Drawing Down College Savings

[Closet_Gamer]

I'm not trying to close down the thread -- pls keep the ideas coming! -- but do want to take a second to say thank you for the excellent responses.

This is why this board is great. One could (literally) spend $1000 with a financial advisor to get the same insights/concepts about funding strategies, 529 approaches, AA and financial aid.

Thanks.

[ivinsfan]

Quote:

Originally Posted by Closet_Gamer It's a job that can start at $100k+ and go from there. The payback is actually pretty fast vs. many other options. It also and has to do with using ones talents (chemistry and disciplined planning/execution) along with following ones desires to help people. But I understand your point and appreciate you taking the time to respond to the post. It takes all kinds and there are many paths. Thx

If you research a little you will find out the majority of pharm D people start out with a decent wage, but unless they want to work extra shifts the income doesn't really go up much...unless you get into a very lucrative field like research, years of experience don't add much to your bottom line.

[euro]

Quote:

Originally Posted by Blue Collar Guy i think its an obscene amount of money to spend for a job that pays 120k,

That really depends on what the young woman ultimately does with the degree. There is huge upside potential for someone with a Pharm.D so I'd look at it as an strong investment. That said, obviously, the investment would be even stronger if the cost were lower.
I would rather spend 300K all in on a Pharm.D. than 150k on a BS in art-history or comparative religion. Nothing against those either, but it is MUCH harder to recover your investment in one of those fields - purely on a financial level, that is. If someone's passion is in comparative religion, then by all means go for it, but it is a much harder row to hoe.

[MichaelB]

What's the value of the tax deferred income over the 9 year period? In other words, how much tax are you avoiding with this account by using those funds last, vs first? There's something to be said for having the savings in a regular taxable account. You have maximum options, in case there is a change of plans, family finances, or other circumstances.

One option to keep in mind is to borrow some money. If some loans can be obtained with favorable terms, that cash that would have been used can stay invested for a few more years and be used to pay down the loans later.

[ivinsfan]

Quote:

Originally Posted by euro That really depends on what the young woman ultimately does with the degree. There is huge upside potential for someone with a Pharm.D so I'd look at it as an strong investment. That said, obviously, the investment would be even stronger if the cost were lower. I would rather spend 300K all in on a Pharm.D. than 150k on a BS in art-history or comparative religion. Nothing against those either, but it is MUCH harder to recover your investment in one of those fields - purely on a financial level, that is. If someone's passion is in comparative religion, then by all means go for it, but it is a much harder row to how.

When you say huge upside potential what are your referring to,my DD's in-law family have 6 pharm Ds between and I don't find your statement to agree with what I know about their jobs/wages.

[Fedup]

Quote:

Originally Posted by Closet_Gamer Wow. Huge insight on the graduate students being treated as independent. Will need to go deep on that one. Thanks! I will be going full tilt at work until Year 5 of the plan, but my income will drop a lot starting in year 5 so maybe the financial aid will change. Let's hope. LOL on the 15 year old. My 17 year old is pretty locked on pharmacy at this point...but it hasn't occurred to my 14 year old that it's unlikely she can be a chef, a cognitive psychologist, an engineer and a physical therapist all at once. (Though if she did find a way to combine those, she'd have carved out a niche for herself!) Thanks!

Last I've checked, it depends on the grad school. I checked on MBA, law school and medical school. But you can borrow loans but no financial aid like undergraduate. Graduate engineering or computer science school can be paid by employers.

[euro]

Quote:

Originally Posted by ivinsfan When you say huge upside potential what are your referring to,my DD's in-law family have 6 pharm Ds between and I don't find your statement to agree with what I know about their jobs/wages.

That's why I qualified my opinion. If they work store hours in a chain Pharmacy, then I can see your point. However, I know plenty of Pharm.D.s in the pharmaceutical industry and contract research/development fields who pull in very serious sized paychecks.
So, not saying everyone is guaranteed big bucks, but the potential for upside is definitely there

[Closet_Gamer]

Quote:

Originally Posted by ivinsfan If you research a little you will find out the majority of pharm D people start out with a decent wage, but unless they want to work extra shifts the income doesn't really go up much...unless you get into a very lucrative field like research, years of experience don't add much to your bottom line.

True of nearly any discipline. If you're part of the herd, you earn what the herd makes. If you pull away from the herd, you earn more.

In this case, the herd makes a lot of money, very quickly but that doesn't change the reality that to accelerate your income beyond that, you need to take risks and set yourself apart.

[Closet_Gamer]

Quote:

Originally Posted by MichaelB What's the value of the tax deferred income over the 9 year period? In other words, how much tax are you avoiding with this account by using those funds last, vs first? There's something to be said for having the savings in a regular taxable account. You have maximum options, in case there is a change of plans, family finances, or other circumstances. One option to keep in mind is to borrow some money. If some loans can be obtained with favorable terms, that cash that would have been used can stay invested for a few more years and be used to pay down the loans later.

While I'm in the high brackets, I believe all-in the tax value is 15-20% of growth depending on whether gains are captured as dividends or capital gains. New money gets you a 3.4% deduction on the amount contributed.

What intrigues me more is the liability matching. The 529 we use grows at the cost of college inflation. Call it 3.5%. I don't see any other, guaranteed 3.5% growth options with 3-9 year maturities. A CD paying 2% will bleed 1.5%/year relative to the cost of college...big hit over multiple years.

[RE2Boys]

Just a couple of notes:

If your AGI is under 180K, make sure the first $4000 of tuition comes out of your pocket, not the 529 plans. Makes you eligible for the American Opportunity Tax Credit.

I note you are in PA. You can get a PA state tax break each year by contributing up to $14K per kid into a 529 plan. Doesn't matter if it is a PA 529 OR Utah 529. No minimum time it needs to be in the account, so you can be "washing" money through for the 3%.

I've two boys, one in the first year at Penn State, #2 starts this coming Fall. I pay the first $4000, rest comes from 529. 529s will run out sometime in year 3, Next step will be Series EE and I savings bonds cashed to get interest free by putting into 529s as needed (though must engineer income under I think $110K at that time, but shouldn't be a problem as retired for 17 years now, maybe quit my part-time work). Did not fully fund 529 for 4 year private as life's unpredictable, kids could change mind, change majors, etc. Kept money that could have been put into 529 over the years in a regular taxable account that can be used for whatever.

My educational expenses likely to drop as son #1 does not like dorm life and is moving back home and commuting to one of the Penn State's 4 year regional campus next Fall. Too bad I can't count the cost of a reliable car as an educational expense!

[Fedup]

The closer you are to college years, the more it should be in cash.

[RE2Boys]

Quote:

Originally Posted by Fedup The closer you are to college years, the more it should be in cash.

Last summer, as the first draw down on my son's 529 plan was only months away, I moved his 529 (which was down to about 25% equities) into the Colorado Stable Value Fund 529, current yield of 2.59% after all fees.

[Closet_Gamer]

Quote:

Originally Posted by RE2Boys Just a couple of notes: If your AGI is under 180K, make sure the first $4000 of tuition comes out of your pocket, not the 529 plans. Makes you eligible for the American Opportunity Tax Credit. I note you are in PA. You can get a PA state tax break each year by contributing up to $14K per kid into a 529 plan. Doesn't matter if it is a PA 529 OR Utah 529. No minimum time it needs to be in the account, so you can be "washing" money through for the 3%. I've two boys, one in the first year at Penn State, #2 starts this coming Fall. I pay the first $4000, rest comes from 529. 529s will run out sometime in year 3, Next step will be Series EE and I savings bonds cashed to get interest free by putting into 529s as needed (though must engineer income under I think $110K at that time, but shouldn't be a problem as retired for 17 years now, maybe quit my part-time work). Did not fully fund 529 for 4 year private as life's unpredictable, kids could change mind, change majors, etc. Kept money that could have been put into 529 over the years in a regular taxable account that can be used for whatever. My educational expenses likely to drop as son #1 does not like dorm life and is moving back home and commuting to one of the Penn State's 4 year regional campus next Fall. Too bad I can't count the cost of a reliable car as an educational expense!

Thanks. Good insights. Particularly the tax credit. My income is too high right now (high class problem) but once I hit RE we could be in that zone.

Thanks for your response.

[Closet_Gamer]

Quote:

Originally Posted by Fedup The closer you are to college years, the more it should be in cash.

This is what I'm trying to balance...Year 1 is right around the corner...Year 9 of the plan is a decade away. Really does feel like RE planning in some ways.

[Shanky]

Quote:

Originally Posted by Closet_Gamer Thanks. The part where I FIRE in the middle eliminates the ability to fund the later years out of bonuses but to another suggestion that came in, I could stack bonus dollars while I'm still working.

I was not thinking. One of the advantages of having our kids when we were young. They were gone when I was in my late 40's. FIRE not till I was 55.

[LOL!]

We have two children. Oldest graduated with a masters a couple years ago. Youngest is in school and intends to pursue graduate work. Our income dropped while both were in college when I retired.

We paid about half of expenses from 529 plans and the rest* from cash flow and taxable brokerage accounts. We received the American Opportunity Tax Credit when our income dropped when I retired. *Ooops, my kids also worked during college to help pay for their educations.

I don't think you should "save" the 529 plan money until later, but should use it proportionately every year. My youngest goes to a relatively inexpensive state university, so it costs about $20K a year all-in. He would have have 529 money leftover after graduation if we hadn't started using it from the get go.

Furthermore, selling assets from our taxable brokerage account were never taxed just like the 529 plans were never taxed. That's because of two factors: (1) tax-loss harvesting earlier means later gains are offset and (2) when I retired we dropped to 15% marginal income tax bracket where LTCG are not taxed.

That is, keep in mind that 529 plans just save taxes on gains. If one is using 529 plans to pay for college during college, the asset allocation of those plans is probably mostly fixed income and not something that will continue to gain a lot of money. That is,the tax savings are going to be limited.

I know our tax savings on 529 plans turned out to not be such a big deal. OTOH, investing aggressive in a big pile of long-term money in a taxable account was amazing. That's because we were invested for the very long-term and invested tax-efficiently and did tax-loss harvesting. So the taxable account outperformed the 529 plans in a major fashion and still didn't cost us taxes AND gave us the AOTC.

For fun, you might calculate how much taxes you actually saved by using 529 plans. You might be disappointed.

[Montecfo]

Quote:

Originally Posted by Closet_Gamer I'm not trying to close down the thread -- pls keep the ideas coming! -- but do want to take a second to say thank you for the excellent responses. This is why this board is great. One could (literally) spend $1000 with a financial advisor to get the same insights/concepts about funding strategies, 529 approaches, AA and financial aid. Thanks.

I would probably spend some of the 529 as i go. I do not think the investment element is valuable enough to defer till end, especially given risk of having to incur penalties if things do not go as planned.

And as a overall statement, your daughters are very young. They would be the vary rare young ladies (or young men for that matter) that do not change their minds! Or meet someone and move out of state before completing college. Or or or.

I would not feel I owed my daughter 6 years of school. I would plan for four. Even under good circumstances, 4 can become 5 easily.

My son graduated from college last summer. He was a year late. He was "locked in" to engineering. But that did not work out and after that costly out of state adventure, he spent 2 years earning his way back to away college while living at home and paying his own way going juco. He did not run through his college money, so stayed on budget.

it did all work out. He earned his way back, went away to an excellent in-state school, and has an excellent, high paying job.

I am just saying, stuff happens, so be flexible. Great job saving.

[Closet_Gamer]

Quote:

Originally Posted by LOL! We have two children. Oldest graduated with a masters a couple years ago. Youngest is in school and intends to pursue graduate work. Our income dropped while both were in college when I retired. We paid about half of expenses from 529 plans and the rest* from cash flow and taxable brokerage accounts. We received the American Opportunity Tax Credit when our income dropped when I retired. *Ooops, my kids also worked during college to help pay for their educations. I don't think you should "save" the 529 plan money until later, but should use it proportionately every year. My youngest goes to a relatively inexpensive state university, so it costs about $20K a year all-in. He would have have 529 money leftover after graduation if we hadn't started using it from the get go. Furthermore, selling assets from our taxable brokerage account were never taxed just like the 529 plans were never taxed. That's because of two factors: (1) tax-loss harvesting earlier means later gains are offset and (2) when I retired we dropped to 15% marginal income tax bracket where LTCG are not taxed. That is, keep in mind that 529 plans just save taxes on gains. If one is using 529 plans to pay for college during college, the asset allocation of those plans is probably mostly fixed income and not something that will continue to gain a lot of money. That is,the tax savings are going to be limited. I know our tax savings on 529 plans turned out to not be such a big deal. OTOH, investing aggressive in a big pile of long-term money in a taxable account was amazing. That's because we were invested for the very long-term and invested tax-efficiently and did tax-loss harvesting. So the taxable account outperformed the 529 plans in a major fashion and still didn't cost us taxes AND gave us the AOTC. For fun, you might calculate how much taxes you actually saved by using 529 plans. You might be disappointed.

Thanks. Re: the 529...the current attraction (and thought of holding) isn't the absolute return or the tax benefits. The PA GSP 529 grows at the rate of college inflation...so its liability matched over both long and short horizons. The thought of spending it down later is in part driven by having an asset that should hold right about pace with the growth in college costs without exposing it to equity swings.

But I think the breadth of advice overall about not holding the 529s to the end is tipping my thinking here. It is "single use" money.

Like you, I've got some capital losses harvested that will offset gains.

[TallTim]

+1 to spending the 529 $ earlier, net of the tax deductible amounts noted above. This gets you best treatment on those dollars and gives you the chance to allocate your brokerage assets to take advantage of the longer time horizon for DD2.

FWIW, we set up a combination of small 529s and UTMAs for our two kids - and are 2 yrs into it now with both in school ... it's better having them pay their own taxes on the UTMA accounts than having those taxable dollars in my return

[Closet_Gamer]

Quote:

Originally Posted by Montecfo I would probably spend some of the 529 as i go. I do not think the investment element is valuable enough to defer till end, especially given risk of having to incur penalties if things do not go as planned. And as a overall statement, your daughters are very young. They would be the vary rare young ladies (or young men for that matter) that do not change their minds! Or meet someone and move out of state before completing college. Or or or. I would not feel I owed my daughter 6 years of school. I would plan for four. Even under good circumstances, 4 can become 5 easily. My son graduated from college last summer. He was a year late. He was "locked in" to engineering. But that did not work out and after that costly out of state adventure, he spent 2 years earning his way back to away college while living at home and paying his own way going juco. He did not run through his college money, so stayed on budget. it did all work out. He earned his way back, went away to an excellent in-state school, and has an excellent, high paying job. I am just saying, stuff happens, so be flexible. Great job saving.

Thanks. Yes, things can (and will) change.

I've always aimed at 4 years funded school...even in this plan I intend that the kids will pay back anything beyond 4 years (for whatever reason). We've actually built a pretty good spreadsheet that shows her pretty clearly "here is what we're paying...whether you go to rodeo clown college or Oxford...the rest is on you."

The part I'm wrestling with (and which another response got me researching better) whether given my financial circumstances they will be able to get access to subsidized student loans. I was making the conservative assumption that they wouldn't and that I would have to be the bank. Sounds like that may be a bad assumption for the graduate school portion of a PharmD. If so, that makes this A LOT easier.

Thanks again.