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How much is too much to fully fund 529 for 2 y.o. and infant?
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Anonymous
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Wonder where the PP is getting her tuition projections? I haven't seen those numbers.
For those posters who are, like me, older first time parents or have husbands who are near the same, and are not in the 5M taxable savings branch (going to guess not too many of us are!). Consider funding your Roth instead. You can take this out and use it for college if you want, but if DS / DD becomes the next Bono or Michael Stipe, then you can feel free to buy that yacht you've always wanted, instead, with less of a penalty. Obviously, this depends on age. I'd be eligible for Roth deductions when my DS is in his junior year of college. So my plan would be to fund his 529 for two full years of tuition then load up on my Roth otherwise. Financial advisor, would love it if you'd weigh in on this strategy. |
Anonymous
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To the finanacial advisor -- thanks for the advice.
Can you tell me at what level your 529 stops growing tax free? I thought it was $200k or something like that. Does that affect how much you should fund while the kids are young? |
Anonymous
| I would be conservative and use other vehicles to fund college in addition to a 529 and here is why. We are not super-rich, but my husband's family has a lot of money and has given the gift max to our children each year starting at birth. We have always put it into 529s for them. Our eldest developed anxiety/psychological issues around pre-K. In the last few years the issues have become more severe and it has become obvious we may need to pay for private school for him, if not now, later. We never had any intention of sending our children to private school, moreover, the schools that are good fits for him are far more expensive than typical ones. (I.e., $25K seems like a bargain comparatively) and we can't use the 529 money. While this scenario is unlikely to happen to you, your kids are still so young, and depending on how much you've got overall, you might consider keeping some of it accessible. |
Anonymous
I'm 14:13. Plunk in some numbers at this calculator: http://apps.collegeboard.com/fincalc/college_cost.jsp. If you want to bet that tuition costs will increase by only 5% each year, and you'd like to assume an instate payment, you can certainly get calculator to tell you tuition will cost ~$200,000. Sadly, I think you'd have be very out of touch to think tuition is only increasing by 5% and to think that average in-state tuitions aren't going to rise dramatically. GW cost $50,000+ this year, tuition + room and board. Williams C cost $42,000+, tuition + room and board. Type in $50,000 and enter in 7% inflation. What if costs are higher than 7%? It's very chilling. I don't think people can be too realistic about the potential costs of higher education and 529s do let you put the money towards room + board costs as well as graduate school expenses. |
Anonymous
I'm the PP you quoted at 14:13. I have no intention of paying for my son's graduate school!!! I think the thing that between us we've made clear is that there is no right answer. The best way to go about figuring out how much to fund your 529 is to make a bunch of assumptions and do some math. For me, I'd rather underfund and pay cash for the extra, so I'm going as far as assuming that he will go to college but maybe state school, and that I wont pay for grad school. I estimate in-state that could b 50k/yr. then made some not-so-conservative estimates about growth (8% annualized) and figured out how much to put in now. If you're willing to risk overfunding and assume that either your child will be able to use the $ for grad school or you will take a penalty to take it out (or will transfer to another beneficiary), by all means put more in. Figure it out by determining how muhc you want in the end (what do you think your target education will cost), how do you think your money will grow, and what does that mean. Separately, for the tax adviser, I've actually read that for middle/upper middle class folks who are generally expected to pay for kids' educations, there is an argument that $ in a 529 is not a 'gift'and there is no limit. This may be a risky tax position, but FWIW the tax rules are not all that clear. |
Anonymous
Ok, yeah, I thought you were inflating, and you were. No offense, but I don't think aiming high to be "safe" is really the safest choice. It's like the people who don't claim all their eligible deductions on their w4s because they'd rather overpay Uncle Sam and then get a rebate than pay the right amount or even underpay (even though that way your money can be working harder for you, earning interest). You do NOT want to overfund a 529. So you don't want to take the absolute, positive, highest cost estimate you can find for college and apply it. Or you'll end up taking a penalty on that money. Even if you do assume a high inflation rate, your base costs are using colleges on the WAY high end of the spectrum. The state school where I went is currently 13K per year. I could easily pay that out of pocket right now. Why in the world would you save all that money for the highest possible private school when your child just might attend a state school or a more reasonable private? That way, if your child DOES attend the more expensive school, you pay cash or liquidate other resources. If you oversave in the 529, your choices are hope he goes to grad school or take a penalty. Not to mention the opportunity cost you face due to socking the money into a 529 in lieu of a more flexible investment scenario. Unless he's only allowed to apply to expensive schools, you may end up over-saving and taking a hit. And, not everyone goes to grad school (not to mention college). Here's an article on real life college prices (average) right now. http://www.collegeboard.com/student/pay/add-it-up/4494.html While these averages are low, your state college estimates were crazy high. The school I went to now is 13K per year right now (tuition only). Double that for total expenses, including housing, fees, books and a meal plan, and you still have nowhere near your cost estimates. Now, I do plan to save more than state school tuition. I figure I'll plan mid-range. Then if DS goes to a higher cost school, we'll make up the difference from other accounts. I'd rather risk losing out on some tax savings, which aren't THAT great, than take the penalties if I've put too much money in there. But that's just me. |
Anonymous
| Another issue is the non tuition costs. Food, housing (off campus, potentially) books, etc. The rate of increase for these items is not likely to be as high as the rate of increase of college tuition. Rents have stayed fairly flat compared to tuition increases in many college towns because of the economy and housing slump. |
Anonymous
| Is 529 just for tuition? Or can you also use it for board (if on campus)? Assuming you can't use for books, etc. |
Anonymous
Have you checked? It's my understanding that 529 can be used for any education, so you could use it for private elementary, middle or high school as well as college. Also, I don;t hink it has to be college. I think it can be trade school, so if your child is a budding chef, s/he could go to cooking school. |
Anonymous
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great thread!
one thing I have been wondering (I have an 8th grader with 65k in college savings) is how trends in financial aid and loan accessibility will impact this upcoming generation. I have heard anecdotically that these things are harder to access, and need based awards are diminishing as colleges endowments were hit hard |
Anonymous
no, this is wrong, the 529 has a list of approved institutions... the poster whose child has anxiety MIGHT be able to withdraw that money if there were a medical diagnosis, however... |
Anonymous
It can be used for school related expenses. I don't know the list, but I'm sure it's out there. |
Anonymous
| Has anyone thought about doing the pre-paid tuition versus or in addition to the 529 plans? |
Anonymous
529 can only be used for post-secondary education, not private elementary or high school. |
Anonymous
We did a prepaid tuition for MD, then we have a 529 with some money, and then we have a taxable savings account which I think of in my head as being for college tuition if we need it (we also have Roths-- so that is a good idea too). I think the prepaid tuition for MD is a good deal because there is basically no penalty for using the money at any private school, but I do think it's a good idea to combine different strategies to diversify different kinds of risk. By the way, I think there is a limit on total contributions to a 529, but there is no limit to how big the account can grow. |