gooddecisions
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Post by gooddecisions on Jan 22, 2013 10:28:06 GMT -5
How much do you think is smart to contribute to my child's 529 plan per year? I was thinking 6000/year right now since we can afford it, but my husband just wanted to do $4,000/year to get the full state tax benefit. The state tax deduction works out to $230, which is not a huge benefit. To me, the real benefit of the 529 plan is that the earnings are income tax free when withdrawn. We compromised with 400/month or 4800 year and opened it this month. She is 15 months old.
Is this enough? Too much?
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Deleted
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Post by Deleted on Jan 22, 2013 10:30:24 GMT -5
Personally, I am not contributing anything to a 529 until I can max out my 401k, my wife's 401k, my IRA and my wife's IRA.
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gooddecisions
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Post by gooddecisions on Jan 22, 2013 10:31:39 GMT -5
Assuming you are maxing all those- what would be an appropriate amount?
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Post by Deleted on Jan 22, 2013 10:34:29 GMT -5
If you earn 5% a year and contribute $4800 a year you will have $124k in 17 years. That seems pretty good to me.
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gooddecisions
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Post by gooddecisions on Jan 22, 2013 10:36:30 GMT -5
Let's hope. College was cheap for us at around $5000/year, but I read all these stories about enormous student debt, it sounds like tuition rates are sky rocketing.
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giramomma
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Post by giramomma on Jan 22, 2013 10:55:23 GMT -5
The grandparents have been contributing 3K/year for our kids. (We asked for that in lieu of gifts).
After 7 years of contributions, my oldest has enough to pay for 4 years worth tuition in today's dollars at our flagship state university. So, with 10 years to go, I feel like my oldest should do OK between working, our help, and the 529.
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thyme4change
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Post by thyme4change on Jan 22, 2013 10:59:57 GMT -5
You can always pay for college with money not from a 529. Yes, you will miss out on some tax savings, but it isn't the end of the world. If you save too much, then you have to pay a penalty to get it back out. So, over-saving may cost you more than under-saving.
My sister is working on transferring all the money left over from her son's 529 to her not-yet-born grandchildren. Meanwhile, she is borrowing money to put a new roof on her house. I'm sure the few grand she saved on taxes isn't really helping her right now.
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Post by Deleted on Jan 22, 2013 11:14:39 GMT -5
"Appropriate" amount is going to depend on your budget and goals. As Archie said, retirement savings should come first. I'm not sure if maxing them all is necessary for everyone though. For us to do so we'd have to save 62% of our income. We compromise with 20% to retirement and $150/month/kid to 529's. I look at it like this, if I had that extra $300/month I probably wouldn't put it towards retirement. To me, it's just how I choose to spend my money after saving for retirement where others might like to eat out, vacation more, or buy new cars.
Even at $150/month my 10 year old already has enough for 3 years of tuition at the state schools here. I would think $400/month is pretty good.
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phil5185
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Post by phil5185 on Jan 22, 2013 11:16:42 GMT -5
A problem with the college accounts is that they seldom last for an 18-year 'kid' cycle. The first version, an Edu IRA, allowed a $500/yr contribution. Later it became a Coverdell Fund. And in 1996 the 529 was invented. So it's been around for 17 yrs - hard to tell if it will be around for another 18 yrs - or if you'll need an account in 18 yrs (by then the US may have socialized education).
At any rate, it might not be good to bet your entire edu fund on it. It isn't a real good deal anyway, no tax deduction on the contribution and quite a few State restrictions on the investment choices. You might do better by using a taxable no-load account, letting it grow tax deferred, and paying the 15% cap gains tax on the profit when you use the money. You can select investments that are better than the State choices (and lower fees), plus there are no restrictions, no future rule changes to navigate.
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telephus44
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Post by telephus44 on Jan 22, 2013 11:18:56 GMT -5
We started at $100 a month and increase it 10% every year. Given that DS#1 has autism I don't want to put a lot in since I'm not sure he'll be able to use it.
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midjd
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Post by midjd on Jan 22, 2013 11:23:30 GMT -5
While it's probably dangerous to assume the 529 structure will remain unchanged for 18 years, and there are some more restrictions than with a regular taxable account, I think it's just as dangerous to assume tax rates will remain steady. If the capital gains rate is 35% or more vs. 0% for a 529, the math is a bit different. (I wouldn't put all my investment eggs into either basket).
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Post by Deleted on Jan 22, 2013 11:24:58 GMT -5
A problem with the college accounts is that they seldom last for an 18-year 'kid' cycle. The first version, an Edu IRA, allowed a $500/yr contribution. Later it became a Coverdell Fund. And in 1996 the 529 was invented. So it's been around for 17 yrs - hard to tell if it will be around for another 18 yrs - or if you'll need an account in 18 yrs (by then the US may have socialized education). At any rate, it might not be good to bet your entire edu fund on it. It isn't a real good deal anyway, no tax deduction on the contribution and quite a few State restrictions on the investment choices. You might do better by using a taxable no-load account, letting it grow tax deferred, and paying the 15% cap gains tax on the profit when you use the money. You can select investments that are better than the State choices (and lower fees), plus there are no restrictions, no future rule changes to navigate. The Education IRA/Coverdell/ESA is still around and better than they used to be. The contribution limits are 2K a year and you can invest them however you choose and use them for K-12 expenses as well as college. As far as no choices in 529 accounts, you can invest in any state's plan and there are some really good one's out there run by Vanguard and TIAA-CREF that have low cost funds to choose from. Plus lots of state's (like the OP's) do offer a tax deduction for contributions.
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Peace77
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Post by Peace77 on Jan 22, 2013 11:34:55 GMT -5
Do you have an Emergency Fund (savings + ROTH) of at least 8 -10 months worth of expenses?
Have you maxed the amount to retirement accounts?
Do you have sufficient life insurance (10 x income) and disability insurance?
These should all come first, before setting aside funds in a 529.
Do you own your home? Is it paid for? If not, I would split the funds with part to paying off the mortgage and part to the 529.
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gooddecisions
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Post by gooddecisions on Jan 22, 2013 11:41:14 GMT -5
We have about 35K+ going into a brokerage account per year, 35K+ going to the 401(k)/year, 6K going to an HSA/year and some other investments including rental properties. So, I wouldn't say this $4800 into the 529 puts all our eggs in one basket. It's a car payment and we paid off our cars 10 years ago. I guess we can re-evaluate and see whether we should stay the course with it or back off a bit. Changes to the tax structure is definitely the wild card. There is no guarantee that capital gains will remain 15% and there is no guarantee that the rest of these accounts' earnings will remain income tax free.
ETA: paying off the mortgage early is not part of my wealth building plan (thanks to Phil's wisdom back in 2004 when I found the boards). We'll stay the course on a 30 year mortgage at 3.8% and it'll still be paid off by retirement.
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justme
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Post by justme on Jan 22, 2013 11:46:56 GMT -5
You didn't mention Roth. I've seen some people on here say/suggest to save part of the college money in a Roth since there's no penalty to withdraw the contributions even if you're not 59 1/2 when the kids are in college. It muddies the water between college/retirement funds and you have to pay tax on the money you initially put in, but it is a way to save money (and still be tax-free when you withdraw) and not have to worry about what to do if your kid doesn't go to college or doesn't use all the money you put aside in the 529.
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gooddecisions
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Post by gooddecisions on Jan 22, 2013 11:49:10 GMT -5
Our combined income has phased us out of the Roth. It pains me to not have that option.
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justme
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Post by justme on Jan 22, 2013 11:51:09 GMT -5
Our combined income has phased us out of the Roth. It pains me to not have that option. Ah yes, forgot to mention that with the amount your saving it seemed there was a chance you couldn't do that.
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midjd
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Post by midjd on Jan 22, 2013 12:50:51 GMT -5
What about a backdoor Roth? Contribute to non-deductible IRA and then convert?
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Great
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529 Plan
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Post by Great on Jan 22, 2013 13:07:17 GMT -5
Have you tried any of the online future tuition cost calculators? My DS is a freshman this year at an out of state, private university ... the online calculator I used several years ago when he was 2 years old asked a few questions whether in state, out of state, private, current age of child... it was within 2K of our current actual costs.
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Post by Deleted on Jan 22, 2013 13:12:25 GMT -5
Can you use a 529 account for private school for primary or secondary education?
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Post by Deleted on Jan 22, 2013 13:14:18 GMT -5
Can you use a 529 account for private school for primary or secondary education? No. It's for postsecondary only. Private or public college or technical schools. You can use an ESA for private primary/secondary.
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vonna
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Post by vonna on Jan 22, 2013 13:17:58 GMT -5
gooddecisions,
I have 529 accounts for both of my kids. The most I ever contributed was $600 per month (for about 3 years -- only had one kid at that time) -- and that was after maxing all retirement options as well as investing $1000 per month in taxable investment accounts.
Part of my goal was to invest early, while my income was high. I have not regretted that decision.
If you have the income to do it now, it just may open up more options for later!
However, before putting a lot in a 529, I would use the back-door Roth option first, mentioned by MidJD.
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Post by Deleted on Jan 22, 2013 13:19:02 GMT -5
Have you tried any of the online future tuition cost calculators? My DS is a freshman this year at an out of state, private university ... the online calculator I used several years ago when he was 2 years old asked a few questions whether in state, out of state, private, current age of child... it was within 2K of our current actual costs. This one is good. www.archimedes.com/tiaa-cref/csp.phtml
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gooddecisions
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Post by gooddecisions on Jan 22, 2013 13:45:42 GMT -5
Ah yes, the back door roth. I forgot all about that. I expected to be laid off a million years ago and convert my 401K to an IRA and then be able to convert some of it to a roth, but somehow both of us have managed to stay with our original employers. My two regrets, not maxing the roth when I could and not maxing the HSA every year I had an HDHC. But, at least I made some good decisions.
Vonna, that's my hopes- fund it enough while we can afford it so that if there are tighter times in the future, we can back off. My folks paid for my college and I'd like to pay it forward.
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Post by Deleted on Jan 22, 2013 14:37:51 GMT -5
My kids have apx 65k in their 529 plans at 11 and 14 I won't add more. I don't want them to have no skin in that game, and I don't want to put too much in the one basket.. Who knows if they will even want to go that route? So, ill save elsewhere.
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