529 College Savings Plans (1 Viewer)

[mquinnjr]

Assuming the tax only applies on earnings on new contributions, why would anyone want to invest in a 529 plan now? Maybe a small tax break on your current year state income taxes and tax deferral until you take the money out? Why not just invest it in a taxable account, pay some taxes at capital gains rates rather than ordinary income rates, and then you're not pigeon-holed into using the funds for education?

It really just seems odd. Simplifying the tax code, encouraging savings, encouraging people to go to college. This proposal flies in the face of all of those.

Isn't another part of the proposal an increase on capital gains rates?

According to USA Today:

The president's proposal would hike the capital gains rate for wealthy taxpayers to 28%. In the 2014 tax season, single filers with taxable income above $406,750 and joint filers with taxable income above $457,600 pay the highest capital gains rate.

It seems unclear to me how the capital gains tax increase would be implemented. As it sits now, your average middle-class taxpayer pays 15% capital gains rates, but people above the thresholds noted above pay higher rates.

For married-filing-jointly individuals (likely the most common holder of 529 investments?), every dollar of ordinary taxable income between $74,900 and $151,200 is taxed at 25%. From $151,200 to $230,450, the ordinary rate is 28%. That is to say, that under the current system, the "average 529 taxpayer" would be paying 25% or 28% on the income withdrawal, whereas they would be paying 15% (or 18.8%) on the capital gains in a non-deferred account. Time value of money does factor in as well...impossible to really predict any effects of anything without a formal proposal. Would probably benefit some people and hurt others.

Yep. I'm not cheerleading this 529 tax, as not only would it negatively impact me, like virtually everyone else the incentives that the tax benefits create are exactly the type of thing I support.

That said, it's also the exact thing that this administration (and liberals in general) have supported for eons, which makes me think there are other parts of the overall proposal that make this cut worthwhile.

I just have a hard time buying the idea that this is an evil plot by Obama to screw those who save for college.

So, for what purpose will this new tax revenue be used that will help grow the US economy to a greater degree than would leaving the funds untaxed and allowing citizens to lower their student loan overhead?

 

[tommyGunZ]

Assuming the tax only applies on earnings on new contributions, why would anyone want to invest in a 529 plan now? Maybe a small tax break on your current year state income taxes and tax deferral until you take the money out? Why not just invest it in a taxable account, pay some taxes at capital gains rates rather than ordinary income rates, and then you're not pigeon-holed into using the funds for education?

It really just seems odd. Simplifying the tax code, encouraging savings, encouraging people to go to college. This proposal flies in the face of all of those.

Isn't another part of the proposal an increase on capital gains rates?

According to USA Today:

The president's proposal would hike the capital gains rate for wealthy taxpayers to 28%. In the 2014 tax season, single filers with taxable income above $406,750 and joint filers with taxable income above $457,600 pay the highest capital gains rate.

It seems unclear to me how the capital gains tax increase would be implemented. As it sits now, your average middle-class taxpayer pays 15% capital gains rates, but people above the thresholds noted above pay higher rates.

For married-filing-jointly individuals (likely the most common holder of 529 investments?), every dollar of ordinary taxable income between $74,900 and $151,200 is taxed at 25%. From $151,200 to $230,450, the ordinary rate is 28%. That is to say, that under the current system, the "average 529 taxpayer" would be paying 25% or 28% on the income withdrawal, whereas they would be paying 15% (or 18.8%) on the capital gains in a non-deferred account. Time value of money does factor in as well...impossible to really predict any effects of anything without a formal proposal. Would probably benefit some people and hurt others.

Yep. I'm not cheerleading this 529 tax, as not only would it negatively impact me, like virtually everyone else the incentives that the tax benefits create are exactly the type of thing I support.

That said, it's also the exact thing that this administration (and liberals in general) have supported for eons, which makes me think there are other parts of the overall proposal that make this cut worthwhile.

I just have a hard time buying the idea that this is an evil plot by Obama to screw those who save for college.

So, for what purpose will this new tax revenue be used that will help grow the US economy to a greater degree than would leaving the funds untaxed and allowing citizens to lower their student loan overhead?

Apparently the administration and their advisers believe that the revenues from the taxes are better used via the AOTC. I don't know if that's true or not, but I think it's worth examining the entire reform instead of simply blasting the 529 benefit repeal without understanding the bigger picture.

But I'm obviously an Obama supporter, and fully admit that giving them the benefit of the doubt is due to my bias. It's just hard to believe that Obama and Co. don't like folks like us to save for college.

ETA:

Consolidating and Improving Education Tax Incentives

While the creation of the American Opportunity Tax Credit in 2009 made college more affordable for millions of students and their families, our system of tax incentives for higher education is complex, and families are sometimes unable to take full advantage of these benefits. In fact, the Government Accountability Office (GAO) found that 27 percent of families who claimed one tax benefit would have been better off claiming another, while 14 percent of eligible families failed to claim any benefit at all.

Building on bipartisan reform proposals, the President’s education tax reform plan would simplify, consolidate, and better target tax-based financial aid. The President’s plan would cut taxes for 8.5 million families and students, simplify taxes for the more than 25 million families and students that claim education tax benefits, and provide students working toward a college degree with up to $2,500 of assistance each year for five years. These education tax reforms would complement the President’s other proposals to make college more affordable, including continuing historic increases in the Pell scholarship program and making a quality community college education free for responsible students. Together, these proposals would benefit students, families, and the broader economy by helping more students earn a postsecondary credential. The President’s education tax reform plan would:

• Simplify, consolidate, and better target tax benefits through an improved AOTCConsolidate duplicative and less effective education benefits into a permanent, improved AOTC. Under current law, the AOTC is scheduled to expire after 2017 and revert to the less generous Hope tax credit. Under the President’s plan, the AOTC would be a permanent feature of the tax code, so that students in school today would not have to worry that these benefits will expire before they graduate; the credit would also grow with inflation. The Lifetime Learning Credit and the tuition and fees deduction would be consolidated into the more generous AOTC.
• Increase the refundable portion of the AOTC to $1,500. The President’s plan adopts Congressional proposals – from members of both parties – to increase the refundable portion of the AOTC so that more working families and students can qualify. Like legislation that passed the House in 2014, the President’s plan would increase the refundable portion from a maximum of $1,000, or 40 percent of the total AOTC benefit, to a flat maximum of $1,500.
• Expand AOTC eligibility for non-traditional students. Currently, students must be at least half-time to qualify for the AOTC, and families can claim the credit for no more than four years. Under the President’s plan, part- time students would be eligible for a $1,250 AOTC (up to $750 refundable) and all eligible students would be able to claim the AOTC for up to five years.

[*]Make it easier for students and families to apply for tax credits

• Improve information reporting. The proposal would require colleges and universities to provide students with the tuition and fee information needed to claim the AOTC.
• Simplify taxes for approximately 9 million Pell Grant recipients. Currently, eligible families leave tens of millions of dollars of AOTC credits on the table because the rules related to Pell Grants and the AOTC are so complicated. Like bipartisan Congressional proposals, the President’s plan would exempt Pell Grants from taxation and the AOTC calculation, making it easier for Pell recipients to claim the tax benefits already available to them.

[*]Better target and simplify tax relief for student debt and college savings

• Eliminate tax on student loan debt forgiveness under Pay-As-You-Earn (PAYE) and other income-based repayment plans. The President has worked to make student debt affordable for struggling borrowers by offering PAYE: an income-based repayment plan that lets borrowers limit student loan payments to no more than 10 percent of their discretionary income and qualify for forgiveness after 20 years of repayments. The Department of Education is currently amending its rules to extend this option to all direct student loan borrowers. However, under current law, PAYE participants who qualify for debt forgiveness after 20 years could face a large tax bill – likely a surprise to most borrowers, and for others a concern in choosing PAYE. The President’s plan would continue to propose to exempt student loan forgiveness from taxation.
• Repeal the complicated student loan interest deduction for new borrowers. The student loan interest deduction is complicated – so much so that many eligible borrowers fail to claim it – and provides very limited assistance ($100 on average) to a broad group of borrowers, rather than targeting more meaningful assistance to those borrowers struggling to afford their student loan payments. The President’s plan would retain the student loan interest deduction for current borrowers. But for new borrowers, his plan would repeal this complicated tax break and instead provide more generous and more targeted tax relief through the improved AOTC while students are in school and through PAYE once they graduate.
• Limit upside-down education savings incentives and consolidate them into a single benefit. The President’s plan would consolidate education savings incentives into one vehicle and redirect the savings into the better targeted AOTC. Specifically, the President’s plan will roll back expanded tax cuts for 529 education savings plans that were enacted in 2001 for new contributions, and – like Chairman Camp’s tax reform plan – repeal tax incentives going forward for the much smaller Coverdell education savings program.

 

[mquinnjr]

I read the above, and I think I understand what this proposal is doing, which is taking the increase in tax revenue from taxation of income earned from new 529 contributions to fund programs like an increased AOTC, changing the treatment of PAYE forgiveness as income, etc. This would make education benefits more accessible for a wider net of people via the tax imposed, that much I think makes sense.

As far as saving for college tax planning goes, using the ordinary income tax rate to levy the new tax (which is generally twice that of the long-term capital gains rate) for new 529 contributions seems counter-productive. I say this because you could just use a taxable brokerage account for the same purpose of saving for college and just pay your ~15% vs. the much higher ordinary income tax rates making new contributions to a 529 account. I interpret the change as, prior 529 contributions receive previous 2001 tax-free treatment on a grandfathered basis, and moving forward you're best off if using marketable securities to fund your college savings to use a taxable brokerage account to minimize your tax exposure to the new 529 tax treatment at ordinary income tax rates on gains from contributions. You can take it further by investing in tax-advantaged municipals, etc. once we've delved into the taxable investment arena to plan and maximize tax impact.

How you feel about the 529 tax treatment change is a topic for another thread, but if I'm interpreting this correctly, the above is where were headed here for purposes of this thread if this proposal is passed in terms of investment planning to save for college.

 

[rascal]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

 

[cstu]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

 

[James Daulton]

I'm not an investing guru, but wouldn't it make more sense to just invest in an S&P index fund for 18 years?

I need a spreadsheet to do the math, but figure $2500 a year compounding at 7% with a long term capital gains tax. There also aren't penalties for not using the money on college in this scenario and you don't have to worry about silly #### like this.

Gets you to about 85K... which should cover 2 years maybe in a private institution. Public in state though you'd have leftover.

99% my kids will be Terps for this reason.

If you're in-state and you want your kids to be Terps, they'll need to be top 5% in their class with 1,300+ Math/Engl SAT scores (using the current SAT scoring). Maryland has become extremely competitive for in-state kids.

I did my MBA there, my wife did undergrad there.

When I applied to undergrad, it was my safety school. Has it changed that much?

Assuming my kids inherited their parents smarts... shouldn't be an issue imo.

UMD used to be a safe school, now it's seriously competitive. I was really surprised as well when we found out how difficult it is to get in. I'm giving you a heads up so you can make sure your kids are where they need to be before they apply.

 

[Tom Hagen]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

If the taxable 529 earnings are over $2,000 they could trigger the Kiddie tax which would tax them at the same rate as the parents.

 

[(HULK)]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

If the taxable 529 earnings are over $2,000 they could trigger the Kiddie tax which would tax them at the same rate as the parents.

Whats this now?

When I was a kid and worked, I would make more than 2K and I was always in a different bracket than my parents. I don't really think its right to tax a kid lifeguarding or whatever @ 33%. Never heard of this.

 

[eoMMan]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

I read that the beneficiary (student) would be taxed.

I still think many of you are panicking a little too much at this point. It's still a proposal that a lot of people are against. Don't freak out just yet and spend an eternity trying to figure out all the particular aspects of it.

 

[Sand]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

I read that the beneficiary (student) would be taxed.

I still think many of you are panicking a little too much at this point. It's still a proposal that a lot of people are against. Don't freak out just yet and spend an eternity trying to figure out all the particular aspects of it.

Eh - it isn't going to happen, at least with this Congress. Just the idea rankles, though. Yet another in a long line of populist money grabs from the productive to buy votes from the not so productive.

 

[stbugs]

Looks like my existing 529s stay and I won't be contributing to them anymore.

This is a reason why I stayed away from the Roth IRAs. Without knowing the future, I am taking the tax savings now on 401ks, regular IRAs, etc. I have no idea what tax rates will be in the future, but I'd rather not pay at the front door and the back door, which based on our deficit and new proposals like this is starting to look far more likely.

 

[elbowrm]

Meh. If the tax advantaged nature of 529s was enacted to encourage more people to save for college, and it turns out to be only/mostly used by people who would have otherwise still saved for college, I have a hard time calling tweaking/removing the benefits a populist money grab. Currently, Ameicans without 529s are subsidizing the college savings of those with 529s.

 

[humpback]

Meh. If the tax advantaged nature of 529s was enacted to encourage more people to save for college, and it turns out to be only/mostly used by people who would have otherwise still saved for college, I have a hard time calling tweaking/removing the benefits a populist money grab. Currently, Ameicans without 529s are subsidizing the college savings of those with 529s.

Wat?

 

[tommyGunZ]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

I read that the beneficiary (student) would be taxed.

I still think many of you are panicking a little too much at this point. It's still a proposal that a lot of people are against. Don't freak out just yet and spend an eternity trying to figure out all the particular aspects of it.

Eh - it isn't going to happen, at least with this Congress. Just the idea rankles, though. Yet another in a long line of populist money grabs from the productive to buy votes from the not so productive.

Do you realize how assholish this post comes off?

 

[tommyGunZ]

Meh. If the tax advantaged nature of 529s was enacted to encourage more people to save for college, and it turns out to be only/mostly used by people who would have otherwise still saved for college, I have a hard time calling tweaking/removing the benefits a populist money grab. Currently, Ameicans without 529s are subsidizing the college savings of those with 529s.

That seems to be the rationale behind the proposed change. NYT reports that ~ 2% of families actually contribute to 529s, and 70% of those families earn 200k+ per year (top 10%ers).

 

[Steve Tasker]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

If the taxable 529 earnings are over $2,000 they could trigger the Kiddie tax which would tax them at the same rate as the parents.

Whats this now?

When I was a kid and worked, I would make more than 2K and I was always in a different bracket than my parents. I don't really think its right to tax a kid lifeguarding or whatever @ 33%. Never heard of this.

Kiddie tax is a tax on unearned income, not earned income. That is, your income from lifeguarding would not be subject to "Kiddie Tax".

If a dependent child has unearned income above certain thresholds, the income is taxed at the parents' rate. It's an effort by the IRS to prevent income shifting from parents in a higher tax bracket to children in a presumably-lower tax bracket. Without Kiddie tax, wealthier taxpayers could be incentivized to gift income-generating assets to their children and have the income taxed at the child's rate and not the parent's rate.

I don't actually know whether Tom Hagen's post is correct or not re: whether the distributions would be considered unearned income, but it does seem possible.

http://en.wikipedia.org/wiki/Kiddie_tax

 

[cstu]

Meh. If the tax advantaged nature of 529s was enacted to encourage more people to save for college, and it turns out to be only/mostly used by people who would have otherwise still saved for college, I have a hard time calling tweaking/removing the benefits a populist money grab. Currently, Ameicans without 529s are subsidizing the college savings of those with 529s.

That seems to be the rationale behind the proposed change. NYT reports that ~ 2% of families actually contribute to 529s, and 70% of those families earn 200k+ per year (top 10%ers).

I'm fine with taxing higher incomes more, but I'm against making it tougher for people to save for college, regardless of income. 30% of those saving are making less than $200k.

 

[humpback]

Meh. If the tax advantaged nature of 529s was enacted to encourage more people to save for college, and it turns out to be only/mostly used by people who would have otherwise still saved for college, I have a hard time calling tweaking/removing the benefits a populist money grab. Currently, Ameicans without 529s are subsidizing the college savings of those with 529s.

That seems to be the rationale behind the proposed change. NYT reports that ~ 2% of families actually contribute to 529s, and 70% of those families earn 200k+ per year (top 10%ers).

That's not what it said- it said that 70% of the assets in the plans are held by families that make more than $200K per year, which shouldn't be a surprise since they have more money to put in (the Obama's put $240K in themselves a few years back). Other research has shown that over 70% of the plans are owned by those who earn less than $150K per year.

 

[cstu]

Keep 529's tax free and give students two years of CC.

Need the money? Cut the military. Every time someone tries to we get this:

Navy experts and retired officials fear that the elimination of the Tomahawk and Hellfire systems—and the lack of a battle-ready replacement—will jeopardize the U.S. Navy’s supremacy as it faces increasingly advanced militaries from North Korea to the Middle East.


Read more: http://www.washingtontimes.com/news/2014/mar/25/obama-kill-navys-tomahawk-hellfire-missile-program/#ixzz3PfZqGfi2
Follow us: @washtimes on Twitter

Give me a ####ing break.

 

[joffer]

Keep 529's tax free and give students two years of CC.

Need the money? Cut the military. Every time someone tries to we get this:

Navy experts and retired officials fear that the elimination of the Tomahawk and Hellfire systemsand the lack of a battle-ready replacementwill jeopardize the U.S. Navys supremacy as it faces increasingly advanced militaries from North Korea to the Middle East.



Read more: http://www.washingtontimes.com/news/2014/mar/25/obama-kill-navys-tomahawk-hellfire-missile-program/#ixzz3PfZqGfi2

Follow us: @washtimes on Twitter

Give me a ####ing break.

Lockheed-Martin CEOs gotta eat too.

 

[elbowrm]

As per an article in today's Wall St Journal, 50% of 529s are held by households making <$150k, and 30% <$100k. I retract my statement above about most accounts being held by people who would have otherwise been saving for college, whether or not 529s were tax-advantaged.

 

[Pipes]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

I would assume the parents since the plans are in the parents name and the child is just a beneficiary of the plan. The parents not the children have the control over the funds in the plan.

 

[Tom Hagen]

I don't actually know whether Tom Hagen's post is correct or not re: whether the distributions would be considered unearned income, but it does seem possible.http://en.wikipedia.org/wiki/Kiddie_tax

To be clear, I have no idea if it would be subject to Kiddie tax or not but it certainly seems like unearned income to me,

 

[St. Louis Bob]

How about we just slap a 35% tax on all political donations?

 

[Steve Tasker]

How about we just slap a 35% tax on all political donations?

Political donations aren't deductible, so in theory, you're being taxed on money that you no longer have. You earn $100 and you donate the entire $100 to a political party, you're still taxed on the $100 earnings.

 

[avoiding injuries]

How about we just slap a 35% tax on all political donations?

Political donations aren't deductible, so in theory, you're being taxed on money that you no longer have. You earn $100 and you donate the entire $100 to a political party, you're still taxed on the $100 earnings.

$35 should go for more taxes. Maybe $95

 

[St. Louis Bob]

How about we just slap a 35% tax on all political donations?

Political donations aren't deductible, so in theory, you're being taxed on money that you no longer have. You earn $100 and you donate the entire $100 to a political party, you're still taxed on the $100 earnings.

No, no, no for every $100 donated to a politician, $35 goes into the general fund, college fund for poor folks, whatever.

 

[Steve Tasker]

How about we just slap a 35% tax on all political donations?

Political donations aren't deductible, so in theory, you're being taxed on money that you no longer have. You earn $100 and you donate the entire $100 to a political party, you're still taxed on the $100 earnings.

No, no, no for every $100 donated to a politician, $35 goes into the general fund, college fund for poor folks, whatever.

I knew what you were getting at....

 

[Sand]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

I read that the beneficiary (student) would be taxed.

I still think many of you are panicking a little too much at this point. It's still a proposal that a lot of people are against. Don't freak out just yet and spend an eternity trying to figure out all the particular aspects of it.

Eh - it isn't going to happen, at least with this Congress. Just the idea rankles, though. Yet another in a long line of populist money grabs from the productive to buy votes from the not so productive.

Do you realize how assholish this post comes off?

Given the source that's a nice compliment.

For the record the Obamas front loaded their 529 accounts with a cool 120k. So, you know, they got theirs before proposing to cut things off for everyone else.

 

[humpback]

Not that it ever had a chance, but the Obama administration is now dropping the idea of taxing them.

 

[The Ref]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

I read that the beneficiary (student) would be taxed.I still think many of you are panicking a little too much at this point. It's still a proposal that a lot of people are against. Don't freak out just yet and spend an eternity trying to figure out all the particular aspects of it.

Eh - it isn't going to happen, at least with this Congress. Just the idea rankles, though. Yet another in a long line of populist money grabs from the productive to buy votes from the not so productive.

Do you realize how assholish this post comes off?

It does come off as a bit prickish doesn't it?

Of course he's also dead right, so he has that going for him.

 

[tommyGunZ]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

I read that the beneficiary (student) would be taxed.I still think many of you are panicking a little too much at this point. It's still a proposal that a lot of people are against. Don't freak out just yet and spend an eternity trying to figure out all the particular aspects of it.

Eh - it isn't going to happen, at least with this Congress. Just the idea rankles, though. Yet another in a long line of populist money grabs from the productive to buy votes from the not so productive.

Do you realize how assholish this post comes off?

It does come off as a bit prickish doesn't it?

Of course he's also dead right, so he has that going for him.

Perhaps. I disagree re: the policy - when looking at the numbers this is mostly a tax shelter for folks who would still save for college otherwise - but yeah, the part about "the productive from the not-so-productive" is extremely dickish.

 

[humpback]

Not that it ever had a chance, but the Obama administration is now dropping the idea of taxing them.

Pretty good point raised by the usually left-leaning Slate: "If 529s are just being used as a vehicle for the wealthy/upper-middle-class, instead of taxing them, how about just fixing them?"

Because that isn't their primary motivation. This was just another political ploy, but he grossly miscalculated the reaction to it.

 

[General Malaise]

Will the gains be taxed at the parents income tax level or the students? Student tax rate, for most middle class, will be close to zero, yes?

Excellent question.

I read that the beneficiary (student) would be taxed.I still think many of you are panicking a little too much at this point. It's still a proposal that a lot of people are against. Don't freak out just yet and spend an eternity trying to figure out all the particular aspects of it.

Eh - it isn't going to happen, at least with this Congress. Just the idea rankles, though. Yet another in a long line of populist money grabs from the productive to buy votes from the not so productive.

Do you realize how assholish this post comes off?

It does come off as a bit prickish doesn't it?

Of course he's also dead right, so he has that going for him.

Perhaps. I disagree re: the policy - when looking at the numbers this is mostly a tax shelter for folks who would still save for college otherwise - but yeah, the part about "the productive from the not-so-productive" is extremely dickish.

You guys do realize that people can and do LOSE money in 529 vehicles, right? They don't all just go up up up. There is an inherent risk putting saved, post-tax dollars into the stock market or bond market. Calling it a tax shelter is incredibly off base. Tax shelters don't pose great risk. Parents willingly saving post-tax dollars in a vehicle subject to market fluctuations SHOULD receive tax breaks. Take a look at this article from 2009 and then tell me these are tax shelters:

It hurts to lose your own money in the market, but losing the money you have set aside for your children is agonizing. Just look at what has happened to "529" plans.

At their best, 529s are a safe and sensible way to save, tax free, for your children's college expenses. At their worst, they offer irresponsibly risky exposure to stocks and appallingly bad investments that can blow parents' money and students' dreams to smithereens.

All too many families have gotten the worst. Of the 3,506 options (including funds with different sales charges) in college plans tracked by Morningstar, 93% fell in value over the past year, and 1,098 lost at least 40%.

Of course, the stock market was down 43% over the same period. But the popular "age-based option" for 529s is supposed to protect investors. It should work like this: A young child's account starts out primarily in stocks; with each passing year, more money moves into bonds and cash. By the time the student hits college, less than 20% of the money should be at risk in stocks -- limiting the potential damage from even an epic bear market to 10% or so.

That is vital. Students typically have a finite period, often only four years, during which they spend their 529 savings. They don't have the luxury of waiting for stocks to recover.

Nevertheless, some states pushed students into stocks or out of cash. Last April, Oregon doubled the stock exposure in its "1-3 Years to College" portfolio to 40%. In 2004, an in-college student in Rhode Island's aggressive age-based portfolio would have had 40% stocks, 31% bonds and 29% cash. By 2008, the equivalent was 40% stocks (including real estate), 55% bonds and a measly 5% cash.

Other plans took too much risk all along. In Utah, college enrollees could have 65% in stocks. Several states, including Maine and New Mexico, offered 529 portfolios with no allocation to cash for students over the age of 18. Even after North Carolina finally scaled back its risk earlier this month, a college sophomore can still have 43% in stocks, real estate and junk bonds.

Says Mercer Bullard, a securities-law professor at the University of Mississippi: "In some states, the asset allocation for the 16- to 18-year-olds looks as if it was designed by the 5-year-olds."

Unfortunately, the states compounded their bad strategic decisions with even worse tactical choices. One of Maine's portfolios for students 18 or older consisted of the following Oppenheimer funds: 60% Limited-Term Government, 20% Core Bond, 10% Champion Income and 10% International Bond. Gorging on mortgage-backed securities, the first three funds lost 6.3%, 36% and 78%, respectively, in 2008. That portfolio fell 22% over the past 12 months (not including sales charges).

The "Ultra Conservative" portfolio in New Mexico had 0% cash, 20% stocks and 80% in two Oppenheimer bond funds; it fell 23% last year. Some of the same funds blew up 529s in Illinois, Oregon and Texas. "The performance of the OppenheimerFunds 529-plan portfolios," says a spokeswoman for the fund company, "is not much different than what others have experienced as a result of [the] unprecedented market events [of 2008]."

Assets in 529s, which peaked at $112 billion at year-end 2007, totaled $88.5 billion as of this December. Sadly, the public's faith in 529s appears to be based partly on a false premise: that state bureaucrats are good at managing other people's money.

Officials in several states, including Maine, New Mexico and North Carolina, declined or didn't respond to requests for comment; nor did J.&W. Seligman & Co., which ran the riskiest portion of the North Carolina plan.

Contributing to a 529 is still worth it for the tax benefits alone. Visit savingforcollege.com and the plan's own Web site to make sure your teenager is not up to her armpits in the stock market. If she is, transfer to a less-risky option within the same plan. If you can't tell, call the fund company that runs the 529 and demand details on how the money is allocated.

For young children, consider the remarkable deal offered by Ohio's 529: federally insured certificates of deposit from Fifth Third Bancorp with maturities of up to 12 years at yields as high as 5%. But it is tough to beat a risk-free 5% return exempt from federal income tax. What a tragedy that more states didn't offer similar options before it was too late.

 

[mquinnjr]

^^^^^^^

Excellent post.

 

[pecorino]

So let me just get confirmation from my FFA brethren: If I earn under 100k and have a newborn who will be in college after I turn 60, shouldn't I just put college savings inside a Roth which has all of the benefits (except maybe the State tax deduction) but less fees and restrictions than a 529? Also note that I have money in a 401k that can be rolled over into a Roth so annual contribution limits aren't really a factor. I see no compelling reason to open a 529 given my age and setup. Am I missing something?

 

[Steve Tasker]

So let me just get confirmation from my FFA brethren: If I earn under 100k and have a newborn who will be in college after I turn 60, shouldn't I just put college savings inside a Roth which has all of the benefits (except maybe the State tax deduction) but less fees and restrictions than a 529? Also note that I have money in a 401k that can be rolled over into a Roth so annual contribution limits aren't really a factor. I see no compelling reason to open a 529 given my age and setup. Am I missing something?

IMO, you should be maxing the Roth before putting anything into a 529 plan. If you have the capacity to max the Roth and money leftover, then consider the 529.

 

[Vincesanity]

Absolutely, always my recommendation to clients when it's the right scenario.

So let me just get confirmation from my FFA brethren: If I earn under 100k and have a newborn who will be in college after I turn 60, shouldn't I just put college savings inside a Roth which has all of the benefits (except maybe the State tax deduction) but less fees and restrictions than a 529? Also note that I have money in a 401k that can be rolled over into a Roth so annual contribution limits aren't really a factor. I see no compelling reason to open a 529 given my age and setup. Am I missing something?

 

[NutterButter]

Does anyone know of a 529 fund getting less than a .19% expense ratio? Nevada and Virginia have stock index plans with that ratio.

For those actively managing their own fund (ie not investing in an age based portfolio), what formula are you using to determine the right mix of stocks, bond, cash, etc?

 

[NutterButter]

Does anyone know of a 529 fund getting less than a .19% expense ratio?  Nevada and Virginia have stock index plans with that ratio.

For those actively managing their own fund (ie not investing in an age based portfolio), what formula are you using to determine the right mix of stocks, bond, cash, etc?

So anyone got anything?   I'm pulling the trigger with my first 529 deposit this week and I'm going with VA all stock index if I don't hear otherwise.  Thanks.

 

[Big Blue Wrecking Crew]

So, I am digging into how distributions work, as my oldest is off to college next year.  I am the non-custodial parent (invisible from a FAFSA perspective), so if I am reading correctly, any distributions from the 529 I have established would count as untaxed income for my son when next year's FAFSA is completed.  Looking to see if that is the case, as I then may want to delay using the 529 until his junior year, where it would be off the radar from a FAFSA perspective.

I welcome any thoughts on this topic, as well as how I could utilize the 529 funds earlier without having a negative impact from the need-based aid perspective.

 

[Sand]

Perhaps. I disagree re: the policy - when looking at the numbers this is mostly a tax shelter for folks who would still save for college otherwise - but yeah, the part about "the productive from the not-so-productive" is extremely dickish.

Two years later and you're still incredibly wrong.     Love ya, GB.

So anyone got anything?   I'm pulling the trigger with my first 529 deposit this week and I'm going with VA all stock index if I don't hear otherwise.  Thanks.

How old is your kid?

 

[NutterButter]

How old is your kid?

They're 7 and 10.   I went with the NY plan.  I was going to go Virginia, but I couldn't for the life of me figure out how to make a deposit online.   NY has some of the lowest fees so I'm happy with it.

 

[Gawain]

I'm in NY. With the move towards free college for households under X in household income, I'm starting to think that saving in a 529 is the suckers bet.

NY just went to free tuition for SUNY schools for households under 100K. What is the drawback to saving the money that would have gone into a 529 in a brokerage account and gaming income for the tuition years to qualify. It appears that the push is to make college cheap/free based on household income. A family friend quite her Manhattan fashion job to become an under the table waitress to drive household income down as her daughters started college. Think they are 3K out of pocket for each of them.
 

As long as you have cash saved that would have gone to the 529, why not approach your employer about deferred compensation, retire early or take a sabbatical?

 

[NewlyRetired]

I'm in NY. With the move towards free college for households under X in household income, I'm starting to think that saving in a 529 is the suckers bet.

NY just went to free tuition for SUNY schools for households under 100K.

A lot of state schools around the country have very low tuition and place their costs to the student else where with in their list of expensives.

For example, a SUNY school like Buffalo State yearly cost with housing for in state residents is $24.5k a year.  Of the $24.5k only $6470 is considered tuition.

At Purchase College, it is similar.  Total cost of $21,250 while tuition is only $6470.

==========================

I learned about this the hard way as it is even worse in my state.  

My daughter won the Abigail Adams award, which is a full tuition scholarship to any state school in Massachusetts. While it sounds incredible on the surface, you just need to look at this info to see how little it is:

Bridgewater State University, for example, lists a tuition of $910 with fees of $7,142 for a total of $8,052. With the Adams Scholarship, only the $910 would be waived. 

The University of Massachusetts at Amherst, the state’s flagship school, breaks down its per semester tuition like this:

• Tuition: $857.00
  
• Curriculum fee: $4,707.00
  
• Service fee: $675.00
  
• Activities fee: $48.00
  
• Basic Health fee: $327.00
  
• TOTAL: $6,615.00
  

The John and Abigail Adams Scholarship would cover only the $857 portion of this state school’s bill. 

==============================

In short, if you hear about a full tuition scholarship for a private school, you are looking at a ton of money saved.

If you hear about a full tuition scholarship at a state school, always check the fine print to see exactly what you are saving.

 

[NutterButter]

I'm in NY. With the move towards free college for households under X in household income, I'm starting to think that saving in a 529 is the suckers bet.

NY just went to free tuition for SUNY schools for households under 100K. What is the drawback to saving the money that would have gone into a 529 in a brokerage account and gaming income for the tuition years to qualify. It appears that the push is to make college cheap/free based on household income. A family friend quite her Manhattan fashion job to become an under the table waitress to drive household income down as her daughters started college. Think they are 3K out of pocket for each of them.
 

As long as you have cash saved that would have gone to the 529, why not approach your employer about deferred compensation, retire early or take a sabbatical?

How much tuition we talking about with that NY program?  And that's just tuition right?   The approach I took is the max out my roth and now that I have some extra money, start contributing to a 529.  I figure that just with room and board, I'm going to need at least $60k per kid.   If I'm lucky and they get some type of scholarships or whatever and I don't need the roth, then that just goes to a nicer retirement or maybe some goes to them helping with a down payment on a house. 

 

[I am the Walrus]

I just me with my financial dude for a routine account review.  One of the items we covered was the 529 plan I established for my 2 boys (one in first year of college and the other is still in high school).

In 2009 I left my prior employer and I received a lump sum payment of $84K for cash I put in a deferred comp account over several of the prior years.  I think I contributed about $60K of cash, and it then grew to $84K.

Anyway, I chose to put the entire amount into a 529.  That $84K has now grown to $217K.  Hot diggity dog.  Obviously, in retrospect, I was incredibly lucky to invest at the very bottom of the market, and it is pretty cool that my $60K of original savings will now pay for nearly all of the college expenses for both boys.  Feeling pretty damn lucky.