Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
529 plans
Old 08-13-2012, 02:24 PM   #1
Recycles dryer sheets
 
Join Date: Aug 2012
Location: Murfreesboro
Posts: 57
529 plans

Anyone have any experience with investing in a 529 plan for your children?

Any advice?

I have a 2 year old that I started a plan for, but I wonder if there's a better way to prepare for his future; especially if he decides not to go to college or ends up qualifying for a scholarship.
__________________

__________________
5971 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-13-2012, 02:32 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Mulligan's Avatar
 
Join Date: May 2009
Posts: 7,376
I have used a 529 the past few years. I get the 6% state tax deduction, but I must confess, I have been using it mostly to keep my AGI down, so I don't lose my $2k pension tax credit. Remember if you have baby number 2 and 1 doesn't go, you can transfer the funds to number 2.
__________________

__________________
Mulligan is offline   Reply With Quote
Old 08-13-2012, 03:31 PM   #3
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,395
I didn't do a 529 plan (we don't have state tax so that wasn't a consideration). We just are paying for college out of our regular savings. However, to get an overview and information about each state's plans you might look at Clark Howard's guide:

Clark's 529 Guide | www.clarkhoward.com
__________________
Katsmeow is offline   Reply With Quote
Old 08-13-2012, 04:01 PM   #4
Recycles dryer sheets
ducky911's Avatar
 
Join Date: May 2010
Posts: 397
i started 529s in my kids names after they where done with college. The plans where for my future grandkids. When my daughter had her first i transfered hers into my granddaughter name and made my daughter the custodian.

pretty good for us.

no tax angle here in California

when i started it Maryland was the best state...it did and is doing well.
__________________
You've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?
I hate (despise) loads and fees
Retired July '11 investments 55/45 in very low cost index and mutual funds, balance once a year at best.
ducky911 is offline   Reply With Quote
Old 08-13-2012, 05:59 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Quote:
Originally Posted by 5971 View Post
Anyone have any experience with investing in a 529 plan for your children?

Any advice?

I have a 2 year old that I started a plan for, but I wonder if there's a better way to prepare for his future; especially if he decides not to go to college or ends up qualifying for a scholarship.
We have 529 plans for both our kids. Here's my advice:

Under absolutely no circumstances should you contribute to 529 plans for your kids unless you are making the legal maximum annual contributions to your retirement plans every year. That's $17,000 to your 401(k) or 403(b), $17,000 to your spouse's 401(k) or 403(b), $5,000 to each of your Roth IRAs. These are the best ways to prepare for the future. Such contributions will shield assets from the financial aid formulas and ensure that you have enough for your retirement.

If you are making those contributions, then investing in a low-cost, passively-managed 529 plan such as those run by Utah, Ohio, and so on would not be a bad way to go. But DO NOT DO THIS UNTIL you are able to contribute $44,000 a year or more to your own retirement plans.
__________________
LOL! is offline   Reply With Quote
Old 08-13-2012, 06:20 PM   #6
Full time employment: Posting here.
misanman's Avatar
 
Join Date: Apr 2008
Posts: 535
We are contributing to 529 plans for each of nine grandchildren. Actually eight as we finished with the oldest this spring. No real specific advice except to review the ratings on the various state plans and pick one that works best for you.
__________________
"The best thing about the future is that it happens one day at a time." -- A. Lincoln
misanman is online now   Reply With Quote
Old 08-13-2012, 06:25 PM   #7
Moderator
rodi's Avatar
 
Join Date: Apr 2012
Location: San Diego
Posts: 8,804
My dad started 529's for my sons... seeded them with $5k each. That was a really sweet start to them.
I've been adding $5k/kid/year since.
It's on track to cover most of their public school, undergrad, education - based on today's prices. But lately tuition has been going up more than the market... so I may not have enough.

Since my plan is to be retired when they hit college (I'm 8 years out from the oldest starting college, and 2-3 years from my planned retirement... the joys of being an older mom) I want to have enough to help them. I won't be able to pay as they go - since I won't be working then.

And I agree with funding retirement and other tax advantaged savings first. I'm doing 401k max plus catchup - so $22.5k/year. As is the hubby.
__________________
rodi is online now   Reply With Quote
Old 08-13-2012, 07:16 PM   #8
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
529 plans that offer a state tax deduction are ideal but the tax-free growth is a nice plus as well. We have one for each of our children and for ourselves. There's no rule against getting four deductions and later transferring the balances to your children (if you decide not to go back to school).

One limitation that can be significant is that you can't trade anytime you want in a 529. You are limited to one change annually so find an investment that you're comfortable with and plan to stick with it (which is not a bad strategy in general anyway).

I agree with LOL that your own financial security should come first- the best gift you can give to your children is not to move in with them when you're 70. That said, I don't think that maxing all your retirement accounts necessariy has to be a requirement to get the job done. It's a smart move from a tax standpoint, but if you've got other sources of retirement income in the plan (pensions, real estate income, inheritance, etc.), you may be comfortable starting a 529 and not maxing out all retirement accounts. Personally, I can't count on other sources so I'm maxing everything I can and getting the tax benefits along the way. I think this just falls under the category of "it depends" like just about everything else.
__________________
panacea is offline   Reply With Quote
Old 08-13-2012, 07:19 PM   #9
Recycles dryer sheets
 
Join Date: Dec 2005
Posts: 133
I started 529 Funds @ Fidelity for both my kids back in 2001. It was a good time to invest due to the market lows. They've done really well, and last year I switched them to money markets (still 529) as they're both in College now. It will cover 4 years of state schools for both of them and they will graduate with no debt.
__________________
Livefree is offline   Reply With Quote
Old 08-13-2012, 07:41 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
One can take out a 401(k) loan to help pay for college.

Also one can take out a 401(k) loan to fund a 529 plan. Such a plan keeps tax-deferred space high, gives one a tax-break for contributing to the 401(k) and makes gains tax-free like a Roth. So it's better than a Roth in that you get tax-deductibility upfront and no taxes on gains at the back end. Try it, you'll like it.
__________________
LOL! is offline   Reply With Quote
Old 08-13-2012, 07:47 PM   #11
Recycles dryer sheets
 
Join Date: Aug 2012
Location: Murfreesboro
Posts: 57
Quote:
Originally Posted by Katsmeow View Post
I didn't do a 529 plan (we don't have state tax so that wasn't a consideration). We just are paying for college out of our regular savings. However, to get an overview and information about each state's plans you might look at Clark Howard's guide:

Clark's 529 Guide | www.clarkhoward.com
Thanks for the link. That's perfect for us.

My 401k is maxed out yearly and no state tax for us. The 10% penalty seems like a small risk versus the no tax benefit.
__________________
5971 is offline   Reply With Quote
Old 08-13-2012, 08:36 PM   #12
Full time employment: Posting here.
 
Join Date: Jul 2011
Posts: 721
Quote:
Originally Posted by LOL! View Post
One can take out a 401(k) loan to help pay for college.

Also one can take out a 401(k) loan to fund a 529 plan. Such a plan keeps tax-deferred space high, gives one a tax-break for contributing to the 401(k) and makes gains tax-free like a Roth. So it's better than a Roth in that you get tax-deductibility upfront and no taxes on gains at the back end. Try it, you'll like it.
Interesting concept- thanks!
__________________
panacea is offline   Reply With Quote
Old 08-13-2012, 11:32 PM   #13
Confused about dryer sheets
 
Join Date: Aug 2012
Posts: 8
Wouldn't the advantage of using 401(k) money to fund a 529 be negated by needing to repay the loan with post-tax dollars?

Also, does anyone have experience with the Private College Prepaid 529? https://www.privatecollege529.com

I'm thinking of putting a bunch of money into this plan when my first child is born later this year. It seems like the only disadvantage would be losing out on a lot of potential interest or appreciation gains if your child doesn't go to one of the schools in the plan. They do have an excellent selection of schools though. I'm considering this because I think that tuition inflation will exceed or at minimum match the reasonably expected returns on a conservative stock/bond portfolio in a non-prepaid 529.
__________________
fossil_fuel is offline   Reply With Quote
Old 08-14-2012, 04:14 AM   #14
Full time employment: Posting here.
 
Join Date: Mar 2011
Posts: 534
Quote:
Originally Posted by 5971 View Post
Thanks for the link. That's perfect for us.

My 401k is maxed out yearly and no state tax for us. The 10% penalty seems like a small risk versus the no tax benefit.

Its a bit worse than that, the earnings are taxed as income tax for the beneficiary as well (only if it isn't used for a qualified education expense).

Having said that, I still think its the best way to save for college, and in my case I'm willing to accept any overfunding risk.
__________________
jon-nyc is offline   Reply With Quote
Old 08-14-2012, 06:22 AM   #15
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,430
Quote:
Originally Posted by fossil_fuel View Post
Wouldn't the advantage of using 401(k) money to fund a 529 be negated by needing to repay the loan with post-tax dollars?

Also, does anyone have experience with the Private College Prepaid 529? https://www.privatecollege529.com

I'm thinking of putting a bunch of money into this plan when my first child is born later this year. It seems like the only disadvantage would be losing out on a lot of potential interest or appreciation gains if your child doesn't go to one of the schools in the plan. They do have an excellent selection of schools though. I'm considering this because I think that tuition inflation will exceed or at minimum match the reasonably expected returns on a conservative stock/bond portfolio in a non-prepaid 529.
Hi fossil fuel, welcome to the forum. Why not stop by here and tell us a little about yourself Hi, I am... - Early Retirement & Financial Independence Community
__________________
MichaelB is online now   Reply With Quote
Old 08-14-2012, 07:25 AM   #16
Dryer sheet aficionado
 
Join Date: Jul 2012
Posts: 47
Quote:
Originally Posted by 5971 View Post

or ends up qualifying for a scholarship.
Hi 5971,

If your child ends up earning a scholarship, you can take an amount out of your 529 equal to the amount of the scholarship without the 10% penalty. You would still owe taxes on the gains.

We have 529s for our kids -- started when they were very young, and we were able to fund them heavily in the early years. If anything happens to be left once they are both done with their college educations, we will keep them for the grandkids!

~Gabi
__________________
Gabieta is offline   Reply With Quote
Old 08-14-2012, 12:25 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Quote:
Originally Posted by fossil_fuel View Post
Wouldn't the advantage of using 401(k) money to fund a 529 be negated by needing to repay the loan with post-tax dollars?
This is the age-old debated myth. The principal payments are not taxed twice. They are only taxed once. The interest on the loan may be considered as taxed twice ... once before you put the money in and once again when you take the money out.

Suppose the 401(k) was invested in a bond fund. Indeed, the loan from the 401(k) is like the 401(k) buying a bond from you with you paying dividends to yourself and eventually paying off the principal of the bond. You are going to pay tax on the dividends earned by the bond fund regardless of whether it was a PIMCO bond fund, a Vanguard bond fund, or YOUR PERSONAL bond fund. However, if you are like me, you are gonna withdraw the 401(k) money while you are in the 0% tax bracket, so you won't really be paying taxes twice on those interest payments.
__________________
LOL! is offline   Reply With Quote
Old 08-15-2012, 12:14 AM   #18
Confused about dryer sheets
 
Join Date: Aug 2012
Posts: 8
ah, I think I understand now. Despite the fact that you have to repay the loan with post-tax dollars, the money borrowed from the 401(k) is not taxed when you receive the loan (if you borrow $50,000, you get $50,000, no tax withholding). So it is essentially a way for you to access pre-tax money early, which you then pay back with post-tax dollars so it cancels out. The only real penalty is double-taxation of the interest which will be quite small.

It does seem like a good way to fund a prepaid 529 plan.


I made a table to explain it to myself:

SCENARIO 1: 401(k) LOAN (assuming 10% interest on loan, 20% state+fed tax rate now and in retirement)
EventCashflow in Pre-Tax DollarsCashflow in Post-Tax Dollars401(k) balanceChecking Account Bal.
"Contribute $10,000 to 401(k)"-10000-8000100000
Take $5000 loan from 401(k)5000500050005000
Repay loan with post-tax dollars-6000-5000100000
Repay 10% interest with post-tax dollars-600-50010500-500
Take full distribution upon retirement10500840007900
SCENARIO 2: NO 401(k) LOAN (assuming 20% state+fed tax rate now and in retirement)
EventCashflow in Pre-Tax DollarsCashflow in Post-Tax Dollars401(k) balanceChecking Account Bal.
"Contribute $10,000 to 401(k)"-10000-8000100000
Take full distribution upon retirement10000800008000
Anyways, sorry for hijacking the thread. I think that a mix of prepaid and investment-based 529 funds could be a good way to hedge risk, in case the rate of tuition price increase exceeds the rate of return in your investment-based 529 or vice versa.
__________________

__________________
fossil_fuel is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 12:48 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.