How much to put in DD's 529 plan?

[disneysteve]

I've been funding my daughter's 529 college savings plan for several years and now have about $22,000 in there. She is 11 and entering 6th grade, so will start college in 7 years. The 529 money is in an age-adjusted portfolio that gets less aggressive as she gets older (like a target retirement fund). I currently contribute $400/month to the account. Assuming a 6% return, that would give us about $75,000 when she starts school. She is an only child and we have nobody else to transfer that money to if we overfund the account.

A complicating factor is that when she turns 18, she will begin receiving monthly payments of $600 from a legal settlement from an accident. My wife and I haven't totally discussed what we will expect her to do with that money, but certainly covering some of her college costs will definitely be part of it.

If you were in my shoes, what would you do at this point? Would you keep putting the $400/month into the 529? Would you lower that amount and, if so, to what? Obviously, we don't know where she will go to school or what it will cost. At this stage, we really don't have any particular idea of what she wants to do in life.

If I reduce the 529 contributions, I would still put that money into savings but in taxable accounts, but I'd still be able to draw on it if needed to cover college costs. The main thing I want to avoid is overfunding the 529 and having to pay penalties to get the money out.

[Like2Plan]

If you were in my shoes, what would you do at this point? Would you keep putting the $400/month into the 529? Would you lower that amount and, if so, to what? Obviously, we don't know where she will go to school or what it will cost. At this stage, we really don't have any particular idea of what she wants to do in life.

disneysteve,
Yes, I would keep funding the account up to the 75K amount. I would revisit the question for amounts above 75K upon reaching that level.
75K even at in state tuition and fees including room and board and books will most likely cover a little over a half of the college expense 7 years from now.
Here is a link to an interactive college cost calculator:
Link to a college cost calculator
I don't believe your account will be overfunded at the 75K level.

You have to do you own risk analysis. Is there a chance your DD will opt out of college? If so, you will have to pay taxes and a small penalty (on the gains only). If you save outside of the 529 plan in a taxable account, you will have to pay taxes on the gains anyway. So, the only risk is the small penalty on the earnings. Isn't it worth taking the risk with the payoff being tax free earnings if the money is used for college?

[moneybags]

I find the 529 plan to be a bit of a gamble, but I do it anyway. I'd keep saving, but think about options for her contribution. There are going to be additional expenses involved when your daughter gets to college that you can designate her money to go towards - spending money, travel to/from home, etc. Another possibility is to pay expenses with the 529 money, but have her pay you a set amount of her money per month. You could also incent her to save for retirement with the money she gets. She'd obviously have to have a job to create earned income, but I'd encourage her to put some into an IRA (my goal in life is to have my kids saving for retirement at the earliest possible age).

I have 5 years to go until DD13 goes to college, and there is money set aside for her, but she will also be expected to contribute. I need to figure that part out. My brother has 2 college aged kids and told them he would pay XX dollars per year for them. I may use that method, but there are so many factors to consider.

[disneysteve]

Thanks for the opinions so far - pretty much in line with what I've been thinking. I figure wherever she goes to school, 75K for 4 years of qualified expenses shouldn't be too much 7-10 years from now. Plus, if she does any graduate work, the 529 funds can be used for that too.

moneybags - I definitely want her to start retirement savings as soon as she has earned income. I'd even be willing to front her some of the money to match her earnings and let her make the contribution but keep her money.

As for the settlement she'll be getting, at the very least we figured it would cover car payments and insurance.

[JanH]

I agree with your planning. Considering that college costs have been going up every year in the seven years we've had kids in college and that a lot of the kids have to go five years to finish, I don't think you are saving too much. Then graduate school cost more per hour. Add in books. Plus car, expenses for projects, etc. If she joins a service organization or other college club, there will be other expenses. Seems like you've got a good idea of what you'll need.

[MonkeyMama]

Um, I have to voice another opinion. I would research carefully what you can use 529 funds for. A lot of the stuff mentioned here I Was under the impression you can not use 529 money for. I thought it was simply tuition. Probably books. In some cases room and board. Certainly not transportation and stuff like that.

If you expect her to go to private college and/or live in a dorm, then $75k sounds good.

For us we are not putting much in 529s at all. Looking at our family history we are not big college spenders.

It's a gamble and a tough one though. Really no right answer.

[Cassandra]

The colleges I looked at averaged 30K/year for tuition. Not including room and board, books, lab fees, orientation, health care, etc. Most of these were private colleges.

Public universities average 15-20K/year for tuition.

And college tuition goes up each year. I think it would be better to overfund the 529, especially if your daughter might go onto grad school, and risk the penalties.

I would also begin doing scholarship searches soon. If you look in the right places, you'll find scholarships available to kids at almost every age and for the most ridiculous things.

Cassandra

[Like2Plan]

Um, I have to voice another opinion. I would research carefully what you can use 529 funds for. A lot of the stuff mentioned here I Was under the impression you can not use 529 money for. I thought it was simply tuition. Probably books. In some cases room and board. Certainly not transportation and stuff like that.

If you expect her to go to private college and/or live in a dorm, then $75k sounds good.

For us we are not putting much in 529s at all. Looking at our family history we are not big college spenders.

It's a gamble and a tough one though. Really no right answer.

MonkeyMama,
It depends on the type of 529 account you have. There are some 529 plans which individual states offer which will only cover tuition and fees--they are prepaid tuition plans. Typically, the rate of return on these is not very good if you end up not attending an in state public school. (There is also a pre-paid tuition plan for private colleges which is pretty good if you know you will attend one of the colleges in your group. )

Then, there is the other type of 529 plan which are investment instruments of one sort of another. There are so many that you can invest in now. Most states offer at least one plan. They run the gambit of options from guaranteed rate of return to age based evolving portfolio and some even have index funds. You can use funds from these accounts for tuition and fees, room and board and books. Even if you have the first type, you are allowed to roll over the funds into the second type.


Here is an exerpt from IRS pub 970 Link to Pub 970
"Qualified education expenses. These expenses are the tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution (defined in the next column).
They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. The cost of room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution."

[Like2Plan]

Public universities average 15-20K/year for tuition.

Cassandra,
That sounds right for out of state of tuition rates. If your child elects to go to an in state college (what are the odds? ) it really seems like a bargin. Here are some of the schools in my state (I took the tuition and fees from US News and World Report Americas Best College 2007Link to US News and World Report )
William and Mary : $8,490 in-state tuition and fees,
University of Virginia: $7,845 in-state tuition and fees,
Virginia Tech: $6,973 in-state tuition and fees,
Virginia Military Institue: $9,473 in-state tuition and fees

[Scanner]

Living the world of health insurance, you and I, DisneySteve, I personally wouldn't earmark the $600/month for college.

I am facing a similiar conundrum with my oldest. The reason we may pursue legal action isn't to net a settlement for college or room/board but for him to have money in case he needs surgery to fix his problem down the road.

Whatever that money was for for your daughter stems from an accident. If she moves out of Jersey one day and goes to a state that has "pre-existings" on their health ins. policy (NJ does not), then she may need that money to pay for whatever health care needs.

See what I mean?

I would take the $600/month and place as much as you can into a Roth when it starts rolling in for her and put the balance in a NJ muni bond fund when the time rolled around. The money will stay conservatively invested so it's there if she needs it.

[Scanner]

BTW,

Good job on having $22,000.

My son turned 10 and we've only got about $8000 in Education IRA's/529's.

We do have substantial home equity should the need to rise but we'd both like to avoid taking a HEL without grabbing an asset to offset it.

Summer jobs and part time work are almost assuredly in both my son's destiny.

[disneysteve]

Whatever that money was for for your daughter stems from an accident. If she moves out of Jersey one day and goes to a state that has "pre-existings" on their health ins. policy (NJ does not), then she may need that money to pay for whatever health care needs.

Fortunately (if you want to use that term) her injuries were mainly cosmetic. She may need corrective surgery at some point, but I doubt it as she healed much better than expected. Besides, the settlement also provided for that if the need arose.

We didn't actually pursue legal action looking for an income stream but rather to ensure that any future care would be covered. The annuity was kind of a surprise to me. It pays to have a good lawyer.

[Scanner]

Perhaps you can give me some ethical advice as a fellow physician.

My son was injured on a trampoline doing kid stuff. A neighbors kids was on a friends trampoline and he was like a big 16 y.o. and was jumping with him to get him to fly all over.

My son came down sharply and dislocated his left elbow.

It has now healed up but he has lost extension to some degree and he says, "It feels like my bones move and rattle around in there." (joint instability, I suppose) It hasn't affected much, other than he plays baseball and will never play shortstop, because he doesn't have much range with that arm (he's left handed).

My concern, knowing insurance, is the "pre-existing" rules that someday he may want a new surgery on his elbow and it will be policy excluded.

Anyway, also being a doctor, I am conflicted about bringing suit because I know our tort system is ridiculous.

What do you think?

Anything we'd theorectically get would be escrowed for this purpose.

[disneysteve]

My concern, knowing insurance, is the "pre-existing" rules that someday he may want a new surgery on his elbow and it will be policy excluded.

I'm not positive, but I think pre-existing rules generally specify a time frame during which the condition won't be covered, like 6 months or 1 year. After that, all conditions are covered. You might want to check into that. That's to prevent people from buying insurance for 1 month to get some surgery and then dropping the coverage.

[Scanner]

The way I see it is just from my industry - musculoskeletal stuff, which this is.

Sometimes, an insurance co. will exclude a condition totally, like a bad back.