How many 529 plans should I have?

[Like2Plan]

Originally Posted by jIM_Ohio

Technically YES you can take the 2 credits at the same time- if the qualified expenses are for 2 different students in the same tax year. This really helps if you have a junior or senior which uses LLC and then use the Hope for a Freshman or sophomore.

Agreed.
You can take the two credits for two students but, not for the same student and that is what is written over and over again.

[jIM_Ohio]

One other point lost here which has not been brought up...

If we are dealing with 90k of education expenses, we should be comparing a 22k annual cost to the income of the parents.

If parents make 44k, the education would be half their gross income.
If the parents make 66k, talking one third of income.

In both situations I do not think it is reasonable to expect parents to pay for 100 percent of costs, whether a qualified plan is used or not...

If same family came here and suggested they wanted a mortgage with 22k of annual mortgage expenses, we might argue those costs are too high.

If annual income was 80-100k and someone suggested 22k of annual mortgage expenses, still probably too high.

At 120-160k annual income, the suggested 22k of annual expense (or 90k of 4 year expense) almost looks reasonable.

Another issue which I alluded to before is how much compounding really exists in a 529? Compared to an IRA or retirement account?

It should be noted that a 529 plan has a much higher annual limit than any retirement account I know of. It's lifetime limit is also higher than I will probably contribute to my retirement accounts.

Limits for Ohio is $321,000- not sure if that is per year, account balance, or lifetime contribution amount.

My retirement accounts will probably compound 4X-10X, maybe even 14-20X if I live long enough. Think in terms I contribute 200k over 30 years and have $2 MILLION- 10X what I contributed- at retirement.

A 529 plan might compound 3X if you take on more risk than I would recomend. If you need $200k you need to set aside 70k within 3-6 years of kids being born, 100k within first 9 years, or take on significant risk to get the 200k you need.

Most of my comments are based on the 3X to 20X compounding analagy.

If you are going to contribute $400-$700 per month to a 529 plan, my thought is to look for another way to use same money to create more cash flow.

1) reduce taxes at federal level (401k/IRA)
2) pay down high cost debt (mortgage)

If person A contributed $3600/yr to 529 plan for 3 years (10800 total), they might get 2-6 percent back in state taxes ($648 over 3 years).

If person B used the $10800 to free up more cash flow (paying off mortgage sooner for example) and had $13000 the 4th year, which is better?

If this were retirement, we would probably argue person A is better because they started sooner. Because compounding is lower in a 529 plan, I use philosophy B up to a point.

For example, I am using B. My kids are 9 months old. I up my 401k right now which saves me 29 percent (state taxes for me are about 4 percent) right now. I can then take the 29 percent savings and invest that for retirement too.

Within 4-6 years I expect both 401ks to be maxed. That means any raise spills into taxable accounts- this is when a 529 would likely get started. I already have a seperate mortgage payoff plan for when my boys are 17 or 18 which was put in place before they were born.

My annual mortgage payments are around 24k per year, and the current thought of wife and I is that is about our threshold for how much college we would fund.

[Like2Plan]

Originally Posted by jIM_Ohio

You cannot project 90k of education expenses without projecting same inflation on the tax brackets and on the tax credits.

Because those numbers are established year to year (do you know the published 2009 brackets could change before end of 2009?), it makes little sense to project them out (for planning like you are asking).

So I took 90k of todays cost and divided by 4 for a yearly estimate of what it looks like today.

If you only inflate the education costs but not the brackets, percentage or the credits, it makes little sense, and there is little documentation to suggest the inflation number on all 3 would be the same (the credit may not even keep up with the bracket, or it might exceed the bracket inflation)..

Jim,
I think I was giving you the advantage because I believe the tax rates will increase (just as salaries increase over time... it is pretty shocking sometimes to take a look back 20 years prior). Additionally, the rate of inflation for college expenses has been around 7-8% whereas, I only used 5% in my example.
But, if you wanted to take todays cost, on average it is 18326 per year for 4 yr in state public college. In your case, it would be X 2 or 36652 per year.

You are significantly overthinking my plan and strategy..

I don't think it is a good starting strategy to fund the IRA with the intention of possibly pulling out the funds during your peak earning years, that's all. IRAs were designed for retirement. In an emergency, sure it is great you have the ability to tap into them for certain things without having to pay a penalty. But, I don't think it should be a part of the basis for the overall funding plan. It will make the college funding more costly than it should be if college is the single most important funding objective.

I think a plan might be to look at reasonable funding goals for college in addition to the retirement funding. Aim for a certain percentage. Increase the percentage as you are able with salary increases. That is what we did. When we first started out, it was unrealistic to fully fund college savings. Over time, that changed.

If someone has a 401k maxed and Roth maxed, the college savings route is OK.
But I will stand by that if retirement accounts are not fully funded 14-18 years before college, I doubt retirement is an option for the parents.
If parents are not taking care of themselves out of some amount of loyalty to their kids or some society or social pressure to send and fully fund their kids education, very little I can do about it...
Retirement cannot even be a question if college savings are a goal.

Jim,
We are in total agreement here. Parents should look at their own retirement situation, first (and not tap into their retirement funds for other things). Kid going off to college might not be able to see the big picture such as if parents fund kids college now it might lead to parents moving in with kids when parents get older because parents haven't saved enough for retirement.

But, getting back to our OP, seriously it doesn't seem like any of the above will be an issue because they clearly have their house in order.
They have
1. paid off their mortgage already.
2. Fully funded their retirement accounts invest 25% of pay to 401k and maxed out their Roth's the last few years.

and

• They will get a 1,000 tax credit each year they contribute 5,000 to 529 plans in their state.
  
• The earnings saved in the 529 plan will grow tax free if used for qualified college expenses.
  
• They have 4 children to put through college and they are encouraging them to go to college. The odds are all will go to college, but even if one doesn't they can change the beneficiary and let another child use the funds.
  
• Amount needed to save for kids are 8, 6, 3, and 1 at 100%
  1 yr old: 181,040 (assuming 5% inflation rate on average 4 yr public in state college costs) 17 years from now.
  3 yr old: 164, 209 (assuming 5% inflation rate on average 4 yr public in state college costs) 15 years from now.
  6 year old: 141,850 (assuming 5% inflation rate on average 4 yr public in state college costs) 12 years from now.
  8 year old: 128, 662 (assuming 5% inflation rate on average 4 yr public in state college costs) 10 years from now.
  Using college cost calculator on College Board web site.

OP will get a job to increase college savings when youngest goes off to school (in 4 years?)

OP is concerned about overfunding, however OP is already planning to save some funds outside of 529 plans.

OP is wondering what the consequences are of the kids getting scholarships if they have met 100% funding.
Adjusted qualified education expenses.
Basically, the beneficiary will pay taxes on some or all of the earnings (depending on how much scholarship money has been awarded) or the parents could change beneficiary to another child if that seems to be a better option.

OP is wondering if they should have 1 account or 4.
I believe it should be 4 because there is going to be overlap when the kids go to school and you can only have 1 beneficiary on an account at a time. Additionally, there could be some taxable events. (such as getting a scholarship: where a like amount of money could be pulled out of the 529 account and the beneficiary's earnings are taxed. )

OP is wondering what happens if a child decides not to go to college:"What if my beneficiary decides not to go to college?
If the beneficiary decides not to go to college, you have three options:

Stay invested. You can leave the money in the account in case the beneficiary decides to attend school later. There is no age limit for using the money.

Change the beneficiary. You can change the beneficiary on your account at any time provided that the new beneficiary is an eligible Member of the Family of the former beneficiary. Please see the Disclosure Statement for more information on who qualifies.)

Withdraw the money for other uses. The earnings portion of a withdrawal not used for a beneficiary's qualified higher education expenses is subject to federal and state income taxes and may be subject to a 10% federal penalty tax. (For exceptions to this penalty, please see the Disclosure Statement.)
Additionally, any accumulated earnings that are withdrawn from your account must also be reported on the recipient's income tax return for the year in which they are withdrawn. Contact your tax advisor to determine how to report a non-qualified withdrawal. "
(If the state tax write off was taken on the contributions, their may be a recapture tax for the account owner, too.)
link to college choice

[Like2Plan]

Jim, you're awake!

Originally Posted by jIM_Ohio

One other point lost here which has not been brought up...

If we are dealing with 90k of education expenses, we should be comparing a 22k annual cost to the income of the parents.

If parents make 44k, the education would be half their gross income.
If the parents make 66k, talking one third of income.

In both situations I do not think it is reasonable to expect parents to pay for 100 percent of costs, whether a qualified plan is used or not...

If same family came here and suggested they wanted a mortgage with 22k of annual mortgage expenses, we might argue those costs are too high.

If annual income was 80-100k and someone suggested 22k of annual mortgage expenses, still probably too high.

At 120-160k annual income, the suggested 22k of annual expense (or 90k of 4 year expense) almost looks reasonable.

Agreed. No matter how determined the parents are, this would seem an impossible obstacle to overcome.

Another issue which I alluded to before is how much compounding really exists in a 529? Compared to an IRA or retirement account?

You've lost me on this one Jim. If you are going to put the same dollar figure into acount A or account B and pull the funds out at exactly the same time, it seems irrelevant to me. The time horizon is exactly the same. The compounding would be exactly the same.

A 529 plan might compound 3X if you take on more risk than I would recomend. If you need $200k you need to set aside 70k within 3-6 years of kids being born, 100k within first 9 years, or take on significant risk to get the 200k you need.

This one of the lucky breaks we've had in over 20 years of saving for college (another is DS elected to go to a public in state college. ) DS's prepaid tuition plan doubled in value about 4 years with zero risk. The earnings are all tax free. (We bought right before tuition rates jumped significantly.) If tuition had been lower when DS went to college than what we paid in, the plan allows a rollover into a regular 529 and would pay a "reasonable rate of return" (really, it is a very low rate of interest, but there is zero risk to principle).
If we hadn't been saving steadily for this, we would not have been able to take advantage of this when we did. (I would never consider taking a loan and paying interest for one of these plans.)

For example, I am using B. My kids are 9 months old. I up my 401k right now which saves me 29 percent (state taxes for me are about 4 percent) right now. I can then take the 29 percent savings and invest that for retirement too.

Within 4-6 years I expect both 401ks to be maxed. That means any raise spills into taxable accounts- this is when a 529 would likely get started. I already have a seperate mortgage payoff plan for when my boys are 17 or 18 which was put in place before they were born.

My annual mortgage payments are around 24k per year, and the current thought of wife and I is that is about our threshold for how much college we would fund.

Jim,
I like your plan. You are attacking it from several angles. (But, I would give you a 100% chance of success anyway. You seem to have a good handle on your finances in general. )

[jIM_Ohio]

Quote:
Another issue which I alluded to before is how much compounding really exists in a 529? Compared to an IRA or retirement account?
You've lost me on this one Jim. If you are going to put the same dollar figure into acount A or account B and pull the funds out at exactly the same time, it seems irrelevant to me. The time horizon is exactly the same. The compounding would be exactly the same.

My point was if you want 180k for education expenses, you will need to save around 1/3 of that or 1/2 of that (60-90k set aside). You might get two doubles in the college account. My thoughts is most people might get 66 percent return (put in $10k and have $16666 for college). Contributions are often back loaded and conservatively invested.

If I need $1.8 M for retirement, it's possible I could contribute only 10 or 20 percent of that. Meaning I invest 180k or 360k over 20-40 years of working and compounding over a long period of time does more work for me.

The probability a person could contribute only 10 percent of tuition (18k) and have it become 180k inside the 529 is not likely.

[Like2Plan]

Originally Posted by jIM_Ohio

My point was if you want 180k for education expenses, you will need to save around 1/3 of that or 1/2 of that (60-90k set aside). You might get two doubles in the college account. My thoughts is most people might get 66 percent return (put in $10k and have $16666 for college). Contributions are often back loaded and conservatively invested.

If I need $1.8 M for retirement, it's possible I could contribute only 10 or 20 percent of that. Meaning I invest 180k or 360k over 20-40 years of working and compounding over a long period of time does more work for me.

The probability a person could contribute only 10 percent of tuition (18k) and have it become 180k inside the 529 is not likely.

Okay, Jim, I was thinking the driving force for determining the investment vehicle would be determined by two things:
1. risk tolerance and
2. time horizon.
If the investment tanks when you need to pull the money out, you'd have to make up the money somehow...

Incidently, the 529 plans in my state run the gambit from REIT to S&P 500 to fixed income to a international fund to a inflation protected fund to an age based evolving fund, et'c. You can chose to take on as much risk as you want (or virtually no risk and just plan to save more).

[jIM_Ohio]

Originally Posted by Like2Plan

Okay, Jim, I was thinking the driving force for determining the investment vehicle would be determined by two things:
1. risk tolerance and
2. time horizon.
If the investment tanks when you need to pull the money out, you'd have to make up the money somehow...

Incidently, the 529 plans in my state run the gambit from REIT to S&P 500 to fixed income to a international fund to a inflation protected fund to an age based evolving fund, et'c. You can chose to take on as much risk as you want (or virtually no risk and just plan to save more).

Correct on 1 and 2 above. I went over allocations earlier.

14-18 years out 80-20 or 100 equity make sense
within 8-10 years 60-40 makes sense (maybe 80-20).
Within 6 years anything above 40-60 is playing with fire (40-60 is usually a positive return) and within 4 years 100 percent bonds and cash make sense.

My point was for college savings is "save more" is usually the best option (for retirement, "work longer" is also an option). Because asking a HS senior to delay starting 3 years waiting for market to recover does not work... the whole "investing for college" thing should really be termed "saving for college".

I doubt any college investing plan could set asie 60k and turn it into 180k within 18 years. 3X return not probable.

Because more risk can be taken in retirement accounts, turning 60k into 180k over 18 years is much more possible.

[Like2Plan]

Originally Posted by jIM_Ohio

Correct on 1 and 2 above. I went over allocations earlier.

14-18 years out 80-20 or 100 equity make sense
within 8-10 years 60-40 makes sense (maybe 80-20).
Within 6 years anything above 40-60 is playing with fire (40-60 is usually a positive return) and within 4 years 100 percent bonds and cash make sense.

My point was for college savings is "save more" is usually the best option (for retirement, "work longer" is also an option). Because asking a HS senior to delay starting 3 years waiting for market to recover does not work... the whole "investing for college" thing should really be termed "saving for college".

I doubt any college investing plan could set asie 60k and turn it into 180k within 18 years. 3X return not probable.

Because more risk can be taken in retirement accounts, turning 60k into 180k over 18 years is much more possible.

Jim,
Whether you put the money in an IRA or a 529 to be used for college, the time horizon is the same.

Having it in an IRA to be used in college doesn't buy you any time or allow your money to work any longer. If you have 100% of your money in equities in an IRA with the intention of pulling it out in 18 years and the market tanks, you are going to have to pull out more shares in order to pay for the expenses. Those shares would be gone and will not bounce back.

If you want to assume that level of risk, you could do the same thing by investing in a 529 account with the same investment type. You will have to make up the difference, (hopefully not by cashing in retirement funds.)

[jIM_Ohio]

Originally Posted by Like2Plan

Jim,
Whether you put the money in an IRA or a 529 to be used for college, the time horizon is the same.

Having it in an IRA to be used in college doesn't buy you any time or allow your money to work any longer. If you have 100% of your money in equities in an IRA with the intention of pulling it out in 18 years and the market tanks, you are going to have to pull out more shares in order to pay for the expenses. Those shares would be gone and will not bounce back.

If you want to assume that level of risk, you could do the same thing by investing in a 529 account with the same investment type. You will have to make up the difference, (hopefully not by cashing in retirement funds.)

The IRA maintains a more aggressive asset allocation, meaning higher returns for all 18 years.

By definition the college plan has a shorter time horizon and would therefore have a lower risk tolerance.

Because the IRA MIGHT be used for education expenses does change the risks taken within the IRA. The IRA is for retirement and the lowest asset allocation of 60-40 could be maintained for 18 years of kids at home, the 0-14 years before and the 14-30 years after.

If the retirement accounts get more money, I would argue MORE risk could be taken. Examples would include using emerging markets investments, micro cap stocks, foreign bonds and similar. As my accounts get larger, I find myself looking for alternative investing strategies and willing to take some risks with portions of my asset allocation. The same would not be true for college planning (much shorter time horizon).