. Not sure it's worth the big withdrawal when it can mostly be left to grow.

Am I thinking about this in the right way?
About a quarter of the time historically the S&P 500 has been negative for a year. Consider the annual payment a risk free 8.3% return. I'd take that in a heartbeat.
Backtests without cash flows are meaningless. Returns without dividends are lies.
rustlers
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Re: 529 strategy for paying K-12 private school

Post by rustlers »

sergio wrote: Sat Feb 10, 2024 5:51 pm Our older one goes to a private HS. The discount for paying upfront is 2%... the 529 MM fund pays around 3-4% nowadays, so there is zero incentive to pay upfront. Tuition is charged on the 26th of each month, and we take a reimbursement from the 529 on the 27th of the same month to make sure there are no issues with "timing".

Be careful keeping the 529 in a total market fund if you are relying on the 529 for tuition payments... if the market takes a dump and takes a few years to recover, hopefully you're not forced to sell at a loss. It may be better to move to a more conservative asset mix.

In your case, an 8.3% discount is very sizeable and from a strict financial point of view - I'd take it over whatever 529 investment gains I'd get. However, I'd still be nervous about paying all that money upfront. What if the school is forced to close? What if the school breaches the agreement you sign? What if your kid hates the school (some schools allow withdrawals with refunds)?

I'm always nervous about prepaying and losing the leverage to stop making payments. Even worse, I hate hounding and having to chase down refunds.

Good luck!
Is there a IRS rule that the 529 withdrawal should be in the same month as the tuition payment. AFAIK, as long as you you take a distribution from the 529 in the same year, which I do in December to match the yearly tuition, that is all that is required.

I pay the tuition from taxable account, via credit card since the cash back is higher, an reimburse myself from the 529.
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windaar
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Re: 529 strategy for paying K-12 private school

Post by windaar »

jeremyl wrote: Sat Feb 10, 2024 5:22 pmOur child will be starting at a K-12 private school next year and we are going to be using funds from our 529 to pay our portion of the tuition.
Please explain your "portion" of the tuition [??] - You can only use up to $10K/year of a 529 for K-12. Were you planning on spending more?
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Topic Author
jeremyl
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Location: Indiana

Re: 529 strategy for paying K-12 private school

Post by jeremyl »

sergio wrote: Sat Feb 10, 2024 5:51 pm Our older one goes to a private HS. The discount for paying upfront is 2%... the 529 MM fund pays around 3-4% nowadays, so there is zero incentive to pay upfront. Tuition is charged on the 26th of each month, and we take a reimbursement from the 529 on the 27th of the same month to make sure there are no issues with "timing".

Be careful keeping the 529 in a total market fund if you are relying on the 529 for tuition payments... if the market takes a dump and takes a few years to recover, hopefully you're not forced to sell at a loss. It may be better to move to a more conservative asset mix.

In your case, an 8.3% discount is very sizeable and from a strict financial point of view - I'd take it over whatever 529 investment gains I'd get. However, I'd still be nervous about paying all that money upfront. What if the school is forced to close? What if the school breaches the agreement you sign? What if your kid hates the school (some schools allow withdrawals with refunds)?

I'm always nervous about prepaying and losing the leverage to stop making payments. Even worse, I hate hounding and having to chase down refunds.

Good luck!
You bring up an interesting point about doing monthly in case of having to withdraw for some reason or another and avoiding chasing down refunds.

The school has been around for about 70 years so I don't think they'd close but one never knows.

To another person's question about the max being used for tuition, it's a little more than half of the $10k limit so no worries there.

My other thought was if the market is down, I can cash flow the monthly amount or do a combo of cash flow and 529 funds.

I think I'm leaning toward the monthly but the 8% savings of the yearly payment is appealing too.

Correction on the discount for paying full year. It's only 1.5% off the total tuition amount.
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