Should I stop adding contributions to 529?

[GratefulDad]

Our kids are 8 and 10. We live in Florida where we have no state income tax. In-state tuition including books, supplies and room and board is about 20k annually today. Florida has a program called Brightfutures for those that qualify academically.

We save for both of them in the Utah 529 using the target enrollment fund. The current balances for my 8 and 10 year old are 43k and 61k respectively. We are investing 300 dollars monthly in my 8 year old 529 and 160 per month in my 10 year olds. We are targeting saving towards the cost of in state tuition including books and housing.

My wife and I max both our 401k and backdoor Roth IRA. We also save 1k a month in taxable. Using the vanguard calculator (assuming 6 percent return and 5 percent tuition increase), without any more contributions to 529 our 8 and 10 year old are 61 percent and 88 percent funded.

I am considering stopping future contributions to 529 and increasing taxable contributions by 460 per month. For any college expenses the 529 does not cover, we will make up the shortfall from taxable and cash flow. I like the tax benefits of the 529 but taxable is more flexible.

Is there anything wrong with this approach?

[WarAdmiral]

Current 4 year cost = $20K * 4 = $80K
After 10 years, considering 6% education inflation, 4-year college cost = $35K * 4 = $140K per person = $280K for 2 kids.

In your 529 Plan, If you stop today and assume 8% return you will have in 10 years = (43K + 61K) * 8% = $215K

You are likely to come up short but like you said you will self-fund the gap.

If i were you, i would continue for a few more years...

Good Luck!

[GratefulDad]

Thanks WarAdmiral,

What is an appropriate savings target? I can afford to save up to 100 percent but I am also hedging my bets one if not both of them may qualify for brightfutures assuming it is still around.

[runner3081]

Thanks WarAdmiral,

What is an appropriate savings target? I can afford to save up to 100 percent but I am also hedging my bets one if not both of them may qualify for brightfutures assuming it is still around.

It is really a personal question. How much do you plan to fund? Will they be limited to in state, public schools? Can they go private? How about abroad?

[Outer Marker]

What is an appropriate savings target? I can afford to save up to 100 percent but I am also hedging my bets one if not both of them may qualify for brightfutures assuming it is still around.

I agree with your strategy not to over-fund the accounts and cash-flow any shortfall. Too many strings.
- Depending on your income level, you may be able to use I-bonds tax-free for education expenses.
- Recent changes allow you to convert up to $35,000 in unused funds to a Roth IRA for the beneficiary, should you overshoot.

[mhc]

I would stop.

The landscape of college funding seems to be changing. More states are offering free college for lower income people. Florida already has the program you mentioned. Do you think they will qualify?

I shot for 2/3 funding, and I would cash flow the rest. The market has been generous. We may be overfunded. It is just impossible to know how things will turn out.

[markjk]

I've had similar thoughts. We are diversifying our college savings a bit for this very reason. As you said, it provides flexibility. There is nothing wrong with that. Keep in mind any leftover 529 can now be converted to a ROTH IRA as well (up to a $35,000 limit).

[GratefulDad]

Appreciate all the feedback.

I added 1k to my 10 year olds 529 and stopped recurring monthly contributions. I will reassess annually from here. At a 7 percent return (maybe optimistic) I estimate this will fund 100 percent of in state tuition, housing, and books for 4 years.

I kept monthly contributions for my 8 year old son but reduced to 150. I will reassess annually and again when my older son reaches high school.

[winterfan]

I would stop and put more money in taxable. We are pretty much done putting money in the 529. We have an almost 16 yo and there is almost three years of state flagship expenses saved. I think that's more than enough. I'd rather have more flexibility now.

[mhalley]

I don’t think you can assume 8% going forward as the aa will have to become more bond heavy as college approaches.

[legalwriter1]

I think aiming for three years cost of attendance in current dollars for 4 years at the state flagship university sounds about right. That gives you some flexibility.

[cmr79]

I think OP's assumptions (529 investments grow at 1% above college inflation costs) are reasonable this far out from matriculation. Like many other posts above, I think this really isn't a financial question as much as it is an emotional and risk management issue...if the thought of overfunding a 529 is more of a negative than underfunding the 529 and paying a little more in taxes, stop funding the 529 and put the money into the taxable account.

OP, do you expect to be below the income threshold to qualify for the AOTC when the kids are in college? If not, have you considered the "Backdoor AOTC" approach that some on Bogleheads have suggested (search if not familiar)? It seems like it would appeal to you and justify intentionally funding only part of college expenses with 529s.

[GratefulDad]

I think OP's assumptions (529 investments grow at 1% above college inflation costs) are reasonable this far out from matriculation. Like many other posts above, I think this really isn't a financial question as much as it is an emotional and risk management issue...if the thought of overfunding a 529 is more of a negative than underfunding the 529 and paying a little more in taxes, stop funding the 529 and put the money into the taxable account.

OP, do you expect to be below the income threshold to qualify for the AOTC when the kids are in college? If not, have you considered the "Backdoor AOTC" approach that some on Bogleheads have suggested (search if not familiar)? It seems like it would appeal to you and justify intentionally funding only part of college expenses with 529s.

I believe right now we are over the threshold to qualify. Not sure about the future.

I did read about the backdoor AOTC and believe this is a viable option.

[GratefulDad]

Bumping this post because I had an idea after reading the responses here and reading other threads similar.

Does this plan sound reasonable and can I do this?

1. Open a UTMA account now for one of my kids.

2. Gift shares from my taxable account to the UTMA up to 2700 in gains.

3. Sell immediately

4. Use the proceeds to true up both kids 529 up to the 4 year cost of the state school (tuition, books, housing)

5. Close the UTMA

6. Stop all future 529 contributions.

6. File a return next year for our son along with ours

If this is viable what are the pros and cons of this strategy?

[GoldStar]

Personally I would continue the 529s. I am biased perhaps because that is what I did and it saved me many thousands in taxes. It does come at the price of flexibility. To me - by the time my kids were 8 and 10 - I was pretty sure they would go to college so was willing to take the risk that they money would be spent wisely on education.

[986racer]

The UTMA approach you listed is fine. There is no need to close the account each year (I’m assuming you will do this multiple years)

[cableguy]

I would keep saving. Tuition, Housing, Books, Laptops, Study Abroad, Transportation to and from school, etc. You can't save too much. If you can do it...keep saving. If you got to $200k per kid than you can stop. Not kidding. I have 3 kids...was fortunate enough to pay for all their college expenses. One went private, one went public, one went to public in FLA that is very reasonably priced. Keep saving if you can. You won't regret it.

[well9boy9]

Bumping this post because I had an idea after reading the responses here and reading other threads similar.

Does this plan sound reasonable and can I do this?

1. Open a UTMA account now for one of my kids.

2. Gift shares from my taxable account to the UTMA up to 2700 in gains.

3. Sell immediately

4. Use the proceeds to true up both kids 529 up to the 4 year cost of the state school (tuition, books, housing)

5. Close the UTMA

6. Stop all future 529 contributions.

6. File a return next year for our son along with ours

If this is viable what are the pros and cons of this strategy?

What is the point of step 4 if there is no tax deduction?

Never mind, it is for tax free gain, but it has lost flexibility.

I would argue college kids will most likely have 0% LTCG anyway.

[fred2017]

I had a similar post days ago, after some feedbacks and my further consideration, I stopped 529 contribution and switched that contribution to Mega backdoor Roth (through employer 401k plan).

[MCR]

Years ago my sister-in-law gave me this advice: "there is no Sallie Mae for your retirement." I realized immediately that she was correct and immediately stopped contributing to 529s when my kids were around your kids' ages.

We didn't have anywhere near as much saved in their 529s as you do. My two oldest kids both attended and graduated from a state public university debt free (they "owned" their own educations -- that's for another post). My youngest transfers to the same university in a week or two (after attending community college and working the past couple of years).

As others have said, this is a very personal decision. Everyone's financial journey is different. But my sister-in-law's advice continues to ring in my ears; years later our retirement savings are the richer for it.

[jtk]

There are a few things to think about:

• When looking at the cost of attendance, some things are not qualifying 529 expenses, most often transportation and miscellaneous expenses line items. So, your target for a 529 should be the qualifying expenses.
• Use taxable for those other, non-qualified expenses.
• Look at the target schools, but many (and especially in the southeast) are holding costs flat or nearly so. I typically assume that it'll grow at general inflation, and it's been under at our benchmark schools.
• It's up to you whether you subtract the value of a likely state scholarship. We do at the level that's available for median-ish test scores.
• Use a present value to measure where you are. We compute the present value of each future school year for each kid (for qualifying expenses), and sum them for the target value. Then, we look at the percentage of that number that is funded. Ours are above 100 percent, and we aim to keep the kids in balance.
• For a formula method, there are two key updates per year. The first is right after the new year, when a present value formula (if you're choosing N by using a formula that is the school start year minus the current year) is now calculating one year closer to the final value (dropping your percentage saved). The second is in the late summer, when most schools update their cost of attendance for the upcoming year.
• Fund them up to 100 percent (or a little over), and try to keep both kids at approximately the same percentage. That implies that you may want to put a bit in along the way if there's a big market pullback, new year, and/or cost increases. But, you'll always be able to measure where you are, so you can easily react and see issues coming. I like this a lot better than putting in flat amounts per month.
• Our kids are little, so we haven't had to grapple with this yet, but consider how you might de-risk the portfolio as college gets closer. There will likely be some points along the way where the market is up quite a bit, and you can lock in some gains by rebalancing toward short-term bonds. If you play with an early retirement tool and set the expenses to be the college cash flows, you'll see the point where the risk of a short term downturn, combined with nearness of college, makes capital preservation more important than returns, especially if you already have enough.

[GoldStar]

Years ago my sister-in-law gave me this advice: "there is no Sallie Mae for your retirement."

I don't think this applies to the OP.
OP is maxing out two 401K accounts and IRAs and saving 1K monthly WHILE saving in 529s. Unless they are irresponsible or spend excessively I don't think they will be looking for a Sallie Mae for retirement.

[Walobolo]

Bumping this post because I had an idea after reading the responses here and reading other threads similar.

Does this plan sound reasonable and can I do this?

1. Open a UTMA account now for one of my kids.

2. Gift shares from my taxable account to the UTMA up to 2700 in gains.

3. Sell immediately

4. Use the proceeds to true up both kids 529 up to the 4 year cost of the state school (tuition, books, housing)

5. Close the UTMA

6. Stop all future 529 contributions.

6. File a return next year for our son along with ours

If this is viable what are the pros and cons of this strategy?

The only issue I see is you are gifting money from your account to an account owned by the child. After realizing the gains inside of the child’s account you are then transferring money back to your own account. Yes the child is the named beneficiary but you are the owner of the 529 account.

I think doing this is a bit of a grey area. Funds pulled out of the UTMA should be used for the benefit of the child but when? This fiscal year? 10 years from now? I can’t find any rules on this but as long as the money ends up being used or given to the child I don’t see an issue with it.

However it could get complicated. The situation I am thinking of is what if kid #1 does not need the 529 money and kid # 2 ends up using the account for grad school. The funds including capital gains/interest that you gifted kid #1 were in that 529 are “owed” to them as the UTMA account owner that was part of this transaction. As the custodian of a UTMA you have a fiduciary responsibility to manage and care for this money and get it to the rightful owner.

I would do UTMAs for both kids. Just do the 1300 per kid and skip the tax paperwork. Add the money equally to the 529’s as you can always transfer funds between accounts in the future. In the event of my example above, “settle up” with the kids in their early 20’s if needed. I say that age as that is when they would have/should have reached age of majority and had access to the UTMA funds.

[fred2017]

The only issue I see is you are gifting money from your account to an account owned by the child. After realizing the gains inside of the child’s account you are then transferring money back to your own account. Yes the child is the named beneficiary but you are the owner of the 529 account.

I think doing this is a bit of a grey area. Funds pulled out of the UTMA should be used for the benefit of the child but when? This fiscal year? 10 years from now? I can’t find any rules on this but as long as the money ends up being used or given to the child I don’t see an issue with it.

However it could get complicated. The situation I am thinking of is what if kid #1 does not need the 529 money and kid # 2 ends up using the account for grad school. The funds including capital gains/interest that you gifted kid #1 were in that 529 are “owed” to them as the UTMA account owner that was part of this transaction. As the custodian of a UTMA you have a fiduciary responsibility to manage and care for this money and get it to the rightful owner.

I would do UTMAs for both kids. Just do the 1300 per kid and skip the tax paperwork. Add the money equally to the 529’s as you can always transfer funds between accounts in the future. In the event of my example above, “settle up” with the kids in their early 20’s if needed. I say that age as that is when they would have/should have reached age of majority and had access to the UTMA funds.

I have few questions that hoping to get clarifications from you:

- Since I am not familiar with this, I am a little scared about the tax paperwork . Is that 1300 (1350 for 2025) will not trigger tax paper work, but 2600 (2700 for 2025) will trigger tax paperwork?

Thank you so much!

[Walobolo]

The only issue I see is you are gifting money from your account to an account owned by the child. After realizing the gains inside of the child’s account you are then transferring money back to your own account. Yes the child is the named beneficiary but you are the owner of the 529 account.

I think doing this is a bit of a grey area. Funds pulled out of the UTMA should be used for the benefit of the child but when? This fiscal year? 10 years from now? I can’t find any rules on this but as long as the money ends up being used or given to the child I don’t see an issue with it.

However it could get complicated. The situation I am thinking of is what if kid #1 does not need the 529 money and kid # 2 ends up using the account for grad school. The funds including capital gains/interest that you gifted kid #1 were in that 529 are “owed” to them as the UTMA account owner that was part of this transaction. As the custodian of a UTMA you have a fiduciary responsibility to manage and care for this money and get it to the rightful owner.

I would do UTMAs for both kids. Just do the 1300 per kid and skip the tax paperwork. Add the money equally to the 529’s as you can always transfer funds between accounts in the future. In the event of my example above, “settle up” with the kids in their early 20’s if needed. I say that age as that is when they would have/should have reached age of majority and had access to the UTMA funds.

I have few questions that hoping to get clarifications from you:

- Since I am not familiar with this, I am a little scared about the tax paperwork . Is that 1300 (1350 for 2025) will not trigger tax paper work, but 2600 (2700 for 2025) will trigger tax paperwork?

- But setting up custodian UTMA, will this information required when filling the FAFSA financial aids application?

Thank you so much!

(By the way, I come from a different culture background, so I am always a little confused with the money gifted to child (then belongs to the child), can't you ask the child to get some money back to you to support the family, if you really need that money? Anyway, you are paying his living expenses, college expenses, others such as car and all others?)

Yes. The base number for 2025 is 1350. Under 1350 no tax return is required. I say 1300 as you want to leave a little wiggle room. Would be annoying if have to file a tax return by going over by just a few dollars. This number comes from the standard deduction for dependents. ref: https://www.irs.gov/taxtopics/tc551

The ref link is to the 2024 IRS document but I include it just to show what you are looking for when checking each year for these numbers as they are tied to inflation and may change.

The 1,350 limit is for any income type for dependents but things get more complicated when you go over that amount. ref https://www.irs.gov/taxtopics/tc553

For example if your child is a teen and has a part time job there is a completely different threshold for doing a tax return. Details about those situation can be found in the link above. The link is also for 2024 numbers as the Topic pages on the IRS have not been updated for 2025 yet.

A UTMA is an account in the name of a child. When it comes to financial aid and FAFSA these are counted differently. If there is money in a child's account they are expected to contribute a higher percentage of those funds to pay for school than a parent which is generally a negative. If you are on the bubble or may be eligible for financial aid it would be best to not have funds in the child's name.

After you give the money to the child it is their money. Before age 21 (in most states, some are age 18) you still have control of how those funds are used and what they are used to pay for like a first car. If you were to get in financial trouble it would be in the best interest of the child use some of those funds to help you pay the mortgage so they don't end up homeless but...

You have to be a little careful on this forum. The average person that finds this site and creates an account and posts is not average. I mean that as both a compliment and a warning. Some of the ideas and strategies discussed here like UTMA's should be about the 10th thing down on your list of possible accounts.

After you pay off high interest debt, after you max your HSA, after you max you and your spouse Roth IRA, after you max you and your spouse 401k, after you have a sizable taxable brokerage account, after you have a sizable 529 account for each child, after you pay off all low interest debt and after you max your employee stock purchase program a UTMA might be right for you.

A UTMA might be the right choice for your situation but it is a niche account and does not even make it on this list: https://www.bogleheads.org/wiki/Priorit ... nvestments

[GratefulDad]

Seems like the simplest thing is just fund the 529 to comfort and deal with any gap then.

[fred2017]

Yes. The base number for 2025 is 1350. Under 1350 no tax return is required. I say 1300 as you want to leave a little wiggle room. Would be annoying if have to file a tax return by going over by just a few dollars. This number comes from the standard deduction for dependents. ref: https://www.irs.gov/taxtopics/tc551

The ref link is to the 2024 IRS document but I include it just to show what you are looking for when checking each year for these numbers as they are tied to inflation and may change.

The 1,350 limit is for any income type for dependents but things get more complicated when you go over that amount. ref https://www.irs.gov/taxtopics/tc553

For example if your child is a teen and has a part time job there is a completely different threshold for doing a tax return. Details about those situation can be found in the link above. The link is also for 2024 numbers as the Topic pages on the IRS have not been updated for 2025 yet.

A UTMA is an account in the name of a child. When it comes to financial aid and FAFSA these are counted differently. If there is money in a child's account they are expected to contribute a higher percentage of those funds to pay for school than a parent which is generally a negative. If you are on the bubble or may be eligible for financial aid it would be best to not have funds in the child's name.

After you give the money to the child it is their money. Before age 21 (in most states, some are age 18) you still have control of how those funds are used and what they are used to pay for like a first car. If you were to get in financial trouble it would be in the best interest of the child use some of those funds to help you pay the mortgage so they don't end up homeless but...

You have to be a little careful on this forum. The average person that finds this site and creates an account and posts is not average. I mean that as both a compliment and a warning. Some of the ideas and strategies discussed here like UTMA's should be about the 10th thing down on your list of possible accounts.

After you pay off high interest debt, after you max your HSA, after you max you and your spouse Roth IRA, after you max you and your spouse 401k, after you have a sizable taxable brokerage account, after you have a sizable 529 account for each child, after you pay off all low interest debt and after you max your employee stock purchase program a UTMA might be right for you.

A UTMA might be the right choice for your situation but it is a niche account and does not even make it on this list: https://www.bogleheads.org/wiki/Priorit ... nvestments

Thank you very much, thanks for the explanation and the advice, I totally agree with your advice.

[thedaybeforetoday]

Seems like the simplest thing is just fund the 529 to comfort and deal with any gap then.

As a dad of 3 college grads, based on financial aid rules of a couple years ago, I wished that I saved for college in a Roth rather than a 529, esp. if there is no state tax deduction.

As you may be aware, retirement monies are exempted from financial aid determinations. YMMV on this issue so run the Net Price Calculators of schools under consideration. I believe the downside is income taxes would be due on earnings from a Roth used for education, so double check this issue.

Even if financial aid isn't a consideration for you, Roth gives you more flexibility should there be "levftovers" and both Roth contributions and tax free earnings can be used for college and college related expenses.

As I'm learning, converting those 529 "leftovers" to kids' Roth accounts has some nasty qualifiers (account needs to be open more than 15 years, max $30k ...). But if you are intentionally underfunding then cash flowing the balance, this may not be an issue for you.

https://www.bankrate.com/loans/student- ... r-college/

[WS1]

Since the primary benefit of the 529 is tax free growth, would you have any interest in contributing at a slightly higher rate for a couple years and then letting it coast?

$650/month for the next 12 years would get me to my funding goal, but I’m seriously considering bumping it to $1200 while I have a some extra budget space. It’s like CoastFI but for degrees!