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How much is enough in a 529?

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  • How much is enough in a 529?

    I am currently contributing the annual gift limit of $16000 in my child’s 529 (my child is less than 1yo). I was wondering do most folks contribute all the way to until they’re 18? Using a 6% annual return that makes it over half a million by then. I’m in a state that doesn’t have state tax so the tax benefit for me is less.

    There are quite a few unpredictable factors here such as tuition inflation, whether child goes to public/vs private, grad/med school, scholarships/not going to school at all. Is there any good rule of thumb in terms approaching how much I should be contributing?

    Or should I not be worrying about doing a 529 at all and just put it in a taxable account for the flexibility? It’s 0% up ~$40,000 anyways for long term capital gains annually.
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  • #2
    It is really a complex projection based on the unpredictable factors as you note. Also, your projection for returns is really a WAG. Looking the raw numbers, recent projections are a new born needs ~5K/year in contributions for an average public school and ~$18K/year for an average private school. Then again, these projections are based on a WAG of what college cost inflation will be.

    Originally posted by kev777zero View Post
    Or should I not be worrying about doing a 529 at all and just put it in a taxable account for the flexibility? It’s 0% up ~$40,000 anyways for long term capital gains annually.
    That is assuming your taxable income is <= the 2nd tax bracket. The LTCG tax brackets are based on your ordinary income AGI. Very few physicians are going to see the 0% LTCG with kids in college and unlikely in retirement.

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    • #3
      Superfund and forget about it.

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      • #4
        There are a ton of calculators. My view is the money goes in and can’t come out for other than education (unless you pay penalties), so try not to overfund. If you underfund, then you can cash flow or take out of investments.

        https://vanguard.wealthmsi.com/csp.php

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        • #5
          As someone with three kids under 8 and about to graduate fellowship, this is something I've been thinking about lately.

          Right now, my plan is to get some momentum going on other areas for the first several months out but will eventually start making contributions to fully fund a reasonable state college tuition.

          Anything above that (if the markets are good, etc) will be bonus, and if they want some uber private expensive education (and can justify it) we'll hopefully be in a place to cashflow some and the rest they'll have to earn scholarships/help pay for.

          I think much of this depends on your educational goals/priorities/etc. We also live in a state without income tax, which factors in as well.

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          • #6
            Originally posted by kev777zero View Post
            I am currently contributing the annual gift limit of $16000 in my child’s 529 (my child is less than 1yo). I was wondering do most folks contribute all the way to until they’re 18? Using a 6% annual return that makes it over half a million by then. I’m in a state that doesn’t have state tax so the tax benefit for me is less.

            There are quite a few unpredictable factors here such as tuition inflation, whether child goes to public/vs private, grad/med school, scholarships/not going to school at all. Is there any good rule of thumb in terms approaching how much I should be contributing?

            Or should I not be worrying about doing a 529 at all and just put it in a taxable account for the flexibility? It’s 0% up ~$40,000 anyways for long term capital gains annually.
            I am not sure which blog you have attached. he seems tilted towards anti-529.

            Make sure you contribute the max to your retirement. Then 529.

            I would recommend minimum of 200K per child, in today's dollars, for the well off people of this blog. Gives more than enough for public undergrad but just shy of a private one. Excess can be used for grad school.

            BTW, if you are a couple, you can give 16K x 2 = 32K per year. And can give a lump sum of 5 years in one go. To make compounding work well, fund a high amount early for a year or two and stop.

            Depends a lot on what you can afford to lump sum. Just one opinion from someone who did it.

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            • #7
              Originally posted by Kamban View Post

              I am not sure which blog you have attached. he seems tilted towards anti-529.

              Make sure you contribute the max to your retirement. Then 529.

              I would recommend minimum of 200K per child, in today's dollars, for the well off people of this blog. Gives more than enough for public undergrad but just shy of a private one. Excess can be used for grad school.

              BTW, if you are a couple, you can give 16K x 2 = 32K per year. And can give a lump sum of 5 years in one go. To make compounding work well, fund a high amount early for a year or two and stop.

              Depends a lot on what you can afford to lump sum. Just one opinion from someone who did it.
              The blog I attached was straight from WCI email today on how to Superfind a 529!

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              • #8
                Originally posted by kev777zero View Post

                The blog I attached was straight from WCI email today on how to Superfind a 529!
                Reading the whole blog made more sense than snippets. Also, it is one thing to superfund for one child and another to superfund for 4 children, even with a physician salary.

                Also, as an Asian Indian who was brought up with emphasis on education being the most important gift in life and my father sacrificing material benefits for his children's education, I feel that I have inherited those genes and want to pay that forward. I would rather travel in economy than first and use the money to fund my daughter's education. I am not sure what your outlook towards education of children is in your life.

                Superfund the first child and if another one comes along, superfund in 5 year's time !.
                Last edited by Kamban; 02-08-2022, 09:51 AM.

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                • #9
                  I spent over a million to put 4 kids through college. I put all the money in taxable, which worked out well for me. Probably not the most tax efficient , but in all reality I probably did not think about it too hard back then. Though I can say , every year I paid for college with the good stock market returns I was actually ahead of the game and had money left over. Usually I would use some of my bond allocation for the school payments and let the index funds keep growing. At the end , I had my million dollars and my kids had their education paid for.

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                  • #10
                    Too many variables as others have noted. I'm not sure anyone here personally does $16k/yr/kid from age 0-18. If you want to hedge, I'd do what others have recommended. I think you have the cash or could come up with the cash to superfund $80k per kid at birth (or do soon for the existing child you have). You can't contribute more for 5 years. In 5 years' see where you are at. Before that 5 years is up, put extra money that is meant for beyond retirement in taxable.

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                    • #11
                      I understand the value of superfunding a 529 but while this may be a way to optimize estate planning there were too many unknowns for me to pursue this this strategy during the funding stages for my two, now graduated and launched, kids. While obtaining a college degree was expected, who could know where they would go, how much would it cost, would they pursue grad school, would they get scholarships, etc. Not to mention that if significantly overfunded will their be a next generation to pass the funds to? It is possible that the remainder of the account becomes no more than an after-tax funded tIRA with an additional 10% earnings penalty for non-qualified withdrawals.

                      We ended up using 529s to save an estimated 2 years of private school tuition and earmarked a like amount in taxable accounts designated for education. Both used all of their 529s and both had substantial leftovers in the taxable accounts that we now use to make yearly gifts to them. As an empty nester, I am much happier with the 529s at zero and the remaining $ in taxable.

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                      • #12
                        I agree that $200K in today's dollars is a good rule of thumb. Probably need less for a instate public school, about right for out of state public, and probably need more for big name private. But you can stop contributing at some point and then cash flow incidental expenses during college.

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                        • #13
                          I think super funding is fine if you have the money, but I did not. Actually my income was much more modest then, so we just did the best we could each month after setting up our retirement investments. Point is, it became routine, and we added to it over time for both kids. Plenty there to spare by time for college.

                          Two thoughts:
                          1. If you have the money you can do even more than super funding. You just have to report it as a gift. No big deal. It cuts into your estate tax limit.
                          2. There are state maximum's. I've attached a link. What Are the 529 Plan Contribution Limits - SmartAsset

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                          • #14
                            Many ways to look at this, as is obvious from the comments. A lot is philosophy - some of the vocal folks on these forums espouse "only a state school" and some will offer the kid anything. We've been in mostly second camp - my wife and I both went to good private colleges, and feel there's intrinsic value to being with other kids on one's level - as in there will be more "very smart" kids at places like Yale and Univ Chicago and Swarthmore, than at most state schools. Yes, obviously, there will be incredibly brainy kids at every state school as well - as evidenced by many docs who've gone to them, for a variety of reasons - just not statistically as many. But we've funded the best school the kids can get into, with the understanding they must get decent grades. We saved using calculators for such a private college, since they were kids, and now that 2 out of 3 are in college, hit the mark pretty exactly. We also then had the 529 funds to fully PREpay 4 years of tuition, so the college can't raise the tuition rate on us for 4 years.

                            Second, we don't look at this as "return on value" like many do here. To us, a college education has intrinsic value, and is not just a transaction to get from high school to a job or grad school.

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                            • #15
                              I go back and forth on a 529 vs taxable. But for a 529, at the low end I'd superfund with current cost of 4yrs of in-state tuition and just let it ride. On high end, maybe the cost of 4yrs in-state plus boarding. I'm not keen on funding enough for a private school. If it goes that direction we'll just cash flow the difference.

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