I need some help in deciding 529 contributions. My son is in 8th grade. At this point, it’s difficult to know whether he will attend private or public university. The costs differ a lot. So I was thinking of funding 529 plan equal to in-state public univ fees, and the difference between private and public can be funded from my taxable account. Is this the right strategy?
I also see Room & Board is a qualified 529 expense. However if the student lives off-campus, can Room & Board be funded from 529 plan? If not, I will have to fund 529 even less than total public univ cost.
Overfunding a 529 is not that big of a deal. If you don’t spend the whole thing on your son, you don’t have to pull the remainder out right away*. There are lots of options, such as holding it for grandkids, but worst case scenario, you pull it, pay the taxes you owe and the 10% penalty. The reason it isn’t a huge deal is that you can let it sit and compound. The earnings will outstrip the penalty. Early retirees sometimes do this with early 401k draws.
As for expenses, yes room and board off campus are qualified expenses up to the amount it would cost if the student lived and dined on campus.
*This is controversial as the tax code doesn’t specify. A few say it has to be pulled before graduation. Most say there is no time limit, because you’re allowed to change the beneficiary.
Yes to room and board. There are no receipts required. You just claim. Typically off campus is cheaper than on and obviously it’s impossible to track every expense.
One thing to be careful of. You are starting late. If you go into a target one based on age your earnings are likely to be small because at this point they will be mostly in bonds.
If you do what I did and pick a target period further out so as to be more aggressive, with the growth we’ve had and interest rates projecting upward, in such a short time frame you may see principal reduction.
So as important as it is to save, you should decide if a 529 is the avenue you want to save in this late in the game.
Not trying to talk you out of it. But you have less time than others to recover from any potential down cycles.
The fact that you want to save is envious. Good luck.
This is a great point. I misread 8th grade as 8 years old.
Gains are all that are shielded from taxes if used on qualified expenses as contributions are made with after-tax dollars. With that short of a window, you need to make a decision on how much risk to take. If capital preservation is the primary goal, then gains will likely be minimal, reducing the advantage of a 529 over a regular taxable account.
There is a caveat. In some states 529 contributions are deductible and in some, 529 contributions are partially offset by tax credits. This will have to figure into your calculations.
The biggest advantage of 529 comes with starting earlier where there are realized gains that are shielded from taxes if used appropriately.
I am not an accountant but was going to say the same as above. Talk to your accountant or broker and as for options. 529 is just one savings vehicle but might not be the correct one at this point.
I always wondered why not just put into an aggressive S&P account. Some friends put into stocks and withdrew when needed.
This should not be controversial at all, as there is most definitely no time limit for using 529 funds. Perhaps some people are mixing up 529 plans with Coverdell ESAs, since Coverdells do have a “use it by” deadline.
Because for many people 529 contributions provide a state tax deduction or credit, while vanilla investments generally do not, and because 529 earnings used for qualified expenses are tax free, while earnings from vanilla investments generally are not.
Thx. I actually knew that but wouldn’t the investment overtime, if significantly better outway that? Just curious. We did 529 when kids were young and also paid out of current income… Due to merit scholarships etc we actually have a decent amount left over. We are evaluating what to do with it if the kids don’t go to grad school. Be nice to put it in our retirement plans to let it grow regardless of penalty…
Sure, if returns are “significantly better” over time, a regular investment outside of a 529 account could outweigh the benefits of a 529, but there are hundreds of 529 plans out there that offer a wide variety of investment options for all kinds of different risk tolerances.
I started late with the 529 too, but before the big stock market boom. I am not a sophisticated investor, and trend toward target funds usually. I have the 529 in a target fund, but also invested other money outside the 529 more aggressively, so that it can be used on other things beyond college, too.
Maybe nuts, but I like the hybrid approach- at least I get the tax advantages of the 529 for a core amount of money I don’t want to risk. I figured I would let that ride during the first couple years of college, giving me about an 8 year period of tax-free growth, better than nothing. The rest I am comfortable with more risk.
The state deduction or credit could help. We don’t have that advantage in TN. I have two 529s. One in Utah. Vanguard. One in NH. Fidelity.
Again I believe in 529s but the target date fund four years out will be conservative which at this point may be a blessing in disguise.
None of us know where markets are headed.
One thing to note is in a 529 plan you pay higher fund fees then you would on the same portfolio on a non 529 investment.
For example, Fidelity charges a program management fee. Not huge. Just another nuance to account for vs a non 529 account.
Btw Fidelity has a credit card that funnels 2% of all purchases into the 529. So over years it builds up. I am fortunate or not fortunate to have over saved so we just got a 2% non 529 card…not from fidelity.
Thx. I actually forgot which one but we used an OOS 529 for some tax advantage…
Whenever I see a family with young kids, like a new born . I almost always say, “Cute child… Have you started a 529 fund yet”?.. Lol. It’s amazing how many never heard of it but I guess I didn’t know about it either. I actually see some of these families just walking around and some have actually thanked me since they were able to start one with little money. Keep telling them compound interest is a beautiful thing…
According to Investopedia, a resource I trust, it is. This article discusses scholarships, but when it comes to the section on timing, they talk about all distributions.
I personally never interpreted it any other way than you can hold as long as you want. We didn’t have any left, so it wasn’t an issue.
I am in CA. So I get no break on contributions, but the withdrawals will be tax-free.
Good reminder on the market risk in the short term. Maybe I will limit the contributions to 529 for that reason, and partly fund the education from taxable account.
The Investopedia article says that the timing of taking penalty-free non-qualified 529 distributions based on scholarships or grants received by the student is not a settled issue, which is true. But there is absolutely no controversy as to whether or not there is any kind of deadline or time limit for using up the funds in a 529 account, because there is no deadline or time limit. The original post in this thread, which you were the first to respond to, mentions nothing about taking penalty-free 529 distributions because of a scholarship or grant that the student received.
I misread the section on timing. Sorry for muddying the issue.
As far as the extra $2K goes, was it after she’d covered all of her expenses? If you don’t have documentation that it was used for a qualified expense, or another out like scholarship, it’s my understanding that you pay taxes on the gain and a 10% penalty.
So my daughter is paying no tuition. that’s about $34k a year. So I’m claiming room and board and maybe another $1k. Books etc
My son gets $28.5k so tuition about $31k.
Off campus I’m taking his rent and guesstimating food. I should take the on campus expense tho as it’s higher. There’s no way to know true food off campus.
Then do all the pizza runs count ? Or if they go overseas to study airline fix etc.
I really gotta deep dive.
One semester I forgot to claim and u have to claim within the same year of school. I try and do two claims per year.
I will have left over. I will reset the target out far. And assume grad school or kids. I had like 170k total for two.
Just got lucky with kids going cheap.
I do need to dig as one is a junior. I’ve probably let some opportunity slip. On the flip side if I have a grand kid or two eventually they could be well funded early.
Back to the OP question…. They will learn that if their kids do reasonably well, there are many options for schools perhaps less expensive than even your state flagship if that’s the route you or your children decide to pursue.
For me it just happened to be where my kids chose.
It is too bad there’s not a mechanism to help those who did the right thing and over saved. 10% isn’t death. But it is sort of punitive.
