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Any benefit to opening a 529 plan for a child already in high school?

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  • Any benefit to opening a 529 plan for a child already in high school?

    I'm wondering if there is any benefit to opening a 529 plan for my child who is a 9th grader. I also have a 5th grader and wonder whether it would benefit that child to open a 529.

    The details of my situation are as follows:

    -- I am finally maxing out my retirement plan at work and my HSA. I also have investments in a taxable account which I just opened this year. My entire retirement savings is small (I've only really started maxing out my contributions over the past 2 years although I did have some automatic employer contributions over the past 8 years) and I am trying to be more aggressive with a plan to save about 40-50% of my take home pay from here on out so that I am not working until I am 75.

    --Our only debt is a relatively small mortgage that we have 20 years left on.

    -- I live in a state without state taxes so there won't be a state tax deduction benefit.

    -- My husband and I are in agreement that will assist our children up to the tuition cost of the our state schools (currently around $12,000) but we expect them to be partially financially responsible for their schooling so we will not be covering more than that cost. This means we could easily cover the cost per year by putting less in our taxable accounts while our kids are in college without touching any of the money already invested in the taxable account.

    My concerns are whether the short time line makes it too risky or just plain pointless to invest in a stock index fund and expect that money to have grown in 4 years. Does it make more sense for me to open one just for my younger child?

    Should I open it for my older child and then just transfer it my younger child if the investments don't do well over the next 4 years to see if another 4 years of investing will help grow the money?

    Would the benefit of the tax free withdrawals on the earnings be worth it if my investments do grow? Or will the earnings be so small as to not really matter much?

    How much money does it make sense to put away over the next four years if I do open a 529? Just enough to cover the $12,000 per year I plan on giving to my child?

     

     

  • #2


    My concerns are whether the short time line makes it too risky or just plain pointless to invest in a stock index fund and expect that money to have grown in 4 years. Does it make more sense for me to open one just for my younger child? Should I open it for my older child and then just transfer it my younger child if the investments don’t do well over the next 4 years to see if another 4 years of investing will help grow the money? Would the benefit of the tax free withdrawals on the earnings be worth it if my investments do grow? Or will the earnings be so small as to not really matter much? How much money does it make sense to put away over the next four years if I do open a 529? Just enough to cover the $12,000 per year I plan on giving to my child?
    Click to expand...



    • Too risky to use a stock index fund over the short term (< 5 years). Open a 529 for the younger child.

    • However, opening one for your elder child with the intent of transferring to younger child if investments are down in 4 years makes a lot of sense.

    • It depends on the goals your financial plan (if the benefit of tax-free w/d's on the earnings be worth it).

    • I do not know the answers to your last 3 questions. Again, it depends on your financial plan, how much you can afford to invest and whether you will have to sacrifice other goals that may have a higher priority, given that you have just gotten your financial act together.

    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      To answer your question we need your:
      1). Tax bracket
      2). How much you already have saved for college if any, in savings/checking/taxable account.

      I think a 529 plan is very likely to make sense for you, particularly if you are in a higher tax bracket and anticipate paying 20%+ capital gains tax.

      I differ from Johanna in that I would invest primarily in stock index funds in the 529 up to 50% of the anticipated need. IMO bonds and short term reserves are a waste in a 529 as they will not get you much tax free growth or advantage over a taxable account. Save the remainder (50-75%) invested very conservatively in a taxable account and/or CDs. If the market is up when child 1 enters college, drain the 529 first. If the market is way down, spend taxable/CD first and transfer 529 to child 2 and invest more conservatively.

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      • #4
        Some states give a tax deduction against state income taxes for all money put into a 529 so you might want to beware of that.  An example would be open an account, put in the funding, get the tax deduction then pay for school out of that account.  We have a number of parents who never opened an account but then when college hits we set up this process to at least get them a deduction...check your state rules on deductibility.
        Scott Nelson-Archer, CLU, ChFC
        303-953-0263 Direct / [email protected]

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        • #5




          Some states give a tax deduction against state income taxes for all money put into a 529 so you might want to beware of that.  An example would be open an account, put in the funding, get the tax deduction then pay for school out of that account.  We have a number of parents who never opened an account but then when college hits we set up this process to at least get them a deduction…check your state rules on deductibility.
          Click to expand...


          Except OP stated they live in a state w/o income taxes so no benefit.


          — I live in a state without state taxes so there won’t be a state tax deduction benefit.
          Click to expand...


           
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            I am right on the upper edge of the 28% tax bracket so any additional money I make over the next few years will push me into the 33% tax bracket but I don't anticipate making a lot more money that I've earned this year (I'm a salaried physician).

            I don't have any money particularly ear marked for college for either of the kids. But as I mentioned, I won't be giving my oldest child more than $48,000 for the entire 4 years since I want to encourage my children not to go to an expensive school and to be financially responsible for their education. I have more than enough in my savings and checking accounts to cover that entire $50,000 right now (that money isn't earmarked for anything either other than "emergencies" and sometimes I think about moving that into investments since it's just sitting there not making me any money and I'm not sure what emergency would require me to have that money sitting in a savings/checking account).

            My current plan would be to just use $12,000 a year (perhaps slightly more if the tuition of our state schools goes up in the next few years) for my oldest's child's education. That would just come out of my savings account which I would likely replenish from my pay.

            So I suppose my real question is should I be moving that money out of my savings account and into a 529 and investing it?

            I've answered one of my own questions in that I know the amount of money I want to give to my children for their college education (roughly $12,000 a year). So that would be the amount I'd be putting into a 529 each year for the next 4 years (and probably more for my youngest as tuition costs go up).

            Opening a 529 plan would not change my financial plan for putting away money for retirement since my current financial plan includes me giving $12,000 a year to my children (who will not be in college simultaneously) and I have enough money to pay for that without decreasing the amount I intend on putting into retirement accounts and my taxable account.

            With the short time line I have for my oldest child, it seems like putting away $48,000 ($12,000 a year over the next 4 years) and investing it aggressively could yield me extra money that I could then pass along to the youngest child. Or, it could yield me absolutely nothing but losses. Investing it more conservatively over 4 years doesn't seem like it would give me much benefit over keeping it in a money market account that it is in my savings account.

             

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