Hello All,
The billing statement for my S23 just dropped last night. I plan to pay for college using 529 (30%) & Savings (70%). Is there a good practice on how to pay? Meaning
It’s up to you.
If your 529 is in a fixed account, meaning it’s target date is set for schooling now , I’d likely exhaust it and put the savings you had planned to spend, at worst in CDs which short term pay over 4%. The 529 is likely in a money market earning close to nothing.
If you’re like me and set the target on the 529 for years out so it’s be more aggressive, you might want to stick to your plan to capture future growth but if the market falls it will too. Few do what I did though so it likely isn’t you.
Most likely you are the first situation. If you do claim it all now, you’ll have to pay all from savings later. Financially it’s smart but emotionally can you handle ?
The other thing is - do you want to spend it all or have some left for grad school.
Good luck.
529s are interesting and complicated.
Obviously the core purpose is to allow long-term tax-free savings for college and possibly post-graduate education. And if you just use them for that purpose, then that is fine.
But, contributions can also get a state tax break (in some states), they are flexible in that you can change the beneficiary within pretty broad limits, you can now use them to help pay for private high school, some have interesting investment options not available in a brokerage, and depending on the circumstances they can be useful estate-planning vehicles.
The downside to all that is that the truly optimal use of 529s is not necessarily as simple as just using them for college. But the pursuit of optimality given all the complexities and unknown future factors can also drive you insane.
OK, so my two cents is it is typically not a bad idea to use a 529 for any qualified education expense that comes along. But if you have an even better idea, that can be good too. Just don’t stress over it too much.
You can contribute to a 529 while your student is in college. If your state gives a tax break for 529 contributions, you might find it beneficial to pay for all qualified expenses from the 529 this year while contributing to the plan from savings for future years’ college expenses. If your 529 plan includes a CD option, compare the rates within the plan with those outside the plan.
It depends on how much you have, I guess. We used current income plus 529 money. But then my kids got some scholarships and we had a good amount left over that my daughter will use for graduate school. We didn’t want to exhaust it first since we looked at it as a safety net also. We are self employed and can have some lower income some months so it was nice knowing the 529 money was there. Especially during the pandemic years!
You need to do the math based on the current returns you are getting on the 529 vs. savings. Also factor in the tax benefits of the 529. If the 529 is returning less than say 4%, use that first. You can find a savings account returning over 4% right now (Ally.com is 4.25%). You can also find attractive CD rates right now. Maybe put some of the savings into a ladder of CDs that mature when you will need it.
There are many different factors that go into which sources are the best to fund college, in what proportions and when. OP doesn’t provide nearly enough information to give a meaningful answer. Education tax credits, if there is eligibility, should definitely be a consideration, among many other things.
Are you eligible for the AOTC? If so, paying at least 4k from taxable savings in each of four years would be advantageous. (The AOTC can be claimed even if all expenses are paid from a 529 but tax will be paid on a portion of 529 earnings).
Aside from that, there’s probably not a huge difference either way. There are tax considerations in the sense that you’re paying tax on non-529 earnings each year but not on 529 earnings. The longer you can shelter the 529 earnings the better (in theory). In practice it’s possible you’re paying higher fees and earning lower returns on short term investments in your 529 than you would in taxable savings, so it could be a wash either way.
On the flipside, a 529 has higher investment/admin fees than the same non 529 account and that eats into return.
Not necessarily. It depends on the particular 529 plan and investment option. Since they were first created, some 529 plans have done a very good job of reducing fees and expenses such that they are competitive with (or even less expensive than) similar non-529 investments. It just takes a little effort to shop around and find the 529 plan that works best for you.
Vanguard, for example, has portfolios as low as .14%. Obviously their funds go lower but yes they and fidelity ( the two I have - NH and NV) have reduced over the years but still above the same in a non 529.
Thanks all. Here are some additional details that some of you have asked for -
If you only do 10x2 a year then you won’t run out.
I think you’re fine either way.
As you hit the target date, your returns go down as low as 0 or money market interest. You could do better on your own.
That said you’re likely not talking huge swings but 80k at 4% vs 1% is something.
If you sign into your account, you should be able to see a rate of return. Or if you look up the portfolio, you won’t see your return but a 5 and 10 year etc.
Good luck.
Utah plan is pretty low fees/cost iirc.
Full pay at an Ivy suggests a relatively high marginal tax rate, especially if your state and local rates are relatively high.
From a tax efficiency perspective it might make sense to front load payments from taxable savings and push 529 withdrawals as late as you can.
That assumes the FDIC insured option in the Utah 529 is offering a decent interest rate.
Not a huge difference either way likely, so I’d just do whatever works for your mental accounting.
Part of the equation is, what investment choices you used with “my529”. Their plan offers “target date” options, but also for you to pick and choose individual “underlying” funds.
Per example, if much of your investment is in domestic broad market or growth index funds - then market timing is becoming important, now that you only have three years to “get it right”. In that case, you might wish to use your other savings until you can convert any equity funds into money market at whatever time you feel the market has sufficiently recovered. In my case, I always kept 3 semesters worth of my 529 in money market - even if it meant potentially missing out on another year worth of market opportunities.
You, not the bursar’s office, should in control of the timing. Once preserved/parked in money market, then all the other considerations, such as taxes/tax credits, etc. can still be considered.
One thing that I am not clear on: What happens if you have money left over in the 529 with no future plans for anyone to attend university?
We had a “problem” that most people would like to have. Our youngest ended up graduating way under budget, with most of the money still in her 529. This is coming in very handy to help our oldest with her graduate program (and it will be gone well before our oldest is called “Dr TwoGirls”).
Otherwise, I do not actually know what we would do with the money. My understanding is that there are some valid uses outside of education for left over funds in a 529, but I do not know what they are.
My inclination would be to use the 529 money first.
Starting next year you can put up to $35k in a Roth, $6500 a year. I have the same issue. I saved double.
Or wait for the grandkids.
I agree. I have a pot that will fully cover undergrad, and some of grad school, but, for example, grad school for D24 could be funded and basically free, or it could cost $200K. My original plan was to cover room and board out of pocket each year, since that’s about what we pay for private school now, but I have now decided that I am going to take the full COA out of the 529 every year, and then invest any extra in the brokerage, but set aside for grad school. I started the kids 529s the day I got their SSNs as infants, so we are sitting on some significant tax savings, and I want to avoid the penalties as much as possible.
Yes. My additional worry was - I didn’t want left-over funds create any kind of (unspoken) obligation that “the family” expected grad school to follow. So I rather used as much as I could from the 529, and started funding IRAs, in her name and both parents, investing aggressively, to build up tax-deferred funds that could either be used for grad school if that was her choice - otherwise, they’d just be retirement savings.