529 asset allocation

[childay]

Adrian wrote:

Are the state tax deductions (5000k per year per beneficiary) worth staying with my state’s 529? If so, I am tempted to go with Equity Index 500 Portfolio (is 99% domestic stocks). Is it a good choice? And why the big differences between the administrative taxes?

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1. Given the amount you are contributing, you're in a high tax-bracket, and a 5k state tax deduction is nothing to sneeze at.  Make sure you can deduct another 5k in subsequent years with the 150k contribution though!  Otherwise you might not want to front-load so much.

2. S&P500 fund would be fine.  If you want to approximate the "total market" funds you would add some of the Extended Equity Market fund as well.

If you want international stocks also, then the Global Equity Market Index Portfolio  appears to be a combination of US and international stocks similar to Dreamgiver above.

Any of the above would be reasonable.

[Dreamgiver]

I split our investment in the 529 this way:

70% Vanguard total stock market

30% Vanguard International stock market

I might tweak it and do 60% Vanguard total stock market, 20% Vanguard International stock market, 20% Vanguard Emerging/developing stock market.

We are planning for about $30,000$35,000 a year for undergrad in the account. Should be enough for a state college.

[Adrian]

I am new to the finance world so please forgive me if this is too basic.

I plan on front loading the 529s for my 2 children with 150k each this year.

My state’s 529 has bellow portfolios with T. Rowe Price. Total Annual Asset-Based Fees are bellow for their various products and seem very high.

Utah's 529 (the gold standard of 529s, it seems) has taxes of maximum 0.2%!!

1. Are the state tax deductions (5000k per year per beneficiary) worth staying with my state's 529?


2. If so, I am tempted to go with Equity Index 500 Portfolio (is 99% domestic stocks). Is it a good choice? And why the big differences between the administrative taxes?

 

Portfolio 2030 0.71% (is age based so adjusting how aggressive is on its own)

Equity Portfolio 0.70%

Global Equity Market Index Portfolio  0.40%

Balanced Portfolio  0.68%

Bond and Income Portfolio  0.74%

Inflation Focused Bond Portfolio 0.46%

U.S. Treasury Money Market Portfolio 0.43%

Equity Index 500 Portfolio*0.26%

Extended Equity Market Index Portfolio*  0.40%

 

[AR]

I'll keep an eye on that. If loan repayments are allowed, then getting around the calendar year constraint should be possible.

[jfoxcpacfp]

AR wrote:

Here’s another related question that you may know the answer to.  Are student loan repayments a valid use of 529 funds?

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Not at this point, but i believe there is a bill pending (H.R. 529, the 529 and ABLE Account Improvement Act of 2017) that will allow this.

[AR]

jfoxcpacfp wrote:

AR wrote:

Kid has 20K college tuition due.  There is money in the 529 to cover it, but all is invested in stock and the account is has less money than it started with.  So kid pays the 20K (if it’s important where he got the 20K from in this scenario, let me know).  5 years later the 529 is up again, so he decides to withdraw 20K.   He claims it is for the 20K tuition payment that he already made. Is there anything wrong with that?  Let’s set aside the fact that it may not be a good strategy.  I just want to know if it’s allowed and if not, why not? 

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No, the expenses have to equal or exceed the distributions for each year. You cannot reimburse yourself later, not can you take money out early, for example, if you get the spring tuition bill in December, take the money out then but pay in January.

I don’t know why, that’s just the way the regs are written.

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Thanks for the info.

Here's another related question that you may know the answer to.  Are student loan repayments a valid use of 529 funds?

 

 

[jfoxcpacfp]

AR wrote:

Kid has 20K college tuition due.  There is money in the 529 to cover it, but all is invested in stock and the account is has less money than it started with.  So kid pays the 20K (if it’s important where he got the 20K from in this scenario, let me know).  5 years later the 529 is up again, so he decides to withdraw 20K.   He claims it is for the 20K tuition payment that he already made. Is there anything wrong with that?  Let’s set aside the fact that it may not be a good strategy.  I just want to know if it’s allowed and if not, why not?

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No, the expenses have to equal or exceed the distributions for each year. You cannot reimburse yourself later, not can you take money out early, for example, if you get the spring tuition bill in December, take the money out then but pay in January.

I don't know why, that's just the way the regs are written.

[AR]

jfoxcpacfp wrote:

AR wrote:

My plan was just to put in 140K at birth, and then see where that ends up in 18 years.

Here’s one thing I want to clarify:  If the market takes a nosedive when they’re in college, can I just cash flow it during their college years, wait for the market to recover, and then withdraw from the 529 at that point to “pay myself back” for past higher education expenses.

Is that allowed?

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Unfortunately, this will not work. You should gradually liquidate in the 5 years leading up to enrollment: 5 years before freshman year, liquidate that year’s estimated costs and repeat each year.

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Pay myself back was the wrong way to put it, as the beneficiary is the child.  Here's what I meant (still need to know if it is allowed):

Kid has 20K college tuition due.  There is money in the 529 to cover it, but all is invested in stock and the account is has less money than it started with.  So kid pays the 20K (if it's important where he got the 20K from in this scenario, let me know).  5 years later the 529 is up again, so he decides to withdraw 20K.   He claims it is for the 20K tuition payment that he already made.

Is there anything wrong with that?  Let's set aside the fact that it may not be a good strategy.  I just want to know if it's allowed and if not, why not?

[adventure]

Keep in mind, these funds may be used over 1-4 years of undergraduate education, and, if available, also for graduate years as well. If well funded, you should consider that the funds will be used over more than 4 years, which may impact (read: delay) your timelines for moving from 100% equity to other.

 

[jfoxcpacfp]

AR wrote:

My plan was just to put in 140K at birth, and then see where that ends up in 18 years.

Here’s one thing I want to clarify:  If the market takes a nosedive when they’re in college, can I just cash flow it during their college years, wait for the market to recover, and then withdraw from the 529 at that point to “pay myself back” for past higher education expenses.

Is that allowed?

Click to expand...

Unfortunately, this will not work. You should gradually liquidate in the 5 years leading up to enrollment: 5 years before freshman year, liquidate that year's estimated costs and repeat each year.

[q-school]

If you mean withdraw without penalty to pay yourself back, no, I do not think you can do that. There is a list of approved expenditures. Most places recommend you decrease stock market exposure as the college years approach for the reasons you cite. I have two kids, though, five years apart so I have at least nine years to use the money between freshman year for oldest and senior year for youngest. May not pull money aggressively out for first kid depending on how market is doing.

You can transfer to another child, niece/nephew, etc without penalty. You can save it for grandchild with some inheritance issues (I believe), you can use it yourself.

[AR]

My plan was just to put in 140K at birth, and then see where that ends up in 18 years.

Here's one thing I want to clarify:  If the market takes a nosedive when they're in college, can I just cash flow it during their college years, wait for the market to recover, and then withdraw from the 529 at that point to "pay myself back" for past higher education expenses.

Is that allowed?

[Ophtho2]

Hey everyone, I was hoping for some advice with my 529 asset allocation.  South Carolina offers a 529 with a state tax deduction through Columbia Management (www.futurescholar.com). The fees are similar to Vanguard's Nevada 529 plan.  I know most recommend an aggressive 529 portfolio especially in the early years because you have ~18 years to recover.  My first child is an infant and we are planning on 2-3 kids.

The Age-Based Options start aggressive (70% US Stock, 20% International Stock, 10% Fixed Income/Cash) but become 50/50 bonds/savings closer to age 18.  I was thinking I would avoid the age-based options.  Here are some of the options I have been considering:

Target Allocation Option:  Future Scholar Aggressive Growth--Fee 0.16:  70% US Stock (Columbia Large Cap Index 48.0, Columbia Mid Cap Index 14.0, Columbia Small Cap Index 8.0), 20% International Stock (Vanguard Developed Markets Index Fund), 7% Vanguard Total Bond Market II Index, 2% Vanguard Short-Term Bond Index, 1% Vanguard Prime Money Fund.

Individual Funds/Customized

Future Scholar Large Cap Index--Fee 0.20:  Columbia Large Cap Index

Future Scholar Mid Cap Index--Fee 0.20:  Columbia Large Cap Index

Future Scholar International Equity--Fee 0.07:  Vanguard Developed Markets Index Fund

---I am debating between Future Scholar Aggressive Growth (although I do not like the 10% bond/cash allocation this far removed from college) versus 100% Columbia Large Cap Index versus 80% Large Cap/20% Vanguard Developed Markets Index Fund.  Any recommendations?  Thanks!

[G]

I have one child, shooting for 300k by undergrad time; as I will likely be retired by then, cash flowing tuition won't be a good option for me.  As you have likely seen posted elsewhere in this forum and on blog commentary, the goal for folks is all over the place.  Depending on your goals, 50k (likely 75K with that Vanguard fund in 14-16 years--gets conservative real fast!) could cover a state school (in my state at least).  I intend to pay for college, grad school.  If grandchildren are a possibility, will put remainder to them (and likely augment it, as able).  Otherwise, I plan to use it myself to keep my mind active and stave off dementia: https://www.whitecoatinvestor.com/forums/topic/creative-529-uses/

I do not intend to provide much Economic Outpatient Care, but I can see the appeal of putting a little away in a taxable for the two major reasons you have suggested, as well as possibly an "explore the world year" or somesuch.  I'm already putting quite a bit into taxable for my own early retirement/part-time transition; while not ear-marked at this time, I anticipate budgeting for those offspring related expenses when they come up.

[VIRDOC]

So... How much is enough?

Currently I have a 3.5 y/o and a 2 y/o, each with about 50K in their accounts.  NY state direct 529 in vanguard age based portfolio.

At which point would you stop funding the 529, and start funding an account for their 20s/30s i.e. house fund/wedding etc.  ?

 

thx