Wise Ags of the B/I board, tell me your thoughts on my latest predicament..
Baby #2 will enter this world in the coming few months and I started thinking about setting up my 2nd 529 plan for child #2. However, I remembered that one fund could be used for multiple kids and began wondering about just doubling my monthly contributions to my 1st 529 plan rather than making a second separate payments to 2 separate accounts. I decided to run some calculators to see what they came up with.


Each month I pay $425 into child #1's 529 plan. So far child #1 (2.5 years old) has over $15k in their account. If I continued to do $425 for the next 16 years, #1 would have $142,000 for college. I am using 4% interest even though it has been between 6-8% return if memory serves me correct.




Once #2 enters this world and I do the same $425 for 18 years (plus a few gift contributions from grandparents-not included in this calculation), #2 would have $134,000. If I guessed what grandparent's contribution looked like over 18 years, it would get #2's savings around that $140,000 range like #1. Nothing surprising.




Then my final calculation for $850 ($425x2) for 18 years at 4% interest shows $299,000. About $20,000 more than if I had the two separated




Now-my questions is, should I combine them or not? What if #1 wants to go to school out of state and has higher tuition and leaves less $ for #2's in state tuition? Also, to further complicate things, there is a good chance we will have a 3rd child, so if I combine all 3 tuition savings in one account, that could be challenging or fair to track what kid should get what $. I want to keep it as fair and transparent as possible, so keeping them separate would be the EASIEST.

AGGIE WH08P said:

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Then my final calculation for $850 ($425x2) for 18 years at 4% interest shows $299,000. About $20,000 more than if I had the two separated

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Compounding interest doesn't work like that.

In your example, you are getting different amounts because in Scenario 1, you are investing Child 1's 529 16 years. In Scenario 2, you are investing Child 2's 529 18 years, and then you try to add those together to get Scenario 3, which is investing all the money 18 years.

The missing $20,000 is the extra 2 years you invested Child 1's money in Scenario 3. To compare apples to apples, run Scenario 1 again, investing it for 18 years, add it to Scenario 2, and it will equal Scenario 3.

The short answer is that there is no downside to the compounding effect of interest if you keep it separate accounts.

Ok, I see what you're saying.
And yes, poor choice of wording on the compounding interest portion (I'll remove it)

thanks for the feedback.

I say separate accounts. Investments can be tailored to the age (e.g., lower risk investments as they approach college, etc.). Not sure how contribution limits may impact one account. In the event you have extra dough, you can maximize contributions to two accounts.

what if kid 1 starts school at the bottom of a recession, if you could float them for 1-2 years on your cash you could sell higher when kid 2 comes around, probably too complex to worry about at this point

as an example, Utah's 529 plan (UESP) does age based diversification as one investment option, so I would want (and do have) those in separate accounts for each kid.

$142k for college? Am I off or is that a lot? I'm assuming your doing pretty darned well to put up $850 per month for college...I couldn't even dream of that. Hopefully, you are doing that well, and if so, congrats man. If not, remember you can always borrow for college but you can't borrow for your retirement.

For kids born right now, assuming it continues inflating at the same average rate that it has for the past 20 years, $142,000 won't be enough for a traditionally attained 4 year degree (assuming no dual credit, kid isn't living at home, minimal hours transferred from a juco, etc).

I don't think it matters, 1 or 2 from an application standpoint. You're doing the right things now.

One 'gotcha' to be congnizant of is "overfunding." Don't wind up with too much in the 529 that you can't easily use it. If you'll be in your prime earning years in 16-18 years, like most all folks with college aged kids, then some of your college funding can also come out of pocket. There is a balance there.

The money shouldn't be heavily exposed to equity markets within 2 years of them starting college, thus not having this as too much of a risk.

Just curious, have you looked into setting up a ROTH IRA for your kid instead of a 529 plan? I don't have kids so I admittedly haven't looked into this in a lot of detail but my understanding is you would get basically the same tax benefits but the use of the funds would not be limited to just college like the 529. I'd be very cautious putting money into such a limited use investment vehicle.

You have to have earned income in order to put money into a Roth. That's not a requirement for a 529.

Seems like it would be rare not to have earned income as a parent.

Gotchya.

third coast.. said:

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and if your child gets full rides/scholarships/doesnt go to school etc, what are the options for that money?

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Quote:

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If your child receives a scholarship you might not need all the money you've saved up in your 529 plan for college expenses. You generally have three options at that point. The first is to earmark the 529 funds for some future use by that child, perhaps for graduate school. The second is to direct it to another family member, such as a current sibling or a future grandchild. You can make the change in beneficiary anytime before the second family member actually goes to college. The third option is to withdraw the extra funds. The earnings in your account will be subject to income tax either on your return or your child's. Normally, there would be a a 10% additional federal tax on the earnings portion as well, which is penalty for taking a nonqualified withdrawal, but the penalty is waived when scholarships are the reason for it. In effect, the scholarships have turned your tax-free 529 investment into a tax-deferred 529 investment. Of course, many parents will still be able to use their entire 529 balance on other non-scholarship expenses such as room and board, books, and supplies, and so the scholarships received by their children will not lessen the tax benefit of the 529 plan.

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Source

This is why with 2 kids now and possibly a third in the future I definitely don't want to come close to over-funding their accounts. If I can have half of what I think I may need for three kids then I'll be happy. The other half can come from paying out of pocket, scholarships, and my kids taking a few student loans themselves.

Wife is an Aggie said:

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third coast.. said:

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and if your child gets full rides/scholarships/doesnt go to school etc, what are the options for that money?

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Quote:

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If your child receives a scholarship you might not need all the money you've saved up in your 529 plan for college expenses. You generally have three options at that point. The first is to earmark the 529 funds for some future use by that child, perhaps for graduate school. The second is to direct it to another family member, such as a current sibling or a future grandchild. You can make the change in beneficiary anytime before the second family member actually goes to college. The third option is to withdraw the extra funds. The earnings in your account will be subject to income tax either on your return or your child's. Normally, there would be a a 10% additional federal tax on the earnings portion as well, which is penalty for taking a nonqualified withdrawal, but the penalty is waived when scholarships are the reason for it. In effect, the scholarships have turned your tax-free 529 investment into a tax-deferred 529 investment. Of course, many parents will still be able to use their entire 529 balance on other non-scholarship expenses such as room and board, books, and supplies, and so the scholarships received by their children will not lessen the tax benefit of the 529 plan.

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Source

This is why with 2 kids now and possibly a third in the future I definitely don't want to come close to over-funding their accounts. If I can have half of what I think I may need for three kids then I'll be happy. The other half can come from paying out of pocket, scholarships, and my kids taking a few student loans themselves.

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I had always planned to use one 529 for all my boys. But, if I'm reading this right, the beneficiary can only be changed before they start college? I have twins.....

142k is too much to worry about for your child. The college bubble WILL pop in the next 16 years. The academic landscape will be much different. And Ive mentioned it before, but I really really hope you are FULLY funding your own retirement before you even think about diverting money to your kids' college fund.

They've been saying that the college bubble would pop or that it wouldn't keep rising at the same rate for almost 20 years.

As long as the government keeps subsidizing the loans the rates will continue to rise. I agree that it will level out at some point but telling someone with kids already in existence that $142,000 of money for their college is too much is kind of pointless until the bubble does burst or the inflated costs level off.

Besides, it currently projects out to around $80,000 for college right now at a state school and close to $200,000 at private. Going from 80k to 140k isn't hard to imagine at all.

Thanks everyone for the feedback.

Stive- I read up on what the expected cost will be for a public school and read around $160-220k. With my numbers above, that is based on 4% return. But so far my Utah 529 is about 10%. If I do the same calculator @ 8% that gets me to $215k. I just hope I'll have 80-90% saved. I'm from a family of 4 and 3 of us were at A&M at the same time and my folks could only help out a little bit. I graduated with $70k of debt and got it paid off in about 5 years. I told myself that if there was one single thing I could do for my kids, it would be to help pay for most, if not all of their education. Not that student loans are all that bad and it might motivate some kids to work harder in school and open their eyes about finding a true career to help pay off their loan, but to me it's just something I want to be able to do for my kids.

Queso1- ya, we live a very modest lifestyle and have been fortunate in both of or careers to be able to save this amount. My kids college savings will be about the same as my mortgage each month (only for a little longer though-we are getting cramped in our house as it is now!). Both 401ks are maxed to company match and mine is 3% above match. One thing I would like to do from an investment standpoint is to buy a rental home where my kids go to school. Hopefully ATM. Then, I can use their 529 to pay for their housing and basically pay the landlord (me) their rent. Kinda getting back a little of what I put in. If I can get a 3 bedroom home and have 2 of my kids live there at the same time, I could get $700-1,200 from each of my kids + another roommates share. Of course, I'd have to have both kids get into ATM first!! Wishful thinking

Good points about the aged based diversification and the possibility of what the current market could be like at the time when I need to draw from the account. Hadn't thought about that.

AGGIE WH08P said:

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One thing I would like to do from an investment standpoint is to buy a rental home where my kids go to school. Hopefully ATM. Then, I can use their 529 to pay for their housing and basically pay the landlord (me) their rent. Kinda getting back a little of what I put in. If I can get a 3 bedroom home and have 2 of my kids live there at the same time, I could get $700-1,200 from each of my kids + another roommates share.

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Dang that's a good idea!

AGGIE WH08P said:

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Both 401ks are maxed to company match and mine is 3% above match.

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If I am reading this right, you are only contributing enough into your 401K to get the full company match (+3% in yours)? Not necessarily contributing the maximum amount of $18,000 per year, or a total of $36,000 per year for both you and your spouse.

For 529 plan, if you get a scholarship:

In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you'll have to pay income tax on the earnings. As Savingforcollege.com founder Joe Hurley likes to say, "the scholarships have turned your tax-free 529 investment into a tax-deferred 529 investment".

queso1 said:

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$142k for college? Am I off or is that a lot? I'm assuming your doing pretty darned well to put up $850 per month for college...I couldn't even dream of that. Hopefully, you are doing that well, and if so, congrats man. If not, remember you can always borrow for college but you can't borrow for your retirement.

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Saving an extra $850 a month is doing 'pretty darned well'? I always took the saying 'Live within your means' to include saving as part of the 'means'. I guess some people don't.

WIA-I had to go back and double check. I'm actually at 14%, not 10%. I forgot that I increased it a few years back. Company match is 7% I believe. The wife's is 12%. Geez-not sure how I forgot those values. Looking at last years contributions, we were between 70-80% of the full $36,000 max. Probably something we should consider increasing in the future. We are really cash heavy right now saving to buy our next home. Just waiting for the right one. Thanks for bringing that to my attention! Once we buy a the next house, I'll consider increasing these

Abitaholic said:

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We have bought a town home in the Barracks and rent it out. Our plan is to have our kids live there down the road. I've thought about the 529 idea to pay us as landlords and basically pocket the tax free growth money out of the 529 plan. I do believe in order to do that you cannot claim them as dependents - maybe not a huge issue.

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Wonder if I buy the rental under an LLC and the 529 pays the LLC and not me, wonder how that would change things? I dont know how LLC really work in this regard, so that might be a bad idea


some good info on it here:
http://finance.zacks.com/can-pay-mortgage-529-plan-1248.html
I'll keep reading up on it. Definitely something to keep in mind

My dad did something similar when I was in college. He worked for himself, and he 'paid' me as an employee of his, which then went straight to paying tuition. It was basically a deductible against his business I guess? And my income from him was 100% tuition, so no effect on me.

62strat said:

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My dad did something similar when I was in college. He worked for himself, and he 'paid' me as an employee of his, which then went straight to paying tuition. It was basically a deductible against his business I guess? And my income from him was 100% tuition, so no effect on me.

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An Aggie doesn't lie, cheat, or steal.

I'm sure he mopped a few floors to earn his keep.

Prince_Ahmed said:

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62strat said:

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My dad did something similar when I was in college. He worked for himself, and he 'paid' me as an employee of his, which then went straight to paying tuition. It was basically a deductible against his business I guess? And my income from him was 100% tuition, so no effect on me.

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An Aggie doesn't lie, cheat, or steal.

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Well my dad's not an Aggie, soo..

Aside from that, loopholes aren't lying, cheating or stealing. If he wants to pay me as an employee to do absolutely nothing, that's his choice, and is not illegal.

Stive said:

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They've been saying that the college bubble would pop or that it wouldn't keep rising at the same rate for almost 20 years.

As long as the government keeps subsidizing the loans the rates will continue to rise. I agree that it will level out at some point but telling someone with kids already in existence that $142,000 of money for their college is too much is kind of pointless until the bubble does burst or the inflated costs level off.

Besides, it currently projects out to around $80,000 for college right now at a state school and close to $200,000 at private. Going from 80k to 140k isn't hard to imagine at all.

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The difference now vs 20 years ago is that many for profit colleges are going out of business (shut down) and we have an entire generation of millenials coming out with underwater basket weaving degrees, thousands of student loan debt, and an economy that cannot support all liberal arts jobs. About 10 years ago, you could get away with no experience and a lib arts degree. Not anymore unless you have connections.

https://www.washingtonpost.com/news/grade-point/wp/2017/03/14/student-loan-defaults-are-rising-faster-than-you-think/?utm_term=.7c923f6d36aa

62strat said:

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Prince_Ahmed said:

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62strat said:

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My dad did something similar when I was in college. He worked for himself, and he 'paid' me as an employee of his, which then went straight to paying tuition. It was basically a deductible against his business I guess? And my income from him was 100% tuition, so no effect on me.

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An Aggie doesn't lie, cheat, or steal.

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Well my dad's not an Aggie, soo..

Aside from that, loopholes aren't lying, cheating or stealing. If he wants to pay me as an employee to do absolutely nothing, that's his choice, and is not illegal.

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So you aren't an Aggie, or you didn't benefit from this arrangement you are advertising? I'm sorry, I thought I saw an ag tag.

The "loophole" includes the idea that children do actual work, which is made pretty clear by both the Service and case law. IRS has disallowed those business deductions in cases where it comes up that actual work isn't being done by the child, or where the wages were not commensurate with the skills and services the child was providing the business. The Service does provide incentives for kids that actually do work in a family-owned business, with the caveat they are actually working and are compensated appropriately for that work.

You may have benefited from this arrangement legitimately, but I didn't interpret your post that way (especially with the added post that he paid you for doing absolutely nothing. Apologies if I was in error.