I have a son who will be turning 3 in a month and I've been starting to think about saving for his education. I've only briefly looked into 529 savings plans. Do we have any experts who could point out what factors are the most important when choosing a 529? Is a 529 the best route to go or are there better options?
529 Plans and Saving for Education
- Thread starter imjoe
- Start date
Good that you are thinking of this! Other than for the very wealthy, a 529 is likely the best route. The slight downside is that the monies must be used for qualified education expenses.
Here is a primer I wrote http://saverocity.com/finance/college-529-plans-explained/
It starts out exploring 529 plans in general, and goes into a fairly sophisticated strategy to structure multiple plans in tandem so that you can create an overall strategy that has more options (for non-qualified withdrawals)
Let me know if you have any questions on that.
MarkD
Level 2 Member
Great article! I'm not sure how I missed that one.
After starting California 529s for my three kids a long time ago, I just recently opened accounts in NY for them as well. The NY funds have low fees, are highly rated and most importantly they can be paid with Evolve so you can pickup a few points along the way. If California ever gets a state tax deduction for 529s then I may rethink my strategy.
Make sure that the funds you invest in are age appropriate and that you review the performance and allocation of funds at least yearly.
After starting California 529s for my three kids a long time ago, I just recently opened accounts in NY for them as well. The NY funds have low fees, are highly rated and most importantly they can be paid with Evolve so you can pickup a few points along the way. If California ever gets a state tax deduction for 529s then I may rethink my strategy.
Make sure that the funds you invest in are age appropriate and that you review the performance and allocation of funds at least yearly.
kaipoman
Level 2 Member
Personally I would opt for a trust over a 529 for a few reasons:
- Wider array of investment options.
- Greater flexibility of how/when monies are distributed. I have my son getting a bonus payout if he maintains a certain GPA, for instance. I can also set money aside for things like a first time home purchase, marriage, etc.
- Biggest reason: money in a trust will NOT count against any financial aid or scholarships your child may be eligible for. If you set aside a decent chunk of change for your son in a 529, it may disqualify him from any financial aid whatsoever.
The biggest drawback is that once you transfer money into a trust, that money belongs to the trust. If I wanted to, I could cash out a 529 meant for my son, pay the taxes/fees, and use the money for my own personal expenses. With a trust that is not possible. That money will always go to your son, no matter what. While you can alter the payout schedule and terms, that can only be made more liberal, not more restrictive.
There are a few services that will set this up for you at very little cost. I recommend Kiss Trust - http://www.kisstrust.com/home.htm .
- Wider array of investment options.
- Greater flexibility of how/when monies are distributed. I have my son getting a bonus payout if he maintains a certain GPA, for instance. I can also set money aside for things like a first time home purchase, marriage, etc.
- Biggest reason: money in a trust will NOT count against any financial aid or scholarships your child may be eligible for. If you set aside a decent chunk of change for your son in a 529, it may disqualify him from any financial aid whatsoever.
The biggest drawback is that once you transfer money into a trust, that money belongs to the trust. If I wanted to, I could cash out a 529 meant for my son, pay the taxes/fees, and use the money for my own personal expenses. With a trust that is not possible. That money will always go to your son, no matter what. While you can alter the payout schedule and terms, that can only be made more liberal, not more restrictive.
There are a few services that will set this up for you at very little cost. I recommend Kiss Trust - http://www.kisstrust.com/home.htm .
Yep, the trust route was what I was alluding to when I said 'other than for the very wealthy' though in fairness 'very' might be unfair. The advantages with a trust are excellent, but we need to also price in the cost to establish one.
Edit - I hadn't seen this firm before .... I imagine I wouldn't like the investment options, but it does look like a very interesting company and I will be doing more research on them. Thanks!
Azhoopsfan
Level 2 Member
But a trust's earnings do not grow tax-free like 529 plans. A trust is no different than setting aside funds in a separate bank account except that you can set "rules" in case you are not around to distribute the money as you choose.
I remember my CFP final exam - panel presentation and a T&E lawyer ripped apart a fellow student for suggesting 529s for a HNW couple rather than a trust. It's an area that I need to explore more, but I think that there might well be some significant advantages (she was a beast and tore him a new one over his recommendation...)
Is it possible to set up a Roth IRA and use those funds for a child's education? What are the benefits/drawbacks of doing it this way? I have set up 529 plans for all 4 of my grandkids, but just wondering it setting up a Roth IRA may be a better route? Any help is greatly appreciated.
It is possible to create this, but I don't think it is advisable. I have been meaning to write up more on FAFSA (it's been a busy quarter!) but the problem you have with a Roth is that while the Asset could be placed in a way that wasn't counted its distributions, even while being non taxable would be considered income.
Bigger picture, you with 4 grandkids you have options to swap things around (change the bennies) so if one of them should not go to college for whatever reason, funds can be re-targeted. You have more than enough scope with current limits to gift into the 529 plans to pay them through college.
The tough thing is trying not to 'go over' such expenses, but with 4 you are in a good place (if a little pricey!)
Thanks, Matt. Yes, it's costing me a fortune, but what better way to insure their future. I'm still working on ways to minimize 4 grandkids through college. I like the flexibility of the 529 plans in re-targeting the funds. Just wondering if there is a more advantageous way to invest those funds.
kaipoman
Level 2 Member
True, but honestly the tax advantages to a 529 are relatively negligible IMO when compared to the flexibility/creativity that a trust affords.
A trust is different than a bank account as it is not factored in FAFSA calculations. That could be potentially huge.
kaipoman
Level 2 Member
Their available investment options are pretty comprehensive, though far from 100% perfect: http://www.kisstrust.com/investment.htm
Yes you pay a small annual fee that offsets some of the attractiveness of the no-load fund options, but I still think it's a pretty attractive value statement for middle class folks wanting to maximize their ability to save for their spawn's education while not disqualifying them from any 3rd party financial aid.
Azhoopsfan
Level 2 Member
State tax differences make a big difference as well as the tax rate of the trust's owner (if it is deemed a grantor trust). Trusts do not provide any tax savings over 529 plans. They are either separate taxable entities (in which case they pay income tax on undistributed income at rates higher than individuals) or they are grantor trusts (in which case the income of the trust is taxable to the individual owner as though the assets of the trust were owned directly by the owner).
529s have their disadvantages too, but trusts are usually not a better option.
BTW, I'm a tax/trusts lawyer in CA.
529s have their disadvantages too, but trusts are usually not a better option.
BTW, I'm a tax/trusts lawyer in CA.
So I have started doing a little more research on this, and came up with a couple of things.
1. Private institutions have a separate (and more rigorous) criteria for establishing eligibility for aid than you find in the government FAFSA calculations. This is called a CSS profile and it looks deeper into assets.
2. That KISS trust company 'seems to be' a bit aggressive with regard to forums and opinions of whether they are a good company or not http://forum.mrmoneymustache.com/investor-alley/kiss-trust-has-sent-a-legal-threat-to-this-blog/
I'm not saying nothing guvnor - please don't sue me, I have little money (that is outside of trusts) and am too handsome to go to prison.
I'm certainly going to get a lot deeper into this subject in the coming months.
1. Private institutions have a separate (and more rigorous) criteria for establishing eligibility for aid than you find in the government FAFSA calculations. This is called a CSS profile and it looks deeper into assets.
2. That KISS trust company 'seems to be' a bit aggressive with regard to forums and opinions of whether they are a good company or not http://forum.mrmoneymustache.com/investor-alley/kiss-trust-has-sent-a-legal-threat-to-this-blog/
I'm not saying nothing guvnor - please don't sue me, I have little money (that is outside of trusts) and am too handsome to go to prison.
I'm certainly going to get a lot deeper into this subject in the coming months.
Azhoopsfan
Level 2 Member
I have two young kids and have been contemplating setting a 529 for a few months. The mention above that you can fund an NY 529 with Evolve is very interesting, and may be the primary factor on where I open one (since there's no benefit to opening one in CA). I've also heard that it's fairly easy to roll-over a 529 from one plan to another down the road.
Yeah, I was in the process of doing this myself today for the little one. I held off in the end since I am between permanent residences. Evolve listed a page of 529 options (I guess over a dozen) The NY direct plan looked good - Vanguard administered so nice fund options. Can pay for college in any state, and actually internationally as long as the school is an accredited institution.
Have heard that Evolve doesn't like 529 funding, but heard that from a guy with no intention of using the 529 and doing pure MS with it....
Today I signed up for Evolve, grabbed my wallet with an old giftcard in it and almost pulled the trigger, the home issue being the only thing that held me back.
There are scholarships, loans, grants etc made by many organizations, such as the US Government, the College itself, and private foundations. Qualification criteria for these is different in each case and does look at family and student assets when assessing needs.
Unfortunately, generally trusts ARE factored in FAFSA calculations. In fact, they may have a huge impact since they are often considered a student's asset-therefore given greater weight in the calculations- and depending on how/when funds are disbursed may be considered student income. What becomes important is who the asset belongs to, ie the student, the parent, or some other entity.
I believe there are ways you can structure your trust in order to circumvent FAFSA calculations, which is what I assume Kiss does. (Fully admit I'm too lazy to click over to their site and explore right now.) However, in doing so, you may have tax implications or other things to consider.
If you're considering going down this route I'd strongly suggest meeting with a professional in order to make sure you're making the smartest decision based on your family and its needs. You need to be sure you’re setting up the trust in a way that will shelter the assets properly since not just any trust will do; a professional should absolutely be able to guide you in this.
OP, a few other things you may want to consider:
Do you think you'll ever want to use the funds to pay for private schools/camps/etc? Then a 529 plan won't work. 529 only allows for post-secondary ed expenses.
If you’re concerned about not using all the funds for ed expenses, 529 plans have a fairly generous definition of family members. You can change the beneficiary to if your son finds he doesn’t need all the funds for his undergrad. Alternatively, he could use any leftover funds to fund graduate school.
IMO, the best thing you could do is diversify your funds across different vehicles. This will give you the most flexibility since its nearly impossible to predict what your needs may be in 10-15 years. It's also entirely possible that the rules/regulations will change by then.
Finally, unrelated, but I was lucky enough to have my higher ed funded by family. It’s one of the best gifts I’ve ever received. Regardless of which route you go, I’m sure your son will be incredibly grateful for the gift you’re giving him.
Each school gives its own aid package. Generally, it will consist of aid coming from the school and aid coming from federal govt. Aid from the school will include merit based scholarships as well as any need based scholarships or grants it's contributing. The federal aid portion consists of any grants or federal loans for which you may qualify. It will also outline which loan types (subsidized vs. unsubsidized) for which you're eligible. Different loans will also have different interest rates. Work study is considered federal aid, but is slightly different b/c its not automatically given. Rather, it's the amount a student potentially could earn while working a work study position. Qualifying for work study does not mean you automatically qualify for a work study position.
The amount you qualify for is determined by your expected family contribution (EFC). This is calculated based on parent(s)' income and assets, student's income and assets, and other factors such as family size, # of dependents, etc. Once EFC is determined, then aid is awarded based on the remainder needed to cover tuition and expenses. For example, if your school costs 50K a yr and your family is expected to cover 25k then your aid should add up to 25k. That 25k could be a mix of school and federal support. Third party scholarships or outside scholarships must be reported so that the aid offered can be adjusted. In the above example if you had a scholarship worth 5k, then the aid awarded would be lowered to 20K. Usually it's grant funds that are removed from your package.
You must file for FAFSA each year and each year your financial aid package may vary.
If EFC isn't truly accurate, there may be some wiggle room with the school's aid office to improve the package.
You can also use your financial aid package from one school to negotiate a better package at another school, which can further complicate things.
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I think another option is to earmark a certain portion of your own personal investment account for your child's education. Or even start a second account that you know is solely for that purpose. Provided you have the discipline to only use it for your child's expenses, of course. I'm not sure how that affects your financial aid calculation though.
I'm wary of opening a 529 plan just because I'm worried what will happen to the money if my daughter chooses to go to a state school (which I'd fully support and love!). Admittedly I need to do more research, but whenever I do I forget one week later...life of a dad? I'll wait for Matt to figure out the best option for me
j/k...sorta
I'm wary of opening a 529 plan just because I'm worried what will happen to the money if my daughter chooses to go to a state school (which I'd fully support and love!). Admittedly I need to do more research, but whenever I do I forget one week later...life of a dad? I'll wait for Matt to figure out the best option for me
j/k...sorta
I'm working on it... or rather its on the list In the interim, note that these following are considered QHEE (Qualified Higher Education Expenses) and therefore things you could use the 529 money on without penalty. State school may be cheaper, but it still has tuition costs, plus these others:
In the interim, note that these following are considered QHEE (Qualified Higher Education Expenses) and therefore things you could use the 529 money on without penalty. State school may be cheaper, but it still has tuition costs, plus these others:
Haley
I am not a robot
Another draw back to a 529 is there is no way to know how it will be treated in FASFA by the time your child is old enough to use it. For our oldest it was treated as student money, ouch, now it is considered a parent asset.
Retirement savings are currently protected (at least to a point) as is primary residence.
One tip, take every penny of need based money before you even think about merit money. Merit money can be pulled for even a small drop in grades, need money you can count on. Even if you hope to keep your kids out of debt, there is no penalty for paying down their loans after the last year you need to file a FASFA.
The difference between financial aid packages and cost to attend is known as the gap. Mind the gap. When you help your child choose schools to apply to there are two kinds of reach schools, reach based on grades and test scores, and reach based on the size of the gap. Many good schools are trying to lower barriers by covering the gap, something I applaud.
Retirement savings are currently protected (at least to a point) as is primary residence.
One tip, take every penny of need based money before you even think about merit money. Merit money can be pulled for even a small drop in grades, need money you can count on. Even if you hope to keep your kids out of debt, there is no penalty for paying down their loans after the last year you need to file a FASFA.
The difference between financial aid packages and cost to attend is known as the gap. Mind the gap. When you help your child choose schools to apply to there are two kinds of reach schools, reach based on grades and test scores, and reach based on the size of the gap. Many good schools are trying to lower barriers by covering the gap, something I applaud.
A note on 529 accounts, don't think anyone mentioned it above -- you can open it before you have your child. Just an FYI, you can be the trustee and the beneficiary of the same account. You can change the beneficiary once a year, so you don't have to worry about it for a while. If you have money left over after you 22 year old is done with college, you can change the beneficiary and give that money to your other child, or nephew, or wife, etc. Of course, you can use that money yourself if you want to go back to school.
Cheers,
PedroNY
Cheers,
PedroNY
Yep - great point, I didn't mention it in the thread, but in the post I outline a strategy to run 4 x 529 plans in tandem, thus allowing you to cherry pick those that could be liquidated for non QHEE expenses. Something similar to the notion of database normalization where you break the asset allocations between each plan, then link them back together again as a concept.
There is a great thread at FWF on the merits of 529 plans.
http://www.fatwallet.com/forums/finance/1260554/
I read over the alternatives hard, but ultimately I am fully funding my 529 plan (Utah, via Evolve). For me, the deciding factors were:
Pro:
-being a PA resident the state tax deduction (3.07% tax rate up to $14k per kid) was greater than my mortgage rate (2.65%), so it was the more logical place to suck up my non-retirement savings
- My kids are 8 & 5, who knows what strategies will work in 10 - 13 years, but I don't see tax-free 529 earnings going away
- my parents paid my college and my wife got substantial help, so I will replicate this for my kids
Cons:
- Early retirement (a possibility) could make me the asset rich, income poor person who could beat the system
- Higher ed is ripe for disruption and the cost structure could be quite different
http://www.fatwallet.com/forums/finance/1260554/
I read over the alternatives hard, but ultimately I am fully funding my 529 plan (Utah, via Evolve). For me, the deciding factors were:
Pro:
-being a PA resident the state tax deduction (3.07% tax rate up to $14k per kid) was greater than my mortgage rate (2.65%), so it was the more logical place to suck up my non-retirement savings
- My kids are 8 & 5, who knows what strategies will work in 10 - 13 years, but I don't see tax-free 529 earnings going away
- my parents paid my college and my wife got substantial help, so I will replicate this for my kids
Cons:
- Early retirement (a possibility) could make me the asset rich, income poor person who could beat the system
- Higher ed is ripe for disruption and the cost structure could be quite different
Thanks for the link, Fatwallet is a great resource- one thing take issue with in your Pro/Con scenario is comparing tax rates of 3.07% and 2.65%.... I don't think that isn't how to compare two percentages in this situation.
I'm only eyeballing this but, the key difference is that if you take the same finite sum of $28K and apply it towards your mortgage, even at a lower rate you have the benefit of saving for every year until maturity, so there is a compound interest effect going on, at a guaranteed rate. While there could equally be a compound interest effect going on with a continuing bull market it is a different kettle of fish. It's almost like a one off signup bonus on a credit card of the 3.07% of $28K that comes with an ongoing balance at a 2.65% APR (ignoring any deductions of course)
Am I off with this? I would like to model it out, but keen to hear thoughts on it too.
Better_by_Design
Level 2 Member
As a (very new) parent, can we take a step back from 529s specifically, and look at where to put money in general?
I live in a non-taxing state (although we make up for it with property and sales tax), so as far as I understand it, I have no incentive to join my local 529, and could (arguably) just pick the state with the best/lowest fee/free toaster plan.
That said, is it even worth opening a 529 if I haven't completely maxed out both my and my spouse's 401k and especially Roth IRA?
Not that we're expecting to be retired by the time Junior attends college (or grad school) but at the moment, we aren't (quite) maxing out both of these for both of us... which is leaving both Federal tax savings (401K) and tax free growth (Roth) on the table. Plus these are technically retirement funds and don't affect the FAFSA, at all, right?
If we economize and max out both of these, doesn't it become possible to withdraw the Roth principal tax free for Junior's college? At a possible current $11k per year (combined), that's a significant amount, and the growth in principal could remain until we actually do retire... I think?
I'd appreciate any possible advice as this has been occurring to me, but seems to go against the general flow of peers, industry advertising, etc.
I live in a non-taxing state (although we make up for it with property and sales tax), so as far as I understand it, I have no incentive to join my local 529, and could (arguably) just pick the state with the best/lowest fee/free toaster plan.
That said, is it even worth opening a 529 if I haven't completely maxed out both my and my spouse's 401k and especially Roth IRA?
Not that we're expecting to be retired by the time Junior attends college (or grad school) but at the moment, we aren't (quite) maxing out both of these for both of us... which is leaving both Federal tax savings (401K) and tax free growth (Roth) on the table. Plus these are technically retirement funds and don't affect the FAFSA, at all, right?
If we economize and max out both of these, doesn't it become possible to withdraw the Roth principal tax free for Junior's college? At a possible current $11k per year (combined), that's a significant amount, and the growth in principal could remain until we actually do retire... I think?
I'd appreciate any possible advice as this has been occurring to me, but seems to go against the general flow of peers, industry advertising, etc.
That is a good point, hadn't thought of it that way. I mostly looked at it that the risky potential market returns would be gravy over the 2.65% "cost". That said, they are both kind of limited duration trade offs. I have only $49K left on the mortgage, it would be gone already if I hadn't switched the priority last year and pumped 50k into the 529s. When I made the switch I expected to fully fund them both over the next 3-4 years so I was looking at it as a reallocation of who get paid when (I get a healthy chunk of incentive comp which makes the timing less certain).
You can put a token amount in if it makes you feel better but I would do 401(k)s and Roth IRA's first. You are correct that Roth's can be withdrawn for college costs, and more to the point while there are student loans there are no such things as retiree's loans. Build your own nest egg first. This is the right answer in life, as well as the right answer for FAFSA. Something of a coincidence there.
I don't think it goes against the general flow, as people says there's financial aid for education but not for retirement.
I'm in the same boat, currently maxing roth but not 401k. I'm slowly increasing the 401k contribution each year with pay increase.
Once I max 401k, then I'm planning to open 529.
Better_by_Design
Level 2 Member
When I say it goes against the general flow - my wife and I make good salaries - not amazing, but live beneath our means, save, etc.
We have a lot of friends who are in a very similar income range, with higher expenses (bigger houses, newer cars, private school tuition for the kids) who are asking us "Well, started saving for college yet? Where'd you open your 529?" - so I suspect (strongly) that they are NOT maxing out their 401k/IRA contributions.
Just wanted to make sure I wasn't missing something on this topic - thanks for the help folks!
PS: Bonus points for "Put on your own oxygen mask first." Always sage advice.
Sadly, most folk cannot afford to fully fund retirement options and fully fund 529 plans. You might have some people saying they are doing so, but they are just tucking in $500 or something. Not that it is a bad thing, but don't get wrapped up in 'keeping up with the Joneses'.
Sounds like you are doing well.
Sounds like you are doing well.
Outlying Anomaly
Level 2 Member
The CSS PROFILE (thanks for screaming, College Board) is significantly more painful than the FAFSA. Filling out the CSS PROFILE makes you feel as if you've been fiscally stripped. They ask about every single source of income except there are a few they can't touch (artwork comes to mind). Questions on trusts are plentiful, especially at schools where you think they would be.
The FAFSA took minutes, CSS takes days or weeks...very detailed, and there are supplemental questions that can vary from school to school. My favorite? Stanford and somewhere else asked, "What amount are you willing to spend for college per year?" Yeah, mull that one over for a while, knowing your answer can affect whether you are accepted or not!
I filled out one FAFSA. I filled out 7-8 CSS's (versions thereof), and I think three colleges had their own FinAid forms (always in addition to FAFSA).
If you want to see a pretty accurate estimate of what college costs at any college, Google [collegename] net price calculator. If you make more than $100,000 be prepared for a shock to your system. If you have a brilliant child, realize that the top colleges in the country don't give out merit scholarships. You want a mix of safety, match, and reach schools AND some financial safety schools as well.
Tip to rising HS seniors and their parents: That list of colleges you put on the FAFSA? Be very, VERY careful what order you put those in (consider alphabetical order). Every college that sees your FAFSA gets to see the order you put those colleges in, and they often base their decisions on where they appear on your list.
Tip to parents of elementary and middle schoolers: Get junior involved in some charity by the time high school starts. Something out-of-the-box, but local, preferably helping promote diversity. That will open up opportunities for scholarships that are just as good as (and sometimes easier than) saving money for years.
The FAFSA took minutes, CSS takes days or weeks...very detailed, and there are supplemental questions that can vary from school to school. My favorite? Stanford and somewhere else asked, "What amount are you willing to spend for college per year?" Yeah, mull that one over for a while, knowing your answer can affect whether you are accepted or not!
I filled out one FAFSA. I filled out 7-8 CSS's (versions thereof), and I think three colleges had their own FinAid forms (always in addition to FAFSA).
If you want to see a pretty accurate estimate of what college costs at any college, Google [collegename] net price calculator. If you make more than $100,000 be prepared for a shock to your system. If you have a brilliant child, realize that the top colleges in the country don't give out merit scholarships. You want a mix of safety, match, and reach schools AND some financial safety schools as well.
Tip to rising HS seniors and their parents: That list of colleges you put on the FAFSA? Be very, VERY careful what order you put those in (consider alphabetical order). Every college that sees your FAFSA gets to see the order you put those colleges in, and they often base their decisions on where they appear on your list.
Tip to parents of elementary and middle schoolers: Get junior involved in some charity by the time high school starts. Something out-of-the-box, but local, preferably helping promote diversity. That will open up opportunities for scholarships that are just as good as (and sometimes easier than) saving money for years.