Funding grandchild’s college fund

[Dash man]

I recently opened a 529 college savings plan for my grandson (6 months old) and put $20k into an aggressive growth account and add $100 more each month. I only want to ensure he can get through a state school and am not concerned about high cost private colleges. I chose the Utah 529 because the primarily use Vanguard funds and low fees.
My question is am I saving enough, too little or too much? He’s our only grandchild so far and expect a at least a couple more eventually. It’s hard to predict college costs, so what do you think is enough?

 

[LOL!]

Probably too much.

I will assume you are married and you and your partner contributed the $20K this year (plus the $100 months). Otherwise, it is Form 709 for you.

You can always set your will up to pay for college. Or pay directly if still alive.

A 529 plan is good and a great gift, but the tax savings may not be all that big a deal in the end.

 

[cathy63]

If you are trying to cover his entire college cost, you are probably saving too little.

Assuming a 4% annual return for the next 18 years and an initial balance of $20K plus contributions of $100/mo, you'll end up with $71,290 on a basis of $41,600. The excel formula for this is =FV(0.04,18,100*12,20000). If you like 6% returns better, then it comes to $94,173.

A quick Google search gave an estimate around $50K/yr for in-state public schools starting in 2029, which is 6 years earlier than your grandson will attend, but let's use that as a starting point and figure that on your current path, you will have enough for 3 to 4 semesters. If you want to get to $200K in 18 years, you need to save $518/mo if the return is 4%; or $386/mo if it's 6%.

This is a very quick and dirty analysis using a constant rate of return. You might be able to play with Firecalc to see what a more typical sequence of returns for investments would look like.

I do disagree with LOL! regarding the value of a 529. One huge advantage is that you are not having any impact on the taxes of the grandchild's parents as an UTMA account would. Having dealt with that mess, I would have much preferred my child's grandparents to use a 529.

 

[LOL!]

I agree that a 529 plan is better for college saving by a grandparent than a UTMA. Both of my kids had 529 plans started by us, but they also had UTMA money from their grandmother. But I did not suggest that Dash_man do a UTMA. Also, my children's UTMA money was not used for education at all.

But I did write "A 529 plan is good and a great gift, ...", so if you are disagreeing with that I am not sure what to say. Are you saying a 529 plan is bad and a poor gift?

One more thing that may interest folks: If one uses 100% 529 plan money to pay for college expenses, then one cannot get the free $2500 from the Federal government for college expenses in the form of the American Opportunity Tax Credit for each of 4 years of college or a total of $10,000 per student. We never came close to saving $10,000 on taxes with our 529 plans.

 

[misanman]

Regarding the amount - we started a 529 for the first grandchild as you describe. However, we would never have guessed that we would end up with a total of 10 grandchildren. As we treated them all equally it ended up being a bigger commitment than we originally expected.

 

[cathy63]

But I did write "A 529 plan is good and a great gift, ...", so if you are disagreeing with that I am not sure what to say. Are you saying a 529 plan is bad and a poor gift?

You are right, you did say that it's a good and great gift. I read your post too quickly and thought you were opposed to the idea.

 

[Dash man]

Probably too much.

I will assume you are married and you and your partner contributed the $20K this year (plus the $100 months). Otherwise, it is Form 709 for you.

You can always set your will up to pay for college. Or pay directly if still alive.

A 529 plan is good and a great gift, but the tax savings may not be all that big a deal in the end.

Yes, I am married and no Form 709 required. I like the 529 plan because the beneficiary can be changed at any time much more easily than a will or trust.
Thank you for your input.

 

[Dash man]

If you are trying to cover his entire college cost, you are probably saving too little.

Assuming a 4% annual return for the next 18 years and an initial balance of $20K plus contributions of $100/mo, you'll end up with $71,290 on a basis of $41,600. The excel formula for this is =FV(0.04,18,100*12,20000). If you like 6% returns better, then it comes to $94,173.

A quick Google search gave an estimate around $50K/yr for in-state public schools starting in 2029, which is 6 years earlier than your grandson will attend, but let's use that as a starting point and figure that on your current path, you will have enough for 3 to 4 semesters. If you want to get to $200K in 18 years, you need to save $518/mo if the return is 4%; or $386/mo if it's 6%.

This is a very quick and dirty analysis using a constant rate of return. You might be able to play with Firecalc to see what a more typical sequence of returns for investments would look like.

I do disagree with LOL! regarding the value of a 529. One huge advantage is that you are not having any impact on the taxes of the grandchild's parents as an UTMA account would. Having dealt with that mess, I would have much preferred my child's grandparents to use a 529.

Thank you for your feedback. I’ll have to consider adding another lump sum next year to beef up the amount. Hopefully there may be some help from my son’s maternal grandparents, but it’s hard to say.
I never considered a UTMA account. I used a 529 plan for my son and it worked well.

 

[Dash man]

Regarding the amount - we started a 529 for the first grandchild as you describe. However, we would never have guessed that we would end up with a total of 10 grandchildren. As we treated them all equally it ended up being a bigger commitment than we originally expected.

Wow! Ten grandkids! That’s great! Not likely to happen between our two boys, but hopefully a couple more will come along.

 

[Golden sunsets]

Thank you for your feedback. I’ll have to consider adding another lump sum next year to beef up the amount. Hopefully there may be some help from my son’s maternal grandparents, but it’s hard to say.
I never considered a UTMA account. I used a 529 plan for my son and it worked well.

I am interested in this topic as we anticipate having our first grandchild within the next year or two. We want to contribute to a 529 too. I have wondered about how to best accomplish this. We know that DS's in laws have similar wherewithall and desire to contribute. And DS and DDIL have good jobs. So I am wondering, do all three groups set up separate 529's, or does DS set one up and we all contribute to it? What are the tax implications for us? I had another thought...is there such a thing as a 529 that can fund multiple grandchildren from the same 529. I need to bone up on this topic, but any free advice from folks around here would be appreciated. Not trying to hijack your OP Dashman


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[Gumby]

How does a funded 529 plan affect financial aid for the student? Maybe the answer is "not at all". I know nothing about the subject, but the question occurred to me.

 

[Midpack]

A search online might help, here’s just one of many. I plugged in 4-year public (in-state) costs and it showed $211K all up in 17 years. Public out-of-state was about 50% more, private was double!

https://bigfuture.collegeboard.org/pay-for-college/college-costs/college-costs-calculator

 

[misanman]

How does a funded 529 plan affect financial aid for the student? Maybe the answer is "not at all". I know nothing about the subject, but the question occurred to me.

My understanding is that a 529 held in a grandparent's name is not included in the accounting in a financial aid application. However, once a disbursement is made, then it would be considered for the following years. This could be a reason to plan the disbursements for the third or fourth year although I suppose that might not line up with need and might increase the risk that it would not be used if the student drops out.

 

[Dash man]

I am interested in this topic as we anticipate[emoji120] having our first grandchild within the next year or two. We want to contribute to a 529 too. I have wondered about how to best accomplish this. We know that DS's in laws have similar wherewithall and desire to contribute. And DS and DDIL have good jobs. So I am wondering, do all three groups set up separate 529's, or does DS set one up and we all contribute to it? What are the tax implications for us? I had another thought...is there such a thing as a 529 that can fund multiple grandchildren from the same 529. I need to bone up on this topic, but any free advice from folks around here would be appreciated. Not trying to hijack your OP Dashman[emoji16]


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The advantage to setting up your own 529 plan is that you still control and own the money. You can also change beneficiaries should a particular grandchild choose not to go to college. Others can contribute to the 529, but I think they give up control. My DW becomes owner of the account should I die, then my son after that. DW knows to update follow on successor to DIL. When DW passes it’s all up to him to choose successors.

 

[brett]

We started an education fund for our grandson when he was born four years ago. Another one is due today and we will double up on the annual deposits.

We just finished updating our wills (from 10 years ago). We have a provision that grandchildren each get money to be used for post secondary education ahead of both of their parents, our children. Our children will inherit, but we want to ensure ourselves that our grandchildren's eductation will be provided for without them going into debt. We plan to adjust the amounts as time and inflation move forward.

 

[ducky911]

I started 529 plans for my grandchildren before they where born by substituting my children's names and ssn than once born they allow you to switch.

I think it is best to be on the lite side in the 529. You could make up the difference when they opt to go to school.....or if you don't make it leave some extra in your will.

Withdrawals from the accounts is a ways off. I have read a bit about rules of what and how it can be used and think it might be nice to have some out of the plan. Don't get me wrong I realize that the tax advantages of these plans are fantastic.

 

[kgtest]

if i could, i would gift each of my children their wedding expenses up to $30,000, a down payment on a home up to $30,000 and the gift of education expenses.

My gotcha with the education is that I will cover one year of college completely, that one year being the last year of undergrad. Incentivizes them. They can use the $60,000 they are saving on a down payment and wedding to put towards their education. That gives them really 2 years of college to worry about. It will be fun to see how creative they get, knowing in the back of my mind I can defer any possibly interest they might incur with a short term 0% loan from the bank of DAD.

$13.000 of investing today will net you $60,000 in 25 years...just in time for the tuition bill/marriage/house.

Edit: I do contribute to 529 as well. Just not as well-funded as other vehicles.

 

[LOL!]

Withdrawals from the accounts is a ways off. I have read a bit about rules of what and how it can be used and think it might be nice to have some out of the plan. Don't get me wrong I realize that the tax advantages of these plans are fantastic.

I agree that one should have some money outside of the 529 plan to be used for college. At least for us that has worked out better than the 529 plans.

My problem with our 529 plans was 2008-2009 which caused the equity portions of our 529 plans to be cut in half. It is true that overall our 529 plans for our 2 kids gained money and those gains were tax-free, but for us we could also get similar tax-free gains in other ways without the inflexibility of 529 plans.

Plus I think the AOTC will be around quite a while as when a trial balloon was out to change it, there was so much pushback that it will not be politically feasible to make it worse. And the AOTC is pay $4,000 for college, get back $2,500 for us, so that like a 62.5% return on investment with zero risk.

So by all means, grandparents who are generous should use 529 plans, but there are also other ways to help.

 

[Dash man]

I agree that one should have some money outside of the 529 plan to be used for college. At least for us that has worked out better than the 529 plans.

My problem with our 529 plans was 2008-2009 which caused the equity portions of our 529 plans to be cut in half. It is true that overall our 529 plans for our 2 kids gained money and those gains were tax-free, but for us we could also get similar tax-free gains in other ways without the inflexibility of 529 plans.

Plus I think the AOTC will be around quite a while as when a trial balloon was out to change it, there was so much pushback that it will not be politically feasible to make it worse. And the AOTC is pay $4,000 for college, get back $2,500 for us, so that like a 62.5% return on investment with zero risk.

So by all means, grandparents who are generous should use 529 plans, but there are also other ways to help.

There are income limits for the AOTC, and I don’t think grandparents would qualify since the student is likely a dependent on the parents tax return.

 

[LOL!]

There are income limits for the AOTC, and I don’t think grandparents would qualify since the student is likely a dependent on the parents tax return.

That is true, but grandparents can gift money to parents who then get the tax-credit if their AGI is below the limit.