How are you saving for your kids education, if at all

Parents Forum
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<p>Dear Spendthrifts. </p>

<p>We've decided to continue funding 529 of graduated son and have son contribute to his own 529 while he is in grad school. If the current trend of late marriages and later child births continue, I figure at least 25 years, and probably closer to 30 years, before the 529 will be used. This is way better than a Roth since we get a state tax incentive, no taxes at the backend, and fine gift to grandchildren. We got this Edison-moment a couple of weeks ago. I hope you can get to the switch.</p>

82

<p>We found that our 529 plan wasn't performing very well. We can do better by investing it ourselves. Plus, I guess this is a nice problem to have, but at our income bracket, we don't get any tax incentive for funding the 529. Oh, and one bigger problem-- we opened our 529 plan in a different state, before our state offered one. But we will explore the possibiliity of our s opening up one in his name (if he stays a resident of our state) to see if he gets the tax benefit. Heres a question-- we depleted older s's 529 for his college expenses (as I said- dh didnt like its poor performance). Could we open one in our state for that s and fund it for future grandchildren, if we wanted to?</p>

83

<p>
[quote]
Not sure what you mean by not risking the penalties. The minute you withdraw money from your 401k either early or as a loan you pay a penalty, there is no way getting around that unless you are older than 55( if your company is setting up that way).
I'm a little confused by the above statement.

[/quote]
</p>

<p>My bad. I meant IRA. You can take withdrawals to pay for college and/or purchase of a 1st home without penalty (but still have to pay income tax in the year withdrawan). </p>

<p>You can withdraw your principal from a Roth at any time without penalty. You can withdraw the interest for those other 2 exceptions.</p>

<p>One more problem with conventional IRAs that I have come into this year... I inherited a small (definitely NOT life changing) one (from a non-spouse) and will have to start taking mandatory withdrawals over my life expectancy soon. Taking a full withdrawal (one option available without penalty with an inherited IRA because the deceased was over 70) would significantly negatively affect my D's FA this year. With my age and size of the IRA, taking the minimum distribution will only cost me a few hundred in EFC per year, but for every year she has remaining in school.</p>

<p>However, if that had been done as a Roth IRA, (even with only 75% of the balance because income tax had been paid in advance) I would still have to take minimum distributions, but it would be invisible on my tax form and not affect EFC.</p>

84

<p>Our plan was quite simple. Just before he was born we purchased a "new" home built in 1876. We took $7500 of the capital gains from our first starter home and invested it in a mutual funds. My mom gifted all her grandkids $7000 at the same time and we invested that in zero coupon bonds at the suggestion of our stock broker. </p>

<p>Without adding another penny, that original $14500 grew to $76,000 by the time he graduated hs. That $76k gave him the freedom to consider almost any college because the issue of "cost" was largely taken care of.</p>

<p>PS. His share of the cost was "only" tuition, books and spending money. Mom and dad were committed to fund ALL the rest including cell phone and car insurance. That ends next May!!!</p>

85

<p>goalie dad - I'm collegemom16's husband</p>

<p>"Right now, I am trying to maximize the money I can put into both Roth 401K (my employer just started this) and Roth IRAs (we don't earn above the limits either).</p>

<p>Why Roths?"</p>

<p>I somewhat agree, but have all types of investments.</p>

<p>1) I converted old IRA's and a former employer's 401(k)/profit sharing to Roth IRAs during the year when you could spread the tax burden over four years. 2000? something like that. I even took advantage of a loophole at the time when I reclassified back to the IRA after the market tanked (why pay tax on losses) and then moved them back to Roth at the lower basis.
2) I started Ed Roth when they first came out at $500/kid/year and then raised to $2000/kid/year when they went up.
3) I have old 401(k) and current 401(k) that are not Roth.
4) My youngest has a 529, which I don't like because of the limited investment directions available</p>

<p>The aim for me with the Roth types is to throw the biggest risk/reward here because the other end is all tax free. The existing tax deferred 401(k) types, I hold to the theory that my tax basis today is higher than the tax basis when I pull the money as I am retired. Flat tax possibilities may make this wrong in the long run.</p>

<p>I have it figured with three kids, I will be paying for one tuition for college each year, OUCH. Then as another enters, I will use one of their funds to pay for one. And so it goes in what will be nine years of college, assuming four years (??) and undergraduate (?) degrees.</p>

86

<p>"Saving up money is only good if you are rich"</p>

<p>That is so not true.We have maxed out our contributions to IRA/401k accounts since they were legislated in the early 70's. and the combined income for my wife and I was a whopping $17,589 in 1973 and exceeded $100,000 only recently. However our total IRA/401k savings are $1,424,930 and have been invested in stock mutual funds, nothing exotic. </p>

<p>Our son is a college senior and though he has only had summer or part time jobs he has started contributing to a Roth IRA.</p>

<p>Most upper middle class families can accumulate significant wealth if they max out contributions to their individual retirement accounts starting from day 1, invest wisely and the markets perform up to historical averages. I suffered through down markets like most other investors. The only "wise" thing I did was avoid the dot.com bubble burst of a few years ago.</p>

<p>I would encourage every poster here to stress to your college aged children how critically important it is to pay themselves first through individual retirement accounts.</p>

87

<p>Ditto originaloog! We have always done this too, and as we approach retirement I am really glad we did. It's just too bad that after years of not having much and still saving, we now make a decent salary just as our kids are ready for college. Not the best for FAFSA! I think we look richer than we actually are.</p>

88

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<p>There aren't taxes or penalties when you initially take a loan from your 401K. Taxes or penalties only come into play if you leave your employer without repaying your loan and/or if you don't repay your loan on time while you are still employed.</p>

89

<p>^That is what I was referring to, not loan. I was referring to a job loss that requires one to do an early withdrawal from a 401K and some poster suggested.</p>

90

<p>
[quote]
goalie dad - I'm collegemom16's husband</p>

<p>"Right now, I am trying to maximize the money I can put into both Roth 401K (my employer just started this) and Roth IRAs (we don't earn above the limits either).</p>

<p>Why Roths?"</p>

<p>I somewhat agree, but have all types of investments.</p>

<p>1) I converted old IRA's and a former employer's 401(k)/profit sharing to Roth IRAs during the year when you could spread the tax burden over four years. 2000? something like that. I even took advantage of a loophole at the time when I reclassified back to the IRA after the market tanked (why pay tax on losses) and then moved them back to Roth at the lower basis.
2) I started Ed Roth when they first came out at $500/kid/year and then raised to $2000/kid/year when they went up.
3) I have old 401(k) and current 401(k) that are not Roth.
4) My youngest has a 529, which I don't like because of the limited investment directions available</p>

<p>The aim for me with the Roth types is to throw the biggest risk/reward here because the other end is all tax free. The existing tax deferred 401(k) types, I hold to the theory that my tax basis today is higher than the tax basis when I pull the money as I am retired. Flat tax possibilities may make this wrong in the long run.</p>

<p>I have it figured with three kids, I will be paying for one tuition for college each year, OUCH. Then as another enters, I will use one of their funds to pay for one. And so it goes in what will be nine years of college, assuming four years (??) and undergraduate (?) degrees.

[/quote]
</p>

<p>I never thought of reclassifying loans when the stock market is down. Pretty good thinking. I'll remember that next down cycle.</p>

<p>The other advantage area I probably didn't mention earlier of Roth type savings is the dispersment of the asset (either before or after death). Since there are not distribution requirement during the original owner's life time, it allows you to grow the money tax free longer than conventional IRA/401k type savings. </p>

<p>And the bigger plus that I discovered mentioned above is that I inherited a small conventional IRA, that because I don't want to show immediate income (for EFC calculation), I am taking required minimum distributions (based upon my life expectancy). It is more of a complication, than anything, but if I needed access to that money in the conventional IRA, I'd have to show income for it hurting FA for the next year. If that had been a Roth, I could have pulled that money when I needed it (same minimum distributions still required though) without it showing up on FA. Someday your children may inherit what is left of your IRA's and it could affect your grandchildren's FA offers. Food for thought.</p>

91

<p>Thanks for the clarification, TRFA.</p>

<p>I personally wouldn't feel comfortable borrowing from the 401K. I figure that there should be something sacrosanct that I wouldn't touch so that we'll have SOMETHING for retirement (besides living with expensively educated kids).</p>

92

<p>I had planned to pull some money from by IRA (converted from a 401k when I was laid off) for this coming school year and the next (D is rising senior, S rising junior). An inheritance IRA from parents has been exhausted. And, I DID have to show those distributions as income, by the way.</p>

<p>I am over 55 but not currently employed. If I'm following this right, I won't have to pay a penalty, but the withdrawals WOULD count as income (say in 2007) and thus show up and affect the FAFSA for school year 2008-2009?
Admittedly, I don't "get" this IRA stuff.</p>

<p>Can anyone confirm my understanding of this?</p>

93

<p>
[quote]
I am over 55 but not currently employed. If I'm following this right, I won't have to pay a penalty, but the withdrawals WOULD count as income (say in 2007) and thus show up and affect the FAFSA for school year 2008-2009?
Admittedly, I don't "get" this IRA stuff.</p>

<p>Can anyone confirm my understanding of this?

[/quote]

Yes, if you withdraw money from an IRA during calenday year 2007, you will have to report it on your income taxes (as you have done in the past) and on your FA filing as income. And EFC's are a product of your income (as well as non-retirement assets).</p>

<p>If I read your post correctly, it says that you are currently not employed (retired or laid-off?). I would think that the decrease in income from employment will probably offset much (if not all) of your 401k withdrawals, so perhaps in your situation your EFC may not go up at all (depending ultimately on you total income).</p>

<p>To the extent that you can put that withdrawal off until Jan 1 2008, you can defer that income tax hit (and the FA hit) for another year.</p>

94

<p>When the kids were young, we put my yearly bonus' into mutual fund UGMAs for each child and left them alone. When our state first offered a pre-paid tuition plan in the late 90s, we rolled their UGMAs over into the PPT plan. Both kids then had fully paid tuition at any state public school. At the same time we started monthly payments ($100) into 529s to cover expenses other than tuition. DS was able to win full tuition, R&B, books, etc at a nice LAC. DD is a rising Jr and with any luck will be able to obtain some merit aid to help offset the costs. At a minimum, she will have a public school education fully covered. If she wants something more expensive, then we will have to dig into savings and investments. From here, my DW and I are concentrating hard on paying off the house and looking at retirement. It never ends!</p>

95

<p>ellemenope, i agree that IRA/401k funds be sacrosanct, however I prefer the term lockbox! ;-)</p>

<p>And Lukester a big thumbs up for planning ahead and banking those bonuses over the years. Many families could do the same with IRS refunds.</p>

<p>The key is starting early and letting time do its magic.</p>

96

<p>Ahhh, the infamous lockbox...</p>

<p>The key really is to start early. It's a good thing that time is doing magic with my investments, because it hasn't done any magic with my body!</p>

97

<p>I haven't seen this one mentioned yet. It doesn't count as "savings" though. H got his masters degree about 5 or 6 years ago, and while in the program, he networked casually with some of the teachers and the director. A couple of years later, the director asked him to teach a class in the program, at a university about 45 mins from home. This has developed for the past several years into 2 to 3 classes a year, plus some work writing new courses. This brings in anywhere from $10,000 to $20,000 a year in additional income. Minus hefty income taxes, it's really around $7-12K. He teaches the courses in the evenings or on weekends and enjoys it. So much, that when he retires (in his mid-50s, in about 10 years) he hopes to continue teaching for this university. We set this money into a savings account that we use for college. </p>

<p>We also save about $600 a month from our paychecks into the account, which is another $7K a year. H's parents also donate $10K a year from an inheritance for our S's education. He is entering his 3rd year of college at our state flagship school, and they will do the same for our D. It's very generous of them. We pay for tuition, room, board, utilities and books and school supplies and cell phone. (no financial aid). S has a part-time job to pay for extras and to pay for 1/2 rent and all expenses in summer. </p>

<p>So, all in all, we are paying as we go and S will have no loans. He's on his own for grad school, if he decides to go that route. We also have been saving $150 a month for about a decade into a separate account that will cover what we call the "overlap" year, when S is a senior and D is a freshman (2008-2009). </p>

<p>We have been blessed with generous grandparents, a fortuitous 2nd job opportunity and a great flagship school that is half the price of a good private college. It's worked out for us even though we married and had children too young, we sacrificed financially for me to stay home with the kids for 10 years, we both took jobs in the public sector that aren't exactly lucrative, and we live in an extremely expensive housing market (median house in our county = $700,000!!). Education is so important to us that we were willing to take out loans to swing it, but so far that hasn't been necessary and we continue to be grateful and keep our noses to the grindstone. :)</p>

98

<p>oregonianmom- keep your eye on this budget change highlighted below- if so some financial planners might suggest that UGMA's be transferred into 529's as UGMA's are countable assets for EFC calculation? see below:</p>

<p>Bush proposal would make 529 plans more attractive </p>

<p>President Bush’s proposed 2008 budget contains a change that would make 529 plans more attractive as a way to save for college and as an estate planning tool.
Under the proposal, assets in a 529 account would not count at all in determining federal financial aid. They would be ignored entirely when the federal government calculates a family’s expected financial contribution.
Currently, such accounts are considered, although the government typically factors in only about 5 percent to 6 percent of the assets.
This is good news for parents saving for college, but it also reinforces the fact that 529 plans can be a good estate planning tool for parents and grandparents. Family members can contribute up to $11,000 a year to such plans tax-free, and any increase in value of the assets while in the plan is not taxed. In addition, family members can “front load” their contributions – giving up to $55,000 right away and averaging it out to $11,000 over the next five years for tax purposes.
Family members can also retain some control over the investments, and even change the beneficiary – so that if a child doesn’t need the money for college, it can be left in the account to grow tax-free until it is used for a grandchild.</p>

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<p>We pay for college out of cash flow and small loans from MEFA- but our S attends a state university so it it lower than private college. As a family of four with a single income we were never able to save nor did we or will we inherit any funds or receive the annual gifts of $12,000 a year like many of our friends do from their parents. We are on our own so we owe we owe- so off to work I go.....la la la la!</p>

100

<p>We haven't set aside money specifically for college, though we've been reasonably good about saving and investing. (It doesn't look as good this week as it did last week.) It will hurt to see it go "poof" in six years time (2D, two years apart). </p>

<p>Like another (early) poster, H had (has?) notions of financing education with rentals we own. I see tax problems because the properties are almost fully depreciated. But the income stream should be available.</p>

<p>Currently we are maximizing retirement savings. Two years from now that money will probably go to college. That would cover a public unviersity, in-state anyway. Naturally, D are not terribly interested in our public universities. </p>

<p>So, the balancing act. I would love to support the girls at a top-notch college of their choice. We probably won't get any need-based aid except when both D are in college. We, like most of you, will have to balance quality (real or perceived), cost, and "fit." I rashly told D1 that if she loved an excellent school we'd find a way to pay for it. It would have to be notable and nearly unique on both the quality and fit counts. That's my story. I confess that what it really amounts to is that I am willing to pay for a prestigious university or LAC if D loves it. Maybe I should say I <em>was willing</em> before I saw that cost at many schools is creeping up to the $50,000 neighborhood. Ouch, ouch, ouch. That doesn't make sense when D likely could qualify for some merit aid at some very good colleges.</p>

<p>I might go back to work, but I really don't like the idea of my whole income going to D's college. I am willing to give up a new car and some savings, but if somebody has to work soley to put D through college it shoud be D and not me.</p>