Quick college savings question re: optimal investment

[Yowza]

I currently have a 529 for our child who'll be off to college in the 3-5 year range. A grandparent has a savings account for said child's higher education. Grandparent asked me about moving the funds (about 15-20K) into a better vehicle with higher return. Is there a better option for someone starting college in 3-5 years besides simply putting it in the same or a new 529?

Thanks.

[pierre]

Capital preservation should be the goal with that time horizon, not higher returns.

[Yowza]

Anyone have a particular favorite in the Indiana or (would open new account for their low expense ratios) New York 529 plans given the timeframe?

[Zzyzx]

NY uses vanguard funds which is ideal, look at age based funds

[nephron]

it doesn't affect most physicians who are working who will not be eligible for need based aid based upon their income but for the rest, they should be aware that a grandparent 529, unlike a parent's 529, can greatly effect a child's financial need based aid:

https://www.savingforcollege.com/article/workarounds-for-grandparent-owned-529-plans

 

I disagree with the capital preservation statement as well, if you have a large sum to invest and an over 5 year time horizon, the probability that you will loose money in your investment in stocks is low.  Even if your child is in early high school and there is a large downturn, you could just leave the money in their investments until the later years of college.   If you are going to invest in a 529 plan and park it all in CD's or something with a very low interest, you might as well keep it in taxable account as the whole benefit of the 529 is tax free growth.  A 529 has less flexibility then a taxable account.   I would first look at your state plan/their state plan to see if there is any state income deduction.  After that, you can google which 529 plan has the lowest fees, best investment choices and go from there.  I think that I am in vanguard in Arizona? or something.

 

[StrabismusBusiness]

If starting college in 5 years or less, I'd agree with concentrating on preservation, not chasing higher returns. We have a child 3 years away from graduating high school. We use the Nevada 529 plan through our Vanguard portal. The Vanguard 'Aggressive' Age-based fund option for a current 15y/o is a 40%stock/60% bond.

We have planned that if we do not need to touch the 529 money for college or graduate school expenses, we will change the allocation to nearly 100% stocks for potential grandchildren's 529s.

[q-school]

I don’t think the difference in investing 20k is enough to make a significant difference in overall value over 5-9 years and consequently i would focus on capital preservation and thanking grandparents.

 

[pierre]

@Nephron, how does the amount of money one plans to invest ($15-20k in the case of the OP) change the probability of whether or not that investment will lose money with a short time horizon?

[nephron]

there's no wrong answer, but 20K invested in the S+P (where much of my personal college fund is) invested over 9 years growing at an the average 10% S+P rate would become $47,000, tax free in a 529.   A more conservative 5% rate of return would still be $31,000.   With a 3 yr old who is not going to college for 15 years, even a 5% rate of return would make the 20K become 41K by the time that the kid turned 18.  You just have to be able to stomach the years when it is down 40% realizing that in theory (historically), it will recover by the time that the student goes to school.   I was just looking at the us news and world report best national colleges and noted that a most of them seemed to have tuition and fees greater the 50K a yr right now.   I see it as similar to retirement, there is risk in investing, but there is also risk in not investing and not having enough.  I also agree with wci in that if anything, in theory, you can be more aggressive with your investments for college then retirement as if your investments do decline, the student can always borrow.

https://www.usnews.com/best-colleges/rankings/national-universities

[nephron]

pierre wrote:

@nephron, how does the amount of money one plans to invest ($15-20k in the case of the OP) change the probability of whether or not that investment will lose money with a short time horizon?

Click to expand...

it doesn't, the amount only matters in that you are losing out on potential returns or losses if you have more to invest initially if you do not invest the money correctly.  My only point was that if you were given $100 by the grandparents for college, sure, put it in a savings account, $100 invested vs $100 in a savings account is not going to make much of a difference.  If you were given $100,000K, then investing it could mean the difference between not having to borrow 100K vs borrowing 100K for college.

[Larry Ragman]

I had a discussion on the blog about this some years ago. Despite a theoretical appreciation of Nephron’s point, I chose a very conservative NYSAVES fund for my kids’ 529s. My view was that money needed on a strict timeline should not be in the market. I admit in hind site this may have been a slightly blinkered view since at the time (in my 40s) I was aggressively postured in my retirement accounts. That said, my eldest’s freshman year was 2008. I felt especially clever that year as I withdrew from her 529 and the market was crashing around me. Ok, ok, I felt less clever in 2012 for #2 after the market had completely recovered. But I still think that within 3-5 years of needing the money for a large expense one should be minimizing the maximum potential regret.

[Yowza]

Thanks, everyone. I've already maxed the IN 529 contribution for optimal state tax deduction (5K/1K) for the year. The expense ratio in the IN 529 is 0.2% and it appears the Vanguard one through NY is the lowest at 0.13%, so I'll open an account through the NY plan using those funds to start it up. I'll keep it in my name instead of the grandparent, since I understand distributions count as untaxed income to the beneficiary when it's held by a non-parent.

[molar roller]

Yowza wrote:

Thanks, everyone. I’ve already maxed the IN 529 contribution for optimal state tax deduction (5K/1K) for the year. The expense ratio in the IN 529 is 0.2% and it appears the Vanguard one through NY is the lowest at 0.13%, so I’ll open an account through the NY plan using those funds to start it up. I’ll keep it in my name instead of the grandparent, since I understand distributions count as untaxed income to the beneficiary when it’s held by a non-parent.

Click to expand...

it does? For several years, we contributed to 529 plans in our parents' names as well as our own, to maximize the tax deduction.  We are now withdrawing them, grandparents' accounts first.  In our state (NY), qualified distributions had no tax impact, no matter who the owner of the account was.  I don't believe the form actually specified where the funds came from, parents or otherwise.

[nephron]

molar roller wrote:

Yowza wrote:

Thanks, everyone. I’ve already maxed the IN 529 contribution for optimal state tax deduction (5K/1K) for the year. The expense ratio in the IN 529 is 0.2% and it appears the Vanguard one through NY is the lowest at 0.13%, so I’ll open an account through the NY plan using those funds to start it up. I’ll keep it in my name instead of the grandparent, since I understand distributions count as untaxed income to the beneficiary when it’s held by a non-parent.

Click to expand…

it does? For several years, we contributed to 529 plans in our parents’ names as well as our own, to maximize the tax deduction.  We are now withdrawing them, grandparents’ accounts first.  In our state (NY), qualified distributions had no tax impact, no matter who the owner of the account was.  I don’t believe the form actually specified where the funds came from, parents or otherwise.

Click to expand...

I've never done it before, but according to that savingforcollege link I put above, 529 distributions from non-parents are counted as income to the children the following year.  It doesn't affect your aid the first year, but it is supposed to affect your need based aid the following years as the distributions are seen as the students income.

[Larry Ragman]

nephron wrote:

molar roller wrote:

Yowza wrote:

Thanks, everyone. I’ve already maxed the IN 529 contribution for optimal state tax deduction (5K/1K) for the year. The expense ratio in the IN 529 is 0.2% and it appears the Vanguard one through NY is the lowest at 0.13%, so I’ll open an account through the NY plan using those funds to start it up. I’ll keep it in my name instead of the grandparent, since I understand distributions count as untaxed income to the beneficiary when it’s held by a non-parent.

Click to expand…

it does? For several years, we contributed to 529 plans in our parents’ names as well as our own, to maximize the tax deduction.  We are now withdrawing them, grandparents’ accounts first.  In our state (NY), qualified distributions had no tax impact, no matter who the owner of the account was.  I don’t believe the form actually specified where the funds came from, parents or otherwise.

Click to expand…

I’ve never done it before, but according to that savingforcollege link I put above, 529 distributions from non-parents are counted as income to the children the following year.  It doesn’t affect your aid the first year, but it is supposed to affect your need based aid the following years as the distributions are seen as the students income.

Click to expand...

Would that be true if the distribution went directly to the educational institution?