Investing for college

[chewy]

My son is 14 and will be headed to college in about 4 years. I purchased 60k in ibonds in Sept 2000 and always figured I would use them to help pay for his college. However, as college gets closer I realize I may want to keep the i-bonds since they have what I consider to be a very good safe return.

I also plan to retire around the time he heads to school at the age of 54.

My current assets are 650k in retirement accounts.
360k in after tax acounts and approx 450k in home equity(no mortgage).

Combined income between spouse and myself is 140k. We currently max out retirement contributions including catch up contributions for myself.

I will receive a non-cola pension of approx 27k per year when I retire. Currently my wife plans to keep working a few years after I retire but that may change. My annual expenses should be around 70k in retirement and I believe I should be ok.

My son is an excellent student, but I do not know if he will get any scholarships. I am figuring not at this point. I have always told him I would try and pay around 50 percent of his college and he should expect to pay the rest. This may change depending on how much I have once it comes time to pay.

My question is since I may hold on to the ibonds , is there any benefit to funding a 529 at this late date with some cash from my aftertax assets? Or should I just keep things as is and expect to pay my portion of his college expenses out of my after-tax assets.

Thanks in advance for any advice,

Mike

 

[Aiming_4_55]

Mike - welcome to the forum.

You might want to read up on the various state 529 plans available to you first. Your state 529 might offer tax deductions and other incentives.

Any prepaid tuition options for you?

I researched MN529 plan and starting to research Vanguard 529 plans. If you are not comfortable with putting $$ in the 529 stock market type investment with 4 years to go, for me, I think there is a money market fund or fixed income where the rate is low but more stable. The benefit would be any interest is tax free.

I know others will comment for further advice.

 

[LOL!]

There is a tax benefit to 529 plans. There is no tax on qualified withdrawals which include no tax on any gains. In that regard a 529 plan is like a Roth IRA, so is better than a simple taxable account. Just find a low-cost plan that may give you state income tax benefits as well. You can use any state's 529 plan, but your own state may be best if the fees and tax benefits are good. Some good plans are Utah, Illinois, Ohio, etc.

 

[BTravlin]

I've contributed to the IN 529 plan for my son for five years now. Here in Indiana you get a $1k state tax credit for a minimum $5k deposit to the plan. I didn't want his funds in the stock market because he was so close to school so I just put the cash in the money market option. The interest rate doesn't amount to squat but that $1k tax credit makes u for that many times over.

Check and see if your state has any bennies like this available to you.

 

[chewy]

Thanks all, I will check out my states 529 as well as others. Sounds like the way to go.

 

[jIMOh]

Pros and Cons of many approaches.

529 plan- money going in gets a state tax deduction (Maybe, check your state plan)
529 plan- money coming out is NOT TAXED if used for QUALIFIED EDUCATION EXPENSES. Tuition yes... room and board (maybe), books (maybe). Itemize planned expenses and go from there (read the IRS pubs on qualified expenses).
529 plan money cannot be used for federal education credits. Do you think your income in years 1-4 of college would be LOW ENOUGH for federal education credits (hope credit was replaced by a better credit in 2010, forgot the name of it). Basically if you spend $4000-$5000 after tax, you get about $2500 back as a tax credit. But 529 monies are NOT ELIGIBLE for the credit and the money must be spend on QUALIFIED expenses.
The qualified expenses for the 529 money and qualified expenses for the federal credits are NOT the same. Focus on lab fees, room and board, books and similar for differences. Tuition is covered for both.

Ibonds- check me on this, but interest on Ibonds might be tax free if used for education. Maybe, I would have to look that up. I know other savings bonds have this feature. There is probably a third set of qualified expenses for this tax break.

Not sure if the interest can be used for federal education credits or not. I think so, but check me on that too.

Taxable accounts- main advantage is the federal education credits. Expect to get $2500 back as a credit if your AGI is low enough (under 120k??). Student loans qualify you for the credit (you can borrow money and claim the credit). The credit follows the dependency- meaning if you claim child as a dependant, you claim the credit. If child cannot claim own dependency (does not provide half of own support- check IRS for what a dependant is), child cannot claim the credit (that last statement is more of the rich person disclaimer- if you think your AGI is above 120k and cannot claim credit, the child cannot claim credit unless child provides more than half of own support).


My complex plan would be this-

Know what you will spend and price it out. If it is $15k per year , then break down that 15k.
Spend 4k from taxable account and claim the full $2500 credit
put 11k into a 529 plan now, claim a STATE tax deduction on the contribution, then take out the 11k in 4 years.

Make sure there is a good paper trail which shows the 4k spent from taxable is for qualified expenses as it pertains to the federal tax credit.

The 529 has more things to spend money on (relative to tax credit), and make sure you are educated of those differences.

 

[MooreBonds]

There is one thing that no one has picked up on (so far)...

If purchased after 1992, EE and I series savings bonds offer TAX FREE interest if used for college education.

If your son's name is on the savings bonds, then all that interest can be tax free if the interest and principal of the savings bonds are used for his education. If principal + interest exceed his tuition and other qualified expenses, then the tax-free portion is pro-rated.

I'd imagine that your I-bonds have roughly risen by 75% in that time, +/-. If so, your earned interest is about $50k, which means your taxes owed would be about $15k, +/-.

To turbocharge the tax savings even more:

Pre-freshman year - make sure his name is on the bonds

Freshman year (fall) cash in some I-bonds for that year. Make contribution to 529 plan to get your state tax credit (if your state offers one).
Note: Some 529 plans may have minimum holding period of contributions. If they do, simply deposit it into their stable value/mm fund.
If the savings bonds + interest don't cover the full tuition + qualified expenses, then you can add some more money, and you and/or your son can possibly get an additional tax credit or deduction (I'm not up to speed on higher education tax issues).

Sophomore year (fall) repeat Freshman year (the I-bonds, not your son's courses ).

Continue as necessary.

 

[growing_older]

If that money is in bonds, how much earnings do you expect it to have in the next 4 years or so before college? I didn't think the shelter from taxes on that small income was worth tying my money up with 529 expenses and restrictions. You might try to figure out the tax benefit before you automatically assume the tax advantaged plans are better for you.

 

[MooreBonds]

If that money is in bonds, how much earnings do you expect it to have in the next 4 years or so before college? I didn't think the shelter from taxes on that small income was worth tying my money up with 529 expenses and restrictions. You might try to figure out the tax benefit before you automatically assume the tax advantaged plans are better for you.

The main benefit of including the 529 plan is not the tax-free growth, but rather the state income tax deduction (if the OP lives in a state that offers a deduction for contributions to one).

 

[kyounge1956]

There is one thing that no one has picked up on (so far)...

If purchased after 1992, EE and I series savings bonds offer TAX FREE interest if used for college education.

If your son's name is on the savings bonds, then all that interest can be tax free if the interest and principal of the savings bonds are used for his education. If principal + interest exceed his tuition and other qualified expenses, then the tax-free portion is pro-rated.

I'd imagine that your I-bonds have roughly risen by 75% in that time, +/-. If so, your earned interest is about $50k, which means your taxes owed would be about $15k, +/-.

To turbocharge the tax savings even more:

Pre-freshman year - make sure his name is on the bonds

Freshman year (fall) cash in some I-bonds for that year. Make contribution to 529 plan to get your state tax credit (if your state offers one).
Note: Some 529 plans may have minimum holding period of contributions. If they do, simply deposit it into their stable value/mm fund.
If the savings bonds + interest don't cover the full tuition + qualified expenses, then you can add some more money, and you and/or your son can possibly get an additional tax credit or deduction (I'm not up to speed on higher education tax issues).

Sophomore year (fall) repeat Freshman year (the I-bonds, not your son's courses ).

Continue as necessary.

There is a recent thread on Savings Bonds as gifts at bogleheads.org

I suggest you read the thread, the college savings article in the wiki and verify with your tax adviser, because if the info at bogleheads is correct, having the son's name on the bonds as a co-owner means they can't be used tax free for education expenses. (They can be used if the son is named as a beneficiary.)

There are other limits, too. Not all education expenses are not tax free when paid with bonds, only tuition and fees. Books, dorms and other costs don't qualify for the tax exemption.

 

[Texas Proud]

There is one thing that no one has picked up on (so far)...

If purchased after 1992, EE and I series savings bonds offer TAX FREE interest if used for college education.

If your son's name is on the savings bonds, then all that interest can be tax free if the interest and principal of the savings bonds are used for his education. If principal + interest exceed his tuition and other qualified expenses, then the tax-free portion is pro-rated.

I'd imagine that your I-bonds have roughly risen by 75% in that time, +/-. If so, your earned interest is about $50k, which means your taxes owed would be about $15k, +/-.

To turbocharge the tax savings even more:

Pre-freshman year - make sure his name is on the bonds

Freshman year (fall) cash in some I-bonds for that year. Make contribution to 529 plan to get your state tax credit (if your state offers one).
Note: Some 529 plans may have minimum holding period of contributions. If they do, simply deposit it into their stable value/mm fund.
If the savings bonds + interest don't cover the full tuition + qualified expenses, then you can add some more money, and you and/or your son can possibly get an additional tax credit or deduction (I'm not up to speed on higher education tax issues).

Sophomore year (fall) repeat Freshman year (the I-bonds, not your son's courses ).

Continue as necessary.

I did not think you needed your childs name on the bonds for the interest to be exempt from taxes... do you know this

 

[Texas Proud]

There is a recent thread on Savings Bonds as gifts at bogleheads.org

I suggest you read the thread, the college savings article in the wiki and verify with your tax adviser, because if the info at bogleheads is correct, having the son's name on the bonds as a co-owner means they can't be used tax free for education expenses. (They can be used if the son is named as a beneficiary.)

There are other limits, too. Not all education expenses are not tax free when paid with bonds, only tuition and fees. Books, dorms and other costs don't qualify for the tax exemption.

GOOD.. thanks I will read...


Edit to add link:

http://www.finaid.org/savings/bonds.phtml

"The bond owner must be at least 24 years old on the bond issue date (the first day of the month in which the bonds were purchased). Parents can purchase bonds for their children, but the bonds must be registered in the parents name. The child cannot be listed as a co-owner, but may be listed as a beneficiary. You can also purchase bonds for your own education, in which case the bonds must be registered in your name."

 

[jIMOh]

I did not think you needed your childs name on the bonds for the interest to be exempt from taxes... do you know this

I would second this comment. As best I can tell (check tax return), if the interest goes to pay for higher education expenses, it is exempt. This is all done on a 1040 long form.

 

[Nords]

There is one thing that no one has picked up on (so far)...
If purchased after 1992, EE and I series savings bonds offer TAX FREE interest if used for college education.

(*Ahem.*) http://www.early-retirement.org/for...n-education-bonds-and-college-fees-32855.html

There are several caveats and qualifications to the programs. For example, as mentioned, properly-titled EE & I bonds can be redeemed tax-free for tuition expenses but not for room & board. However if the EE & I bonds are redeemed and rolled over to a 529, then the bond redemption is tax-free and the 529 can pay the room/board.

Our daughter's college's room & board fees are due every January & July. Our final set of EE bonds pay their semi-annual interest in Jan & July. So on 2 July I'll go to TreasuryDirect, cash in the EE bonds, and transfer them to our checking account. As soon as they hit the checking account they'll get EFT'd to our Fidelity 529. As soon as they land there we'll use Fidelity's online billpay to send the college their money.

I think our college-fund I bonds pay interest in October & April, but I need to verify my spreadsheet against the TreasuryDirect account.

 

[Texas Proud]

(*Ahem.*) http://www.early-retirement.org/for...n-education-bonds-and-college-fees-32855.html

There are several caveats and qualifications to the programs. For example, as mentioned, properly-titled EE & I bonds can be redeemed tax-free for tuition expenses but not for room & board. However if the EE & I bonds are redeemed and rolled over to a 529, then the bond redemption is tax-free and the 529 can pay the room/board.

Our daughter's college's room & board fees are due every January & July. Our final set of EE bonds pay their semi-annual interest in Jan & July. So on 2 July I'll go to TreasuryDirect, cash in the EE bonds, and transfer them to our checking account. As soon as they hit the checking account they'll get EFT'd to our Fidelity 529. As soon as they land there we'll use Fidelity's online billpay to send the college their money.

I think our college-fund I bonds pay interest in October & April, but I need to verify my spreadsheet against the TreasuryDirect account.

Thanks Nords... I was just looking at some of my savings bonds and was trying to decided what to do about the low interest ones... rolling them to a 529 seems like a great idea!!!

Just wonder if you can put the money in the 529 before cashing them in Or, do you need to show the path the money took... more research

 

[LOL!]

There is also an income limit to use I-bonds tax-free for education. If your income is not low, you can't get the tax break.

 

[ziggy29]

There is one thing that no one has picked up on (so far)...

If purchased after 1992, EE and I series savings bonds offer TAX FREE interest if used for college education.

Yeah, that can be quite a perk. But it would have to be for my I-bonds, which have a 3.4% real fixed yield. I have a feeling I'll be holding those to maturity, as I don't see much else out there which will provide a safe, tax-deferred 3.4% real rate of return until 2030. Even if I could redeem my I-bonds now tax-free, I don't think I would; I'd hate to lose that deal for the next 19 years.

 

[chewy]

Thanks again everyone. Originally I purchased the ibonds with plans to use them for his education. However , since the real int rate is 3.6, I am wavering on using them. This is what led me to the 529's. I am in nj and don't believe our 529 plan is so hot.

At this point I think I will hedge my bets , put some money in a 529 and use a combination of aftertax , ibonds , and some 529 money. College is 4 years off so I don't know how much I will actually need.

 

[MooreBonds]

Yeah, that can be quite a perk. But it would have to be for my I-bonds, which have a 3.4% real fixed yield. I have a feeling I'll be holding those to maturity, as I don't see much else out there which will provide a safe, tax-deferred 3.4% real rate of return until 2030. Even if I could redeem my I-bonds now tax-free, I don't think I would; I'd hate to lose that deal for the next 19 years.

I agree that the 3.4% real fixed + inflation is a whopper to have in your portfolio...but don't forget the potentially HUGE tax implications!

Those I-bonds have almost doubled so far - add another few years in the OP's sitaution when junior reaches college and they will likely have doubled.

If you cash them in and they qualify for tax-free status, you've received an average yield of almost 6% from inception to cashing-in TAX FREE. That's like a pre-tax yield of, what, 8.1%+?

Would you rather earn over 8% pre-tax yield for 15 years on US gov't debt and have doubled your money (after cashing them in), or settled for holding for 30 years and earning 3.4% fixed plus inflation, but then subtracting out for whatever tax bracket you're in at maturity?

Cutting out 25%+ for taxes really whacks off that return....you might want to run those numbers and see how your situation might be. Taking the tax-free return now and avoiding likely higher tax rates down the road might not be a bad move...

 

[Nords]

Just wonder if you can put the money in the 529 before cashing them in Or, do you need to show the path the money took... more research

I think you should treat it like a 60-day IRA rollover, where you're allowed to get your hands on the money from one institution and deposit it elsewhere. Just don't screw it up.

I haven't filed the tax return yet. I hope it doesn't get interesting.