Are we suckers for diligently saving in our kids' 529s?

[Anonymous]

You can absolutely take money out of a Roth before 60.

Google it. Also Google back door Roth.

[Anonymous]

Anonymous wrote:We've been playing around with various schools' net price calculators and it seems that our EFC goes up significantly when we put in 529 data. But had we put that money in, say, a Roth IRA instead, that money wouldn't be lumped in with our assets. Or had we saved nothing at all, the schools would be picking up more of the bill. So freaking frustrating.

I'd be interested in seeing your numbers. Your EFC is based primarily on your income.

Note: The 529 is considered a PARENT asset, not a student asset. That makes a big difference in how it is treated by FAFSA.

http://www.thecollegesolution.com/will-your-savings-hurt-your-financial-aid-chances/

http://www.thecollegesolution.com/dont-fall-for-these-4-financial-aid-myths/

http://www.collegeconfidential.com/ants/

Does This Mean We Should’t Save, or Spend What Assets We HAVE Saved?

This discussion won’t cover specific strategies for asset deployment before applying for financial aid, but rather address the basic question of "ant vs. grasshopper" – is it better to not save at all, and hope for the best at financial aid time? In general, the answer is "no" – it is indeed better to save for anticipated college expenses, even if these assets will be "taxed" by the financial aid process. There are several reasons why this is the case.

First, assets in the parent’s name are just one part of the EFC calculation, and a relatively modest one at that. Parental savings are "available" to pay college expenses at a rate of 6%, which means that a $50,000 nest egg would increase the EFC by just $3,000. While this is substantial, it is not nearly as big an impact as parental income (salaries, business earnings, etc.) Income is calculated at a much higher percentage, and except for low-income, high-asset families, is likely to be the bigger factor in their EFC.

Second, while assets usually take many years to accumulate, a family won’t know about eligibility for financial aid until the college years are quite close – a "no asset" strategy could backfire if, due to a job promotion, family income goes up enough to make financial aid unlikely.

Third, financial aid is often a mixed blessing – at most colleges, a signficant portion of the aid may come in the form of student loans. While sometimes these may have better terms or a lower interest rate than would be available to a typical borrower, they are still loans which must be paid back.

Finally, a family that attempts to minimize liquid assets in the hope of qualifying for more aid is leaving itself vulnerable to many kinds of misfortune unrelated to college: unanticipated job loss, unreimbursed medical expenses, temporary disability, etc. Most financial advisors recommend having at least six months of family income in an easy-to-access, liquid account to handle emergencies of this type. A family without savings is in a precarious situation – while some families may find themselves in this situation because of circumstances beyond their control, it is foolhardy for a family to consciously plan to minimize savings.

[Anonymous]

You can take your original contributions out of a Roth IRA tax-free any time. Only the earnings generate the 10% tax.

[Anonymous]

Anonymous wrote:Yes. Stop the 529 and start back dooring Roth.

Do both

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

We decided against 529s when we realized it could be used for college and nothing else. All things considered, huge waste if kid decides not to go to college or is unable to for some reason.

Not a huge waste. The penalty is small compared to the returns you could get (just 10% of returns is the penalty for withdrawal for noneducational use). We made 35K in ours. That really helps us with our son's college education, but if he had not gone, we would have still made a healthy return (no loss). It is not a "huge waste". You can also use it for another child, such as a niece, nephew or grandchild (or for yourself if you go back to school).

We did not have to file the CSS for the college that our son attended (one more reason we loved the school). They also gave us merit aid. We did not qualify for anything else. The 529 made absolutely no difference regarding our ability to pay. SAVE.

But wouldn't that be a $3500 penalty, for example, in your case? Are you saying you wouldn't have earned as much returns via any other investment vehicle?

I know I get a Maryland tax break for the money I put in; that's worth something. We put in 50K, so we saved almost 3K in MD taxes; would come close to breaking even in this case.

Thanks to both you and the original poster who responded to my question. I have a young child and hope she will go to college, so I am going to start a 529 for her. These explanations are really helpful.

[Anonymous]

Anonymous wrote:You can take your original contributions out of a Roth IRA tax-free any time. Only the earnings generate the 10% tax.

We don't do 529's either and have IRA's and other investments instead.
I think of it this way:
When I am retirement age, there is no one lending money to me.
An 18 year old adult, who is just entering their working life as I am ending mine and is able to get loans for school and a lifetime of earning money to pay it back, is going to be in a much better position than me.
I just can't have $200k (for example) tied up in a college account not knowing that I won't be ill, disabled and have no way to get that money for my needs or the needs of my husband.
Perhaps because I work in healthcare and see the unanticipated and unplanned for disease and debility that I am cautious, but the fact that the money in a 529 has to be used for college, it doesn't seem prudent to earmark such a large amount to a single thing.
And if my husband is disabled at 60 and needs round the clock care at 65, I'm sure not sending my sisters kid to college if mine decides not to go.
Also, if my child becomes ill suddenly or disabled or injured and can't go to college, no matter how bright they were through school, it doesn't make sense to have that $200k just for college when we could use it for medical care and care for that child.
Again, with a child that continues to need my help, I am not sending my sisters kid to college!
(I keep hearing that as a common refrain when it's pointed out that the money has to be used for college,"just send your nephews then! What?)

[Anonymous]

Also, if my child becomes ill suddenly or disabled or injured and can't go to college, no matter how bright they were through school, it doesn't make sense to have that $200k just for college when we could use it for medical care and care for that child.

There are exceptions to the 10% penalty. One is disability of your child. Look it up.

Also, you do have access to that money for other things; you just have to take the penalty (which is not enormous---it's only on the earnings and only 10%).

Personally, I was more worried about paying for my child's education than about needing money for medical care. We have pretty good health insurance. Also, I would say that the 529 is probably not for people who are not funding their retirement accounts first. We were able to do both. So I guess we are fortunate. It has definitely made a difference for our son. He has no loans.

[Anonymous]

^ Also, we did not have 200K in the 529. We had 85K. It made a big difference . . . we were able to use some of that along with current earnings and we were still able to fun retirement. You don't have to do 200K by any means. Any amount can help.

[Anonymous]

If you earn more than 100 or 150 k, as many do on dcum, then you aren't getting any aid anyway.

[Anonymous]

Anonymous wrote:

Also, if my child becomes ill suddenly or disabled or injured and can't go to college, no matter how bright they were through school, it doesn't make sense to have that $200k just for college when we could use it for medical care and care for that child.

There are exceptions to the 10% penalty. One is disability of your child. Look it up.

Also, you do have access to that money for other things; you just have to take the penalty (which is not enormous---it's only on the earnings and only 10%).

Personally, I was more worried about paying for my child's education than about needing money for medical care. We have pretty good health insurance. Also, I would say that the 529 is probably not for people who are not funding their retirement accounts first. We were able to do both. So I guess we are fortunate. It has definitely made a difference for our son. He has no loans.

My point was that saving $200k in an account without any penalties for its use and then assessing the entire family's situation at the time of college makes more sense than just saving in a 529 and having to pay 10% if life does not go according to plan.

In an IRA, the entire amount of donations can be taken out without penalty (any money earned is taxed).

So therefore, if life is great and everyone is healthy and retirement accounts are on track like we are dutifully saving at 15%, then that hypothetical $200k (I have 2 kids so that is my goal) goes to their college.
If my husband or I get multiple sclerosis/bad car accident/cancer and can't work past 55 and need daily medical care and a power wc to get around, then that money will have to go towards that.

Off topic, Health insurance does not cover all costs of living for someone with a progressive medical condition that renders them unable to work and contribute to retirement. Loss of one spouses income in their 50's will significantly alter not just cash flow but retirement savings as well, even of some magical health insurance policy covers all the actual costs of care.

Sounds like everything worked out in your family's plan and that is wonderful! I just wanted to provide another point of view.

[Anonymous]

Anonymous wrote:Yes. Stop the 529 and start back dooring Roth.

THIS! TODAY!

[Anonymous]

Personally, I was more worried about paying for my child's education than about needing money for medical care. We have pretty good health insurance. Also, I would say that the 529 is probably not for people who are not funding their retirement accounts first. We were able to do both. So I guess we are fortunate. It has definitely made a difference for our son. He has no loans.

My children won't have loans, but I haven't done a good job at funding my retirement account adequately. I can work another 23-24 years and hopefully things will get better. I wouldn't be mad if I keeled over at 65.

[Anonymous]

You can change the beneficiary on a 529 if your child doesn't use it.

[Anonymous]

So therefore, if life is great and everyone is healthy and retirement accounts are on track like we are dutifully saving at 15%, then that hypothetical $200k (I have 2 kids so that is my goal) goes to their college.
If my husband or I get multiple sclerosis/bad car accident/cancer and can't work past 55 and need daily medical care and a power wc to get around, then that money will have to go towards that.

Off topic, Health insurance does not cover all costs of living for someone with a progressive medical condition that renders them unable to work and contribute to retirement. Loss of one spouses income in their 50's will significantly alter not just cash flow but retirement savings as well, even of some magical health insurance policy covers all the actual costs of care.

A 529 will have little impact on these kinds of disasters. The penalty is very little really. If such a calamity were to occur and you lose the income of one spouse, chances are very good that your child will then receive financial aid.

[Anonymous]

Even with FA and even some merit based aid (which you really can't count on), some colleges are so stupidly expensive, you'd still have to fork over a lot. I don't want to take that risk. We do fully fund our retirement before we fund 529, though.