college savings for kids

[columbus]

Hello! Anyone have thoughts on the best way to do this? We have a new born and two year old and would like to start planning. Coverdell vs. Other options? Roth? Ways to do pretax? Use investment property? My thoughts/concerns are that we save a bunch of money and then our kid gets no free scholarships or grants and the kid who's parents blew all their money on vacations gets a free ride. also, my wife works at a university so there is a chance they would get 50% off tuition if she stayed that long and they were ok with the school. What if they don't decide/can't get into college? Thanks!

 

[rodi]

Lots of factors here.

Will you still be working (earning a salary/income) when the kids go to college. If so, then your best bet is to do 529's since you probably won't qualify for grants/scholarships. 529's are kind of like Roth's - the gain on the post tax money isn't taxed *if* it's used for qualified expenses. It can be transferred between kids if one kid goes to a cheaper school, and the other decides to do a full PhD program at a pricey Ivy. The other benefit of 529's is that *you* own them. If one of your kids turns out not to be college material (for whatever reason), you can pay the taxes on the gains and use the money yourself. Here's a worst case example: Little Johnny discovers meth in high school - you don't want Johnny to have access to money because it will just be used for drugs... Since you own the account, they never have access to the money.

If, on the other hand, you will be retired and living off savings when the kids go to college you are in a much better position for financial aid. Retirement accounts are not considered (currently) as part of the assets available for the kid's college. But ROTH money *can* be used to pay for qualified college expenses. So it makes sense to have the college savings in ROTH's in your name. This way you maximize any financial aid (since you have low/no income since you're retired and living off of savings.)

We've got 529's for both kids, but since I just retired, I'm now looking at future college funds to be put into Roths.

 

[kaneohe]

If, on the other hand, you will be retired and living off savings when the kids go to college you are in a much better position for financial aid. Retirement accounts are not considered (currently) as part of the assets available for the kid's college. But ROTH money *can* be used to pay for qualified college expenses. So it makes sense to have the college savings in ROTH's in your name. This way you maximize any financial aid (since you have low/no income since you're retired and living off of savings.)

We've got 529's for both kids, but since I just retired, I'm now looking at future college funds to be put into Roths.

interesting article here on Roth and education: looks like ,depending on circumstances, Roth earnings could be taxed and also financial aid could be adversely affected...................
Using Roth IRA to pay college expenses

 

[LOL!]

Save enough in your retirement accounts/plans so that you can retire before the kids go to college. If you are wealthy, then also save as much in your joint taxable account. Anything leftover can go into 529 plans.

If you start now, then when your kids go to college, your portfolio will increase in value by 4 to 5 years of college expenses every single year by then. You will be laughing all the way to the bank. The key though is to save lots and save early, otherwise this won't happen.

 

[daylatedollarshort]

Forbes has a lot of good articles on putting money into retirement accounts as a priority -

Save For Retirement Now, Get More College Aid Later - Forbes

How Assets Hurt College Aid Eligibility On FAFSA And CSS Profile - Forbes

The FAFSA at least currently does not count assets in a personal residence, businesses under 100 employees or retirement accounts. So parents can have millions or theoretically billions in any one or all of those categories and it isn't considered for financial aid at schools that only look at the FAFSA application for aid.

I checked some books out of the library on financial aid but really the Forbes articles are free and have all the latest tips and tricks.

If you retire early you may be able to adjust your income and assets in order to qualify for significant amounts of financial aid and also with a lower AGI possibly qualify for educational tax credits. These are nice because they are credits, not deductions, so they offset your taxes dollar for dollar up to the limit of the deduction.

IRA money and also 401K money rolled over to an IRA may be used for college expenses penalty free. So if you have a small business or other ways to put more money than average W2 jobs allow in retirement plans, it may be best to just load those up first since then you can save for retirement or college that way, and the retirement money doesn't count against you on the FAFSA.

 

[columbus]

We are age 34 so I highly doubt we can retire at 50 when the first kiddo is off to college but would love to

We make about $150k combined. We have 3 rentals and a home with about $200k total equity, $100k in Roth, $65k in pretax accounts and about $75k in cash we are trying to decide what to do with and were thinking about college. My wife is a public employee now so I don't think I can do traditional ira, just a roth. Not sure if she could open a roth as well. I currently don't have any 401k options or anything else

 

[rodi]

interesting article here on Roth and education: looks like ,depending on circumstances, Roth earnings could be taxed and also financial aid could be adversely affected...................
Using Roth IRA to pay college expenses

Thanks for the link. I didn't realize roth withdrawals counted as income for FAFSA. I'm still trying to find the optimum way to save for the boys from a taxes/financial aid/ACA income limits, etc.

 

[rodi]

We are age 34 so I highly doubt we can retire at 50 when the first kiddo is off to college but would love to

We make about $150k combined. We have 3 rentals and a home with about $200k total equity, $100k in Roth, $65k in pretax accounts and about $75k in cash we are trying to decide what to do with and were thinking about college. My wife is a public employee now so I don't think I can do traditional ira, just a roth. Not sure if she could open a roth as well. I currently don't have any 401k options or anything else

I'm a little older than you (52) and have kids in middle school. It's possible to retire when they're pre-college if you save like crazy and manage your expenses/spending.

 

[panacea]

We are age 34 so I highly doubt we can retire at 50 when the first kiddo is off to college but would love to

We make about $150k combined. We have 3 rentals and a home with about $200k total equity, $100k in Roth, $65k in pretax accounts and about $75k in cash we are trying to decide what to do with and were thinking about college. My wife is a public employee now so I don't think I can do traditional ira, just a roth. Not sure if she could open a roth as well. I currently don't have any 401k options or anything else

At that income level, you can both contribute to a Roth IRA... $5,500 each.

 

[EastWest Gal]

My dad had a late in life goal that came out of my sister's and I facing disappointment about not going to UC Berkeley for 4 years instead of as transfer students: he wanted to pay for his grand children's college education. Got him to start 529 plans on all three grand kids before he passed.

I like them because there are so many plans -- guaranteed savings and investment type plans.

If they don't go to college, the money can be used in trade schools. Or it can be pulled out at a 10% penalty and be used as needed.

My niece ended college with <$100 to spare and nephew isn 't there yet. DS went out of state and we will be funding < 1 year's tuition on our own. 529 plans are better the earlier you start them. They didn't exist when we started saving for college in 1993.

My dad's dream has been fulfilled, unfortunately pothumously.


Sent from my iPhone using Early Retirement Forum

 

[pb4uski]

I'm not a big fan of 529s because of poor investment choices, high fees and the restrictions that go along with them but that may have changed since I last looked at them. We just saved for our kids college in taxable accounts. As it turned out, their college years were my peak earnings years so we were able to pay college out of cash flow and used the taxable accounts to fund our early retirement.

 

[kaneohe]

We make about $150k combined. ................... My wife is a public employee now so I don't think I can do traditional ira, just a roth. Not sure if she could open a roth as well. I currently don't have any 401k options or anything else

deductibility/eligibility tables for TIRA/Roth.............looks like if MAGI < 181K,
you get full deduction for TIRA and are eligible for Roth.
http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

 

[LOL!]

I'm not a big fan of 529s because of poor investment choices, high fees and the restrictions that go along with them but that may have changed since I last looked at them.

Some of that has changed. 529s now have great investment choices if you like low-expense-ratio Vanguard index funds. And the high fees are gone, too. At least if you have one-eye open and can select a low-fee plan with index funds. Restrictions? Other than you can't trade in them and have to use them for college, I didn't think there were any restrictions.

Full disclosure: We used 4 separate 529 plans at one time.

 

[growing_older]

I went with a mix of Coverdales and regular taxable accounts. Beware if you do a good job getting to FIRE, FAFSA will disqualify you from most aid. I was concerned about locking up assets in case kids didn't use it all, and in fact I'm likely in that situation as one chose an unconventional and much less expensive school. In retrospect I wish I had done at least some 529, too, as the tax hit is going to be more because of the taxable account.

 

[38Chevy454]

529 is what we did for niece and nephew to help them out. I get a state tax deduction benefit right now which helps me some. Your state rules will control the plans. I agree put as much as you can now and let it compound and grow. The 529 is like Roth in the tax-free withdrawals as long as school related. Also good that you maintain ownership, so it is always under your control.

 

[columbus]

Thanks for the replies. We will open a roth under my wifes name too...not sure why we haven't already! I'm in ohio and it looks like I can deduct $2k per year on state tax for 529 contributions...does that make it pretty worthwhile? I was thinking coverdell was better but 529 may be better option?

 

[REWahoo]

Check out 529.com. The site provides everything you need to know about 529 plans offered by each state - some are much better than others. (You aren't limited to you own state's plan - I live in TX and opened 529's in Utah for the grandkids.)

 

[rrppve]

We used 529 to save in full for our 2 kids. You can use 529s for yourself or transfer to other relatives if your kids don't use the funds.
If you achieve FIRE, you probably won't qualify for financial aid. The standard FAFSA formula assumes that you can afford 5% of your savings each year for the parental contribution.


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[LOL!]

Thanks for the replies. We will open a roth under my wifes name too...not sure why we haven't already! I'm in ohio and it looks like I can deduct $2k per year on state tax for 529 contributions...does that make it pretty worthwhile? I was thinking coverdell was better but 529 may be better option?

Since you are in Ohio, the direct sold Ohio 529 plan is outstanding with several choices of Vanguard index fund options. We used the Ohio 529 for two of our 529 plans. Web site: CollegeAdvantage Ohio 529 Home

Yes, better than a coverdell I think.

 

[PatrickA5]

If I were just starting saving for college, I'd probably use 529 plans and Roths. I have a feeling Coverdells and US Savings bonds (used for college) are going to be phased out eventually once Congress gets around to simplifying the tax code regarding college expenses. I've used 529s for each of my kids. It's a pretty simple process. I would probably put the max in a Roth first and then fund 529s.

 

[Cobra9777]

We saved for college in taxable accounts, but ended up paying from regular cashflow since our earnings were high at the time. We had two kids and they both went to in-state, public schools. They overlapped for one year, but even that was do-able from earnings. The excess balance in the taxable accounts enabled early retirement. My theory is: work hard, LBYM, build wealth, and don't try to predict FAFSA rules and the like, 20 years from now.

 

[daylatedollarshort]

Forbes has a series of articles on how to reduce college costs in general, including all the FAFSA tips and tricks.

"If you are the parent of a college-bound child—of any age–you should be thinking right now about how your family will finance the degree. The difference between doing it right and not doing it right could easily be worth between $10,000 and $200,000."

Paying For College: 21 Ways To Preserve Wealth - Forbes

I think that means $10K to $200K per kid. I highly recommend reading every article in the Forbes series on financial aid as well as saving on college costs in general and digesting all the ideas as early on as possible. The FAFSA loopholes are no different than learning the IRS tax code loopholes and taking advantage of legal tax code laws, like paying zero taxes on capital gains or tax loss harvesting.

 

[sakowitzm]

529 account restrictions

I have to disagree with some earlier posts regarding restrictions on 529 accounts. I opened up accounts for my girls 15 or so years ago, with Fidelity. I believe they were "New Hampshire" based (I don't live in New Hampshire), but that fact never had any impact.

I'm writing to say that we contributed to two accounts each month. Once the money was in, we could do whatever we wanted with it. But stocks, ETFs, mutual funds. Trade the stocks. I might have even written covered calls. There seemed to be no restrictions whatsoever; just like a regular brokerage account.

 

[sakowitzm]

Sorry. That would be "buy" stocks.

 

[rodi]

Sakowitzm - I have two 529's with Vanguard. Since CA doesn't give any tax advantage - I didn't go with CA's plan. (I think mine is Utah or Nevada... I don't remember). I don't have unlimited fund choices - but enough to make it easy. I've got a portion in a target date type fund, and a portion in a vanguard S&P index fund. There are restrictions about how often I can change allocations/rebalance.... I think it's 4 times a year. I treat it kind of like my other funds - set an asset allocation, check the allocation quarterly or semi-annually, and rebalance if it's more than 5% out of my allocation.

Some folks are tied to their state plan because some states make 529 contributions state-tax-free. Unfortunately, CA is not one of those.