How much is too much to fully fund 529 for 2 y.o. and infant?

[Anonymous]

My adviser says 100k for each, now. It seems like a lot but we have it. I trust him, but looking to see what others are doing.

[Anonymous]

Double check yourself here. My friends are currently paying $40,000 a year for out of state tuition/room and board, if that helps.

http://www.savingforcollege.com/college-savings-calculator/index.php

I would assume a really low interest rate of return, personally. So that $100,000 each doesn't sound too out of bounds.

[Anonymous]

I think there are gift tax implications if you put in more than $13,000 (?) per year per child. Your advisor should be aware of these issues.

Personally, I plan just to keep putting in more money each year until the total for each child approximately equals four years of whatever tuition is running at that time. Then I'll assume that the investment growth of the 529 will approximately equal increases in tuition cost for the remaining years, and stop contributing. If tuition rises slightly faster, my child can take a small student loan to cover the difference. If the investment growth rate is slightly faster, then we can use any excess for student housing, books, grad school, etc.

[Anonymous]

I would not save that much to a 529 *if* you were not also fully funding your retirement.

You can also probably cash flow at least some of the tuition payments when the time comes.

[Anonymous]

I don't know, but that sure does seem like a lot, even if (especially if?) you have the money. You don't want to overinvest in this area.

[Anonymous]

You might want to think carefully about fully funding a 529. I'm sure your kids will be smart and successful, but you just never know what might happen. There's no guarantee they'll go to college, and even if they do, they could get scholarships, go to an in-state school, etc. Our advisor told us a lot of people fund a certain percentage, and then plan on paying cash when their kids get to school. Yes, you miss out on some tax savings, but you also lessen the risk of the penalty if you end up not using it for education.

[Anonymous]

Anonymous wrote:You might want to think carefully about fully funding a 529. I'm sure your kids will be smart and successful, but you just never know what might happen. There's no guarantee they'll go to college, and even if they do, they could get scholarships, go to an in-state school, etc. Our advisor told us a lot of people fund a certain percentage, and then plan on paying cash when their kids get to school. Yes, you miss out on some tax savings, but you also lessen the risk of the penalty if you end up not using it for education.

I agree with this PP. I did some calculations recently for my 1YO and decided on about $75k. I dont remember my exact inputs, but basically I estimated that it would grow at 8%/yr compounded and that if DS goes to state school that could be as low as $50k/yr in-state. If you over-fund, you risk taking a huge penalty. If I become convinced in 10 years that he's headed for Harvard maybe I'll up it . The only thing to add is that you are not penalized if you change beneficiaries to another relative, so you might risk overfunding your older child's because you can transfer to younger child.

[Anonymous]

This is way too much. Here is where anonymity makes it harder to convince you, but I have real trouble understanding this recommendation. Overfunding 529 plans means that you may face a penalty if you don't need all of the savings.

The advantage of the 529 is that it allows you to accumulate your earnings tax free, which is nice. The downside is the restriction that it should be used for college. You can't assume a low interest rate given the length of time remaining and you don't know where your child will go to school.

You are far better off funding the 529s to a more modest level and developing a tax efficient investment account that can be used to supplement your retirement funding, or cover the gap in funding if the 529s don't grow enough. College is expensive, but I think your adviser is grossly inflating the level outlay you need now to meet your goals.

[Anonymous]

Financial advisor here

Our rule of thumb is that value today should be worth what you want to spend on school. So a private liberal arts school, fully fund at $50k per year, $200k now. You can fund $13k x 5 years, or $65k per parent per child without gift tax implications. As for the anonymous folks above who say bad idea, this is a strategy that clients with ~$5m plus in taxable accounts frequently use. Folks with lots of excess savings, plan on fully paying for school, using annual gift exclusion in some way regardless.

[Anonymous]

OP here. Thanks 7:09, that makes sense to me.

[Anonymous]

Anonymous wrote:Financial advisor here

Our rule of thumb is that value today should be worth what you want to spend on school. So a private liberal arts school, fully fund at $50k per year, $200k now. You can fund $13k x 5 years, or $65k per parent per child without gift tax implications. As for the anonymous folks above who say bad idea, this is a strategy that clients with ~$5m plus in taxable accounts frequently use. Folks with lots of excess savings, plan on fully paying for school, using annual gift exclusion in some way regardless.

There is one rather large flaw in this reasoning, I think. That is: what you want to spend on school and what your child wants may vary. I may want my child to go to a private liberal arts school, but if he would prefer to go to the University of Maryland at a fraction of the cost, I will have a very over-funded 529. Once the kid is a bit older you may begin to get a sense of whether they are the liberal arts type or not, but it seems silly when your child is 2 YO to decide that he WILL receive the most expensive education just because you can afford it.

[Anonymous]

Anonymous wrote:Financial advisor here

... You can fund $13k x 5 years, or $65k per parent per child without gift tax implications ....

Could you please explain this part? I get that $13k per year keeps you within the gift tax limits. But why the reference to $65k ($13k x 5yrs)? Is $65k some sort of maximum? Why do you reference that figure?

Also, is the $13k gift tax limit a per parent limit? Meaning that two parents could give $26k per year without triggering tax liability for the child? Or is it $13k per married couple?

TIA.

[Anonymous]

NP here. The 13k is per person, so you can give 26k between you per year without tax implications. And a grandparent could give as well, their gift not affecting the tax implications of your 26k.

[Anonymous]

You can either give 65k every 5 yrs or 13k per year per parent. They just tried to make it easier. Then in 5 yrs, you can do the same again. The annual gift exclusion in general is 13k/yr per person.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Financial advisor here

Our rule of thumb is that value today should be worth what you want to spend on school. So a private liberal arts school, fully fund at $50k per year, $200k now. You can fund $13k x 5 years, or $65k per parent per child without gift tax implications. As for the anonymous folks above who say bad idea, this is a strategy that clients with ~$5m plus in taxable accounts frequently use. Folks with lots of excess savings, plan on fully paying for school, using annual gift exclusion in some way regardless.

There is one rather large flaw in this reasoning, I think. That is: what you want to spend on school and what your child wants may vary. I may want my child to go to a private liberal arts school, but if he would prefer to go to the University of Maryland at a fraction of the cost, I will have a very over-funded 529. Once the kid is a bit older you may begin to get a sense of whether they are the liberal arts type or not, but it seems silly when your child is 2 YO to decide that he WILL receive the most expensive education just because you can afford it.

You can use the funds for graduate school. In addition to the fact that schools are projected to cost $400,000 (state) to $800,000 (today's dollars in 20 years), it's a reasonable guess that many kids from the middle class will go on to do graduate work.