When to stop contributing to a 529 plan

[Anonymous]

In this case, for a 12 year old. No other kids to whom we can pass down any excess balance, and we're hoping to fully fund undergrad. We will be retired when kid is in college, so hoping to make a good guess. Current balance is pretty high, but I'm curious where others stop. If your goal is to fully fund a school that costs $80k per year, would you stop contributing if the balance is less than $320,000 because you assume at least some growth that outpaces inflation?

[Anonymous]

We stopped at $200K but our goal is state school. We can pull from retirement.

[Anonymous]

Depends on a lot. Do you think kid will want to attend grad school? Can you afford to over fund a bit, or are you willing to leave it for future generations? Starting in 2024 (or 2025) you can use up to $35K excess to backdoor fund a Roth IRA for your kid if they have income (basically they need to qualify for a Roth and you can use excess up to $35K over multiple years total to fund a Roth).

I'd do projections for having $80K/year for when kid will be 18. And then save extra outside of 529 for the rest. Top colleges will be over $90K in 6 years. But there is a chance your kid will go somewhere cheaper (with merit or a state school), so you are right to not want to overfund by too much.

[Anonymous]

Fund the 529 with enough for in-state, and keep putting away more in a brokerage account. This way, if they go in-state you won't lose the money, and if they go private and/or expensive, you have the funds to cover their education, without any downsides (you can use the money for anything you want).

[Anonymous]

We are doing $200k a kid, give or take. We live in Virginia so we are hoping both go in-state barring a compelling reason not to (I worked in graduate school admissions for a long time and the private undergrad kid had no advantage.) Anything left over can be used for grad school and/or converted to a ROTH Ira. Or saved for grandchildren.

[Anonymous]

If you want to fully fund private, the privates are running 90K now, so I would fund to 320K-350K and cash flow whatever is needed beyond that

[Anonymous]

We plan on stopping at $500k to fund private and grad school. Whatever is left over, can be passed on to their children.

[Anonymous]

Anonymous wrote:We plan on stopping at $500k to fund private and grad school. Whatever is left over, can be passed on to their children.

+1. Our goal is 550k.

[Anonymous]

Anonymous wrote:In this case, for a 12 year old. No other kids to whom we can pass down any excess balance, and we're hoping to fully fund undergrad. We will be retired when kid is in college, so hoping to make a good guess. Current balance is pretty high, but I'm curious where others stop. If your goal is to fully fund a school that costs $80k per year, would you stop contributing if the balance is less than $320,000 because you assume at least some growth that outpaces inflation?

Well, what is it? Why do people share half-ass info. when asking for advice? This is an anonymous forum!

[Anonymous]

We stopped at $200k each and will pay any additional amount out of pocket.

[Anonymous]

Are the penalties for overfunding large enough to matter?

[Anonymous]

We stopped at 500k

[Anonymous]

The withdrawal penalty is only 10% of the gains.

If you put $200K in, and get $300K gains, and only spend $100K (in-state tuition + boarding), the penalty is at most 10% of the gains: 10% *($300K - (60% * 100K)) = $24K, while avoiding any intermediate taxes during the growth phase.

That's a big amount by itself, but not so big in the 20-year scheme of things with avoiding paying all that tuition, and considering the gains were largely unearned free investment income above inflation.

[Anonymous]

Anonymous wrote:The withdrawal penalty is only 10% of the gains.

If you put $200K in, and get $300K gains, and only spend $100K (in-state tuition + boarding), the penalty is at most 10% of the gains: 10% *($300K - (60% * 100K)) = $24K, while avoiding any intermediate taxes during the growth phase.

That's a big amount by itself, but not so big in the 20-year scheme of things with avoiding paying all that tuition, and considering the gains were largely unearned free investment income above inflation.

Good point. People are too focused on the penalty and not on what really matters and that is long term benefits of compounding on tax free growth.

[Anonymous]

Anonymous wrote:

Anonymous wrote:In this case, for a 12 year old. No other kids to whom we can pass down any excess balance, and we're hoping to fully fund undergrad. We will be retired when kid is in college, so hoping to make a good guess. Current balance is pretty high, but I'm curious where others stop. If your goal is to fully fund a school that costs $80k per year, would you stop contributing if the balance is less than $320,000 because you assume at least some growth that outpaces inflation?

Well, what is it? Why do people share half-ass info. when asking for advice? This is an anonymous forum!

OP. Thanks for all the advice. Good point about the 10% penalty being not that significant. I’m probably overthinking the risk of overfunding. Balance is currently $245k for 12 yo. I’m still contributing $17k per year, and now I’m starting to wonder when to stop contributions.