My DS will graduate from HS in 2 years. We have a 529 plan but have not contributed to it since 2008. My DH just started a new job 6 months ago and we are finally in a financial place to begin saving for college again. We can set aside about $1,500 -2,000 a month. For the past 6 months we’ve been putting the money into our savings account. Would it be better to resume putting it into the 529 plan or is keeping the money in savings the better option?
If your 529 plan was mostly in stocks, you can consider diversifying away from it. If you have a brokerage account, you can now get 1 year CD’s at 2% and 3 year CD’s at 3%. No risk to capital, and insured… You can also consider a UTMA account for your child, buy the CD’s in there and you do not pay taxes on interest up to $1050. You can put a max of 15K (UTMA + 529 total) due to gift tax rules. UTMA’s become property of child at 18 or 21 depending on your state, so that needs to be a consideration.
Most 529’s do not have a CD options, so you will be taking the usual risks for a higher return , hopefully, but no guarantees. You do not have a lot of time to recoup losses with a 2 year time frame to start college.
The big issue is whether you need the tax deduction feature that some states will give you on 529 Plan contributions. If your state does, it is likely worthwhile to contribute to the 529, take the tax deduction, and live with the fact that now the money is firmly earmarked for college expenses and your resources are less flexible. Over next two years, the benefit of tax-free growth is possibly not that big a deal, especially as you will need to keep the money invested more conservatively. If your state does not give you any tax breaks for making 529 contributions, the ability to stay flexible on your savings/spending may mitigate in favor of not tying up the money in a dedicated account.
What is the certainty the money will be used for college? The big dangers of money locked into a 529 Plan are (1) the kid gets scholarships such that the parent doesn’t need to spend the savings on college expenses, or (2) the kid doesn’t go or doesn’t finish college, so the money is not needed for college expenses. Absent one of these two scenarios, the inflexibility of a 529 Plan may not be a big deal.
your cash counted abt 5% to EFC, for FAFSA 529 counted as parents asset. But for most private schools, 529 counted as student’s asset, 20% of 529 equivalent less in any college aid.
Which private schools are counting 529 as student asset? And if so, why would it be @ 20%? 20% is a FAFSA percentage, not necessarily CSS/Profile.
I agree it depends if your state is giving a tax break on 529 contributions. Otherwise, it probably isn’t worth the trouble of putting it in just to take out again.
@BooBooBear and @momprof9904 Thank you for fast and thorough responses. Unfortunately, we are in one of the 7 states that does not offer a tax deduction for contributions to our 529 plan.
You can put as much as you want into a regular UTMA, and up to whatever the particular plan limit is for a 529 account. The gift tax rules don’t limit how much can be gifted to any one person per year; they do tell a gift giver how much can be gifted each year before IRS reporting requirements kick in. And unless a gift giver anticipates having more than $11 million combined in estate value at time of death and lifetime gifts that exceed the annual exclusion amount, no gift or estate tax will be owed (under current law).
Momprof- as Belknap points out, there is no limit on how much you can give one person in one year… it just means you file a form in any year where you exceed the annual cap-- and it’s not 15K, it’s 30K if you are married (each person has the ability to give the money). This is a very common misconception and prevents people from making appropriate long range financial plans. The form itself takes 10 minutes to file (if that) and you don’t need a CPA’s help. If you read English, you can do it yourself and filing is free.
HTH.
@blossom @BelknapPoint. Thanks for the clarifications re: gift tax rules. I confused the reporting requirements with limit on contributions.
On a related note, utma is counted as a student asset and 20% is expected as contribution to college tuition versus 5% of parent assets ? So I guess a UTMA may not be optimal if a family’s income may change and they need more aid when kid starts college?
Since to day is 529 day, (5/29/2018). I’ll chime in.
DC529 has a stable value fund paying 2.35% . The rate will change July 2018.
Colorado 529 has a stable value fund paying 2.29% on cash for 2018 and have historically had very competitive rates. I would think that this would be a good choice because of the tax savings on the returns. It’s not FDIC insured though.
We’ve used the Private College 529 plan and purchased my Ds senior year upon depositing at the college once we knew they covered that college. The return if you use it for senior year of college is 3 years of tuition inflation tax free. This returned us around 16%. If you’re going to need loans though, it’s probably better to borrow less and avoid origination fees than to sock away money for 3 years even if the after-tax return on tuition inflation is high.
With your timeline, no state tax benefits, and the possibility that other family expense could suddenly take precedence, I’d put the money into laddered CDs or just the highest interest savings or monrymarket account you can fince.
Generally, this is accurate for FAFSA purposes, with the following clarifications: a UTMA (custodial) 529 will be reported as a parent asset, and the assessed rate for parent assets is 5.6% after the asset protection allowance. Reporting for Profile is different, particularly for student-owned 529 accounts, and will depend on individual school policies.
@Redslp If going the savings route, online high yield savings accounts may give you more yield and are more flexible than cds. Bankrate.com may have suggestions . We use amex hi yield savings. A whopping 1.55% , but better than close to 0% at our local bank.
@ClassicRockerDad Thanks for the 529 plans with stable value options with those yields. Neither of the ones we own have that, although they do have some safe options but with lower yields.