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Hi from PA, two young kids = how much into 529s?
Old 04-25-2014, 10:22 AM   #1
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Hi from PA, two young kids = how much into 529s?

Hi, I've been reading here for just a few days and am so impressed at the depth of knowledge here, disciplined savers, helpful posts, etc

I am hoping to "retire" sometime before 60, (39 now) but who knows? I am in the arts, and many of my colleagues never retire, feeling like we get paid to do something fun and satisfying. As a union member, I can practically count on keeping my job for life although the salary may vary slightly over the years. As a musician, we can count on some teaching income if we need. Our expenses are high now partly due to child care, but I hope we can trim them later once school starts for DD2. We live within our income, but hope to become more LBYM later. Then I can concentrate on ramping up the taxable accounts.

Our total tax deferred accounts add up to 530K. We are maxing out one 403b every year (17,500) and putting a few thousand in a SEP-IRA. I also get an employer contribution of about 11K into another 403b (no union pension though). I had previously done a non deductible trad IRA rollover but I don't understand how to do it now. Do I contribute every year then roll it over every year? Does that mean I end up with a separate account for every year? Apologies if this is elementary, but I never recovered from "pregnancy brain"... We also have 230K in taxable accounts and cash, 25K emergency fund, and almost 400K home equity.

A few questions, mainly how to estimate college costs, and other unknowables. Almost certainly both our kids will go to college, as nobody in our extended family has NOT gone through graduate school. I do see a lot of wisdom in encouraging them to work and pay some of their way through school, teaching them the cost and value of college. However, I also want them to have the freedom of graduating without huge loans. DH and I were lucky enough to have most of our educations funded, and I think we came out ok! So I would like to end up with enough to fully fund two undergrad degrees, with the possibility of paying another year or two each for grad school.

DD 1 is 8, with a 529 balance of 103K
DD 2 is 3, with a 529 balance of 21K

We are currently contributing 250 a month to DD 1 and 500 a month to DD 2. PA gives a state tax deduction. In addition, the grandparents have opened accounts and the balances there must be north of 10K, although I haven't asked lately. I hesitate to ask without sounding like I'm prying or pushing. Silly, I guess.

Should we continue on this path? We can contribute more, without hurting our lifestyle now. I vacillate between thinking we won't have enough and we'll have too much. I just have no idea how to estimate what net college costs will be for us. Based on income I doubt any need based aid will come our way, but DD 1 is very bright and maybe could get a merit scholarship. (Have yet to see how DD 2 is shaping up!) Will merit aid still exist in 10 years? Do some kids really pay sticker price at expensive schools? How does one select a private vs. public college, does it really hinge on campus visits? Will tuition continue to outpace inflation? If we end up with too much can I hang on the account in case we have grandkids someday? Do 529s become parts of estates?

Any comments or advice on any part of my post are welcome!
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Old 04-25-2014, 10:44 AM   #2
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Hi Camellia. I live in PA, am 42, and also have two kids to put thru school so we face a similar situation.

I use the PA Guaranteed Savings Plan as a tool to both estimate college costs and save for college. Each year they publish a cost schedule for a basket of different types of schools -- state, private, ivy, etc. Using this schedule, you can get a good idea of tuition for a typical institution in your target college type.

With two kids, I figure I need to save for 16 semesters of tuition. I understand that room/board is about a 40% load on top of tuition. So I figure if I save enough for 23 semesters (16 * 1.4), I'm probably in the zone. Every year I update the current cost of 23 semesters and see how my saving is tracking to that moving goal. I have some of the savings in the GSP program and some in other vehicles. (Recently, I got enough saved so now I'm just watching to ensure that the college savings stays >= to the 23 semester costs as the years go along and we get closer to college).

You can find the current rate baskets at PA529 | College Savings Plan | Guaranteed Savings Plan | Details . You can also find info on the PA GSP program there as well.

Hope that helps!
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Old 04-25-2014, 11:26 AM   #3
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Easy there. As long as you are happy with state schools, then you already have enough saved to cover tuition. I've found that room & board is not that much more than what it costs me if they live at home. My oldest will go to the local state university this fall.
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Old 04-25-2014, 12:23 PM   #4
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I agree with going to a state university if that suits your childs educational goals. And, consider a local community college for the first two years (lower tuition, often better student/instructor ratio).

What happened with us: We accumulated 3 years worth college tuition in a 529 plan. Our son (only child) attended a local community college (free tuition for one full year under a new state program.....that's another story) Then, out of the blue he decided to serve 6 years in the military. He finished his military obligation, was awarded 1 year of college credits for military classes and is now a junior at our state college. His GI bill covers all tuition and housing stipend. The 529 nest egg, we have decided, will be available for him if he decides to go on to graduate school if his GI bill has been exhausted. If that does not happen we may keep it for his (future?) children. Other option is pay penalties and roll into our retirement fund.

Unlike most, things fell into place for us/him. We are very fortunate. Wishing you success with your educational goals.
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Old 04-25-2014, 05:09 PM   #5
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I was about to chastise you that you can't do LBYM later, that you need to bake it in your DNA, even if the amount was small. Then I kept reading and saw all the substantial amounts you have (and continue) to save. Bravo.

I think you are in good shape. I am in PA and have two kids (8 & 5) and have saved about half of what you have. My goal is to save up to around $200k in the next 5 years or so and then let the account accumulate beyond that. My goal is to try to have more than 4 years public, but probably less than 4 years private. Then let the kids figure out what path they want to take.
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Old 04-27-2014, 06:52 AM   #6
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Thanks everyone. Great information, all. So does anyone think I can contribute less at this point going forward, or I should stay the same path? I don't know what I would do with the money not put in the 529 except throw it in the Ameritrade account or something...
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Old 04-27-2014, 07:08 AM   #7
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Originally Posted by Camellia View Post
Thanks everyone. Great information, all. So does anyone think I can contribute less at this point going forward, or I should stay the same path? I don't know what I would do with the money not put in the 529 except throw it in the Ameritrade account or something...
On the "extra" money, we just put it in a brokerage account that I manage with its own AA given the shorter time horizon.

One thought: even if you're "ahead" of pace, don't slow down. Just keep jamming on it until your college accounts are "fully funded". That's what we did. We treated it in the same way as we did paying off the mortgage.

Choices like that are personal, but I can tell you that I find it very freeing to have the kids college covered and the house paid off. To me it feels like an early version of what many on this board say life it like when you're FIREd. I have lots of friends who are just starting the math/exercise of figuring out college as their kids get close/into school. They're also looking at the McMansion mortgage payment and realizing that it will never be paid off. Endless complaining about the costs/difficulty. I just smile and make sympathetic noises.

Between the mortgage and the college savings being done, life's two biggest financial obligations are gone...so now we're solving a one dimensional problem -- saving for FIRE. (And honestly, enjoying some extra beer money each month!)

My $0.02. Good luck and great job!
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Old 05-05-2014, 05:14 AM   #8
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Living in Pennsylvania, with its many state and state affiliated universities I feel we are truly blessed. My daughter attends The University of Pittsburgh and my wife and I are extremely happy with the cost (roughly $25k all in) and value. My daughter is challenged, works hard and is doing quite well. My neighbors child will attend Westchester University next year and live home and the family will pay about $10k. There is really something for every budget.

I find it incredulous just many people come upon retirement and college surprised and are shocked at the cost. (We've seen their surprise at the 'funding our college' sessions as part of the college walk throughs - loans!) It may be my financial background but when my daughter reached her senior year in HS we had been saving and living simply for 18 years for her and her younger brother Not just for college mind you but, for retirement. I knew the costs and I believe I had a sense of value.

My suggestions
Save and save some more
Shop for colleges and look for value (get your kid involved so that understand value)
Never take you kid to a 60k a year 'Villanova' unless you are prepared to 'pay the freight'
If you don't know that Penn State cost $34k (all in)a year then start doing your research now.

When I see the thoughtful discussions here (actually planning) I think my god there are actually other people like us out there. College costs like retirement shouldn't be a surprise...
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Old 05-05-2014, 09:09 AM   #9
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Originally Posted by Camellia View Post
Thanks everyone. Great information, all. So does anyone think I can contribute less at this point going forward, or I should stay the same path? I don't know what I would do with the money not put in the 529 except throw it in the Ameritrade account or something...
Late to the party, but I'm not a huge fan of 529s because they have too many constraints for my taste. I would boost your taxable savings as it has no constraints by comparison to the 529s. Also, the tax bite of taxable accounts can be low since qualified dividends and LTCG get preferential tax rates (0% if you're in the 15% bracket or below, otherwise only 15%).

I decided to save for our kids college in taxable accounts. As it turned out, DD went to college during some of my peak earning years so we were able to pay for her college costs from cash flow. DS has decided not to go (at least for now).

While we have in the back of our minds put aside an amount for DS in our taxable accounts should he change his mind, those taxable funds have grown and are now supporting us in ER.
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Old 05-11-2014, 08:34 PM   #10
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CollegeConfidential dot com/Parents forum, for funding and college selection from parents giving diverse and experience views. Savingforcollege.com for 529 advice but not necessarily for investment strategy in the 529. And Finaid.com for financial aid information.

Easy questions from this parent. Son first started 12 years ago, so he's done. CMU '06. We are WestCoasters. Visited zero colleges, expensive to visit and time involved to visit was something he and we could not afford. We started investing at birth with Cost target school as Pton, 6% annual cost increases. Today I would say that cost increases will be 4-5% for full payers, which appears to be you.

We did UGMA and EE SavingsBonds, floating with min 4% till maturity ( or 25yrs?) since 529 and Coverdells were not around. In 2001 we had accumulated about 120k; By 2003 that was down to 35k and we had not touched principal. CMU cost-of-attendance was then about 34k. When he left, it was ~40k, returning students got smaller increases. In 2013, the cost of attendance for private colleges was ~62k/year

more later.
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Old 05-11-2014, 09:18 PM   #11
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more-continued.
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Originally Posted by pb4uski View Post
Late to the party, but I'm not a huge fan of 529s because they have too many constraints for my taste. I would boost your taxable savings as it has no constraints by comparison to the 529s. Also, the tax bite of taxable accounts can be low since qualified dividends and LTCG get preferential tax rates (0% if you're in the 15% bracket or below, otherwise only 15%).
ITA.
If a a 529 is part of the strategy, maximize the youngest childs 529 because 529's can be used for either or any child. And since your youngest is 5 years younger, there is 5 more years for growth. Remember that your allocation should change as your child approaches college-something we learned the hard way after 9/11 and son applying to expensive schools. And something we forgot to learn in our retirement funds in 2008-09.

Think about an UGMA. Bc of tax advantages as pb4 stated. We used the depleted UGMA to pay the student loan's interest-never letting the interest to accrue and a small paydown of the principal, especially the first year. Use the generous terms of direct student loan and PLUS programs. If you have good credit scores, you and student can borrow up to COA (cost of attend) per year, so if your investment is doing better than the interest rate (6.8% max ?) of the loans, you borrow and then pay from 529 or UGMA at the end of calendar year. Student loans are disbursed by academic year. See a stock broker(s) for this strategy.
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Old 05-11-2014, 11:22 PM   #12
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Thanks for some great info. College confidential looks fascinating. I may get very distracted, losing time keeping up with this forum! Funny, I had been viewing student loans as such an albatross around a new graduates neck, that it didn't really occur to me that I could take out the loans myself. But wouldn't a Heloc be a good option? Doesn't seem like plus loans are tax deductible for income over 155k if I understand correctly. I don't know anything about them, though.

A very quick google search doesn't show me how UGMAs beat 529s for tax advantages, especially with the state deduction for contributions. What am I missing?For saving in taxable accounts I am suspicious of possible LTCG tax rates going up again before 10-15 years. Any crystal balls here?

Thanks again!
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Old 05-12-2014, 06:45 PM   #13
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The end goal is to pay for college. Correct? Everyone would like to get there fast, easy, and tax free. However fast, easy, tax free does not necessarily mean that it is even possible. Perhaps you can get there fast and easy by paying taxes-would that be OK? And suppose the taxes are negligible to the overall picture.

As PB4uski said above, "there are too many constraints". In my experience, the more constraints, the lower the returns. The opposite is true too. And so there must be some compromising.

So lets look at DS1 with 108k in 529. Theoretically you are done for a state school now. Apply FireCalc to his 529 and the picture may not look so good. In a 529, and you can make just one reallocation/movement per year. Your original question: How Much into 529s- Depends. Get familiar with 529 pros/cons and repost.
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Old 05-12-2014, 06:50 PM   #14
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BTW, congrats for doing a great job in getting where are today. Amazing feat IMO.
The last 5 years has been good for investors.
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Old 05-13-2014, 12:11 PM   #15
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Late to the party, but I'm not a huge fan of 529s because they have too many constraints for my taste. I would boost your taxable savings as it has no constraints by comparison to the 529s. Also, the tax bite of taxable accounts can be low since qualified dividends and LTCG get preferential tax rates (0% if you're in the 15% bracket or below, otherwise only 15%).

I decided to save for our kids college in taxable accounts. As it turned out, DD went to college during some of my peak earning years so we were able to pay for her college costs from cash flow. DS has decided not to go (at least for now).

While we have in the back of our minds put aside an amount for DS in our taxable accounts should he change his mind, those taxable funds have grown and are now supporting us in ER.
A few years ago before I even knew what I was doing I came to the same conclusion and stopped funding DD's 529 account and started putting that money into my taxable accounts figuring I would pay for her college from that. How much would she need? I don't know but I'm guessing about $30k per year all in (?). I'm thinking of having her attend junior college first and then the university for 2-3 years. I would like her to be a veterinarian or something along those lines.

However, I also recently found out that you can't even give money to your own kids to help out without the IRS wanting a cut (on the money they've already taken income taxes on)...ala gift-tax
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Old 05-14-2014, 09:33 AM   #16
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Previous posters have ignored a key benefit of the 529. With a taxable cash account all the amount in savings is considered as part of your net worth deducted from any grants or scholarship tuition reduction in your financial aid offer package. Most of 529 savings is sheltered from that equation.
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Old 05-14-2014, 09:36 AM   #17
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You also want to maximize your oldest child, not youngest. Think about it!
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Old 05-15-2014, 03:51 PM   #18
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Good point Al and everyone should consider the pros and cons. In my case I suppose you could say I ignored that key benefit...because IMHO if anyone is going to ER they'll have a significant amount saved up in taxable accounts anyway. So, if I reach my ER goals I know my kid won't qualify for any financial aid- which is why I'm saving for her college expenses in the first place. Now scholarship...I don't know the rules honestly but didn't think they looked at the parents' assets for that?
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Old 05-15-2014, 05:21 PM   #19
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You also want to maximize your oldest child, not youngest. Think about it!
I did. You are wrong. Think about it.
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Old 05-15-2014, 05:56 PM   #20
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I did. You are wrong. Think about it.

What your oldest child does not use can transfer down the line to your youngest. No guessing. Why load up your youngest and risk not enough might be leftover? You have more leeway if the older child has the larger amount. Your thinking is backward.
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