Money market or 529s first to pay for college - D18 and then S21

Paying for College
1

We are looking at lots of college bills the next 7 years as 2 kids go through college!!

D starts Fall 2018 and our cost will be just north $50k (She got need aid of $15kyear).

We plan to pay about $12k out of pocket each year and the rest from savings – so about $40k from savings for next 3 years and then more when S. is in college.

The savings/equity we have to access are the following:

  1. About $125k in money market from recent property sale
  2. About $75k total for the two kids in 529s
  3. home equity loan (or sales proceeds if we downsize while S. is in college which is the plan) that will cover the rest for S. – estimating from $100k to $135k if he goes private or OOS.

MY QUESTION is: Do we use the money market cash first or the 529s or does it matter?

We are expecting/hoping the one year of overlap when they are both in college we may get a little more need based aid for my D and am not sure if there’s financial aid spend down one source of savings over the other.

Thanks in advance for any advice!!!

2

It seems that you have $200,000 in money market account and 529.

So that would provide $25,000 a year for both kids.

Then you can possibly get another $100,000 from home equity.

So another $12,000 per child per year.

That’s $37,000 a year. If they take their student loan then that would be about $42,000.

And if they work summers and earn $3,000 that would be a budget of $45,000.

The $50k school seems to be above budget.

Now costs go up every year too. And your D would have need based aid that might change depending on your income.

Does she have acceptances to any schools that are more affordable?

Did you run the net price calculator at her school to see how aid might change with 2 in school or with 2017 and future income, and changing assets?

3

The money market account and 529 accounts will both be assessed as parent assets on equal terms for determining need-based financial aid. Which accounts to use when can be complicated by several different factors, including:

-Anticipated growth and tax implications (the longer a 529 account can continue to pick up tax-free earnings, the better)
-529 balance and 529 qualified expenses still to pay (do you want to risk having 529 money leftover?)
-If taking education tax credits is a possibility, paying enough qualified expenses each tax year with non-tax advantaged funds so that the maximum credit can be utilized

It can be a balancing act and a guessing game to a certain extent, so it’s hard to give specific, beneficial advice without knowing a lot more details, which you are probably (and understandably) reluctant to disclose on a public forum.

4

In my state (NY) $10K of contributions into a 529 plan is exempt from state income tax each year. If your state offers something like that, why don’t you consider moving some of your money market funds into the 529?

5

No, we’re good. We’ll pay as we go 12k per year for the 7 years combined they are in college – that’s $84k total, plus the $200k in savings and $125(ish) in home equity (We have twice that in home equity so we have flex) So, $410k total as long as we they don’t exceed much north of $50k per year each we’re okay. And we’ve saved a lot for retirement and will keep contributing, we live frugally, etc. Am doubting our incomes will go up but D’s college meets 100% of need so aid should keep pace with tuition. Finally, my S is much more interested in public so fingers crossed there as that’d be half the cost in our state! :slight_smile: Thanks for your concern, though!

Just looking for advice on which pot of $$ to spend down first – money market or 529.

TKS!

6

@BelknapPoint – thanks. Now that I know it’s not clearcut I’ll do a little more digging. Tks!

7

We just had this discussion with our accountant. Don’t forget to take into account any taxes owed on recent property sale. Everyone’s situation is different, and this is our last child in college, but our accountant suggested we use the 529 first because we are going to get hit with capital gains from sale of property and if we cash in any stock or mutual fund we will get hit with that tax bill too. (yes, I understand we could have avoided the tax hit if we put the money in a 529, but we didn’t)

8

@mamom - This is helpful. The property was inherited and then flowed through a partnership LLC with my brothers… I’ll know more shortly about any capital gains, but for some reason I think there won’t be any – fingers crossed. My inclination is to use the money market b/c it’s not invested and is just sitting there. Of course, my D’s 529 is in low return investments at this point b/c of her age. Tks again!

9

I have money left in my 529. Even though I can take it out without a penalty because of scholarships, I got a state tax deduction for contributions to it. Than means, I have to pay state taxes on both principal and interest when I take it out. Even with no penalties–ouch. My advice would be to 1. Pay enough OOP to qualify for the AOTC. 2. Plan my 529 payments so there is 0 left at graduation time.

I might hang on to the money market money just because I have more flexibility in how it can be spent. Emergencies happen.

10

Reminder the 529 beneficiary can be changed to other family members or future family members…So you could change the beneficiary to grand kids, etc…

Member of family
The term “member of the family” means, with respect to any designated beneficiary—
(A) the spouse of such beneficiary;

(B) an individual who bears a relationship to such beneficiary which is described in subparagraphs (A) through (G) of section 152(d)(2);

© the spouse of any individual described in subparagraph (B); and

(D) any first cousin of such beneficiary.

Section 152 (d)(2)

(A) A child or a descendant of a child.
(B) A brother, sister, stepbrother, or stepsister.
© The father or mother, or an ancestor of either.
(D) A stepfather or stepmother.
(E) A son or daughter of a brother or sister of the taxpayer.
(F) A brother or sister of the father or mother of the taxpayer.
(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.