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Is overfunding a 529 plan enabling?

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  • Is overfunding a 529 plan enabling?

    Our older child is starting her sophomore year in college, and younger is a junior in high school.  The older child is majoring in public health at a private liberal arts school in the Northeast, with a $65K price tag.

    The younger one is not as strong a student, and want to stay home for college.  She will likely go somewhere more locally.  One possibility is very local to us, with roughly $40K tuition.

    We've always funded their 529s to the max.  In several years, we funded the accounts in grandparents' names as well.

    With 1 out of 8 years done, we have $150K in older child's 529, and $137K in younger one.

    I am currently maximizing all possible qualified strategies - 401k, safe harbor, profit sharing, cash balance, HSA, backdoor Roths, Roths for children.  I still have substantial funds left over that are currently going into after-tax accounts.

    I've discovered that 529's biggest benefit is not the tax deduction, but tax-free growth.  The older child's $150K is $70k principal, $80K earnings.  At 20% LTCG, it would be $16K, which is 3x more than all annual tax savings combined (7% of $70k is $4900).

    So I even though we have almost enough saved on paper, I am wondering if I should over-fund the plans on purpose, for tax reasons, as personal investment and estate planning tool.

    In addition, my RN wife is changing careers and is starting an interior design course at a local state college.  I also plan to take anthropology classes there.  The funds could be used for that.

    I wonder if that's worth it though.

    There was very little discussion about the financial aspects of attending a top private university, because we had enough saved.  I raised the question at the dinner table but was quickly overruled by other members of the family collective.  The reason given was "we have the money, we want her to go to the best school possible".

    Currently we don't plan to pay anything for kid#1's inevitable grad school.  If the same argument is raised when she starts looking at grad programs - the tax savings will be irrelevant.  And if we pay for grad school - are we really doing her a service?  She's a great kid and totally immaterial and not spoiled, but she's never had financial concerns in her life.  And frankly, I don't want to pay for grad school, but if the funds are there, I may end up doing so.

     

    Does overfunding 529s make sense?  Or do the funds end up being "wasted"?

  • #2
    There is no shame in growing a large taxable account...

    if you overfund the 529, it can be used by other beneficiaries down the line. As long as it is extra money you won't need for retirement, I don't see the harm in overfunding.

    We also have one that will spend less for a degree, and one that will spend more for a degree plus grad school. For grad school, you can consider a fixed bucket or a loan repayment plan. For example, say that you will pay for XX% or a fixed amount for grad school with the rest covered by a loan. As long as your kids are responsible and motivated, I don't seem the harm in paying for their education. Graduating from school debt-free gives them a tremendous advantage.

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    • #3
      We've lamented the cost of higher on dozens of threads.

      I think if you have the means and your kid is getting a marketable degree you should get them through school debt free.

      Having had a quarter million in student loans I don't really feel like they did anything for me other than hamper my wealth building and stress me out.

      Frankly I think the argument (which I know you are not making) than loans lead to gumption is a little weird.

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      • #4
        My daughter (briefly) was talking about going to school for free, having all four years paid for by an employer, and then working for them afterwards (She's now not interested in that field and I am not sure it is actually "real" anyway).

        However, during the conversation she asked me "What would we do with my 529 $$?" I said "We'd keep it in your name and you would never have to save penny for your kids, due to compounding interest!"  She was very excited about that!

        I, personally, think you should fund them both the same. We are in the same boat with twins older than the youngest kid, so the twins have more in the funds but we have been contributing equally since birth. I would keep doing what you are doing and not worry about where the kids end up in school.

        Congrats on getting them both on the way to college!

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        • #5


          gumption
          Click to expand...


          Amongst our peers, the people making this argument are those that didn't save enough.

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          • #6
            Of interest, what sort of ROI do you anticipate for spending $65k/yr on a public health degree?

            Comment


            • #7




              Of interest, what sort of ROI do you anticipate for spending $65k/yr on a public health degree?
              Click to expand...


              Does it matter?  That is the beauty of family wealth and the ability to fund a fat 529.

              Or as John Adams put it:

              "I must study politics and war, that our sons may have liberty to study mathematics and philosophy. Our sons ought to study mathematics and philosophy, geography, natural history and naval architecture, navigation, commerce and agriculture in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry and porcelain.”

              I loved that quote even before I had a child....

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              • #8
                @G and ZZZ,

                Good points both!  My wife and I are both immigrants, came here in our late teens.   Neither one had much interest in dentistry/nursing respectively, but it seemed like these were good careers that always had demand.   Self-realization was not high on our list.  Hard to instill the same hunger in a kid who grew up in an upper-middle class household...

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                • #9
                  what would you do with the money otherwise?   nothing wrong with taking care of the education costs of other family members with excess 529 money.

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                  • #10
                    "Does it matter?  That is the beauty of family wealth and the ability to fund a fat 529."

                    Well, the title of the post asked about enabling, so seems relevant. Also, I'd just be interested to know the OPs thoughts, he's obviously a smart guy that has done well financially...and given that his own post stated, "I wonder if that’s worth it though," I suspect he has some thoughts on the matter.

                    The John Adams quote is nice, but this situation actually seems to be starkly different than the one he was describing. He wrote that to his wife in 1780, as an ascendant man interacting with the royalty and rulers of his day, as his son did the same. He recognized he was on the path to generation wealth and power such that if young John Quincy continued to achieve as he had (he would soon leave for St. Petersberg to work alongside the US Emissary), that his grandkids would end up the beneficiaries of limitless resources akin to the children of the aristocrats and powerbrokers with whom he spent his days...who'd never have to work a day in there lives.

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                    • #11




                      “Does it matter?  That is the beauty of family wealth and the ability to fund a fat 529.”

                      Well, the title of the post asked about enabling, so seems relevant. Also, I’d just be interested to know the OPs thoughts, he’s obviously a smart guy that has done well financially…and given that his own post stated, “I wonder if that’s worth it though,” I suspect he has some thoughts on the matter.

                      The John Adams quote is nice, but this situation actually seems to be starkly different than the one he was describing. He wrote that to his wife in 1780, as an ascendant man interacting with the royalty and rulers of his day, as his son did the same. He recognized he was on the path to generation wealth and power such that if young John Quincy continued to achieve as he had (he would soon leave for St. Petersberg to work alongside the US Emissary), that his grandkids would end up the beneficiaries of limitless resources akin to the children of the aristocrats and powerbrokers with whom he spent his days…who’d never have to work a day in there lives.
                      Click to expand...


                      I actually think the Adams quote is very appropriate here.  My wife and I come from similar backgrounds.

                      Our parents abandoned their middle class lifestyle in their home country to start from the very bottom in their mid-40s, having to learn new skills in a new language to provide for their families.

                      I was interested in history and anthropology and my wife loved acting and design, but chose dentistry/nursing instead because these were "real" jobs.

                      And now my daughter is taking her 3rd semester of Ancient Greek as part of her language requirement, at a cost of $6k/per course.

                      So.. umm.. yeah, I do wonder.

                      Dentistry has been good to me and we are essentially FI in our mid/late 40s.  We are both planning to return to school to study subjects we were originally interested in... wife left her RN job and is starting an interior design course, I'll be taking Anthro class on my day off, so we understand following one's interests.  But I do wonder if my kids are, in fact, ending up with "limitless resources" at least when it comes to education..

                      Comment


                      • #12


                        The older child is majoring in public health at a private liberal arts school in the Northeast, with a $65K price tag.
                        Click to expand...




                        With 1 out of 8 years done, we have $150K in older child’s 529,
                        Click to expand...




                        If the same argument is raised when she starts looking at grad programs – the tax savings will be irrelevant. And if we pay for grad school – are we really doing her a service? She’s a great kid and totally immaterial and not spoiled, but she’s never had financial concerns in her life
                        Click to expand...


                        After all, this is a financial forum, so....

                        You have not saved enough in 529 for your elder daughter's undergrad and you are talking about paying for her grad school. She has 3 years left at $65K = $195K and you have only $150K in her 529. Assuming no major decline or increase in the value over the next 3 years that is an extra $45K from your pocket with after tax dollars. Maybe a similar situation for the younger one in 2 years time.

                        You may have the money and fund her grad school too but that is another chunk of money. Being a great kid and not into material things is nice but not instilling financial sense now and paying for courses fully means that she might be set up for failure down the road.

                        I am also an immigrant and can afford to fully fund my daughter's undergrad and grad education but have made it clear that it will be in fields where the return is good, like business / finance, medical, engineering etc. If she wants to do 15th century Italian Art at a tony liberal arts college, it will be on her own dime.

                        Comment


                        • #13





                          The older child is majoring in public health at a private liberal arts school in the Northeast, with a $65K price tag. 
                          Click to expand…




                          With 1 out of 8 years done, we have $150K in older child’s 529, 
                          Click to expand…




                          If the same argument is raised when she starts looking at grad programs – the tax savings will be irrelevant. And if we pay for grad school – are we really doing her a service? She’s a great kid and totally immaterial and not spoiled, but she’s never had financial concerns in her life 
                          Click to expand…


                          After all, this is a financial forum, so….

                          You have not saved enough in 529 for your elder daughter’s undergrad and you are talking about paying for her grad school. She has 3 years left at $65K = $195K and you have only $150K in her 529. Assuming no major decline or increase in the value over the next 3 years that is an extra $45K from your pocket with after tax dollars. Maybe a similar situation for the younger one in 2 years time.

                          You may have the money and fund her grad school too but that is another chunk of money. Being a great kid and not into material things is nice but not instilling financial sense now and paying for courses fully means that she might be set up for failure down the road.

                          I am also an immigrant and can afford to fully fund my daughter’s undergrad and grad education but have made it clear that it will be in fields where the return is good, like business / finance, medical, engineering etc. If she wants to do 15th century Italian Art at a tony liberal arts college, it will be on her own dime.
                          Click to expand...


                          I think we saved just about enough for it.  We are continuing to fund it to 529 limits ($10K/yr for 2), and with interest should cover it exactly.

                          I'm also anticipating kid #2's school to be quite a bit less.

                          And I am debating whether to contribute in my in-laws' name as well, while they are still working and getting tax deduction.

                           

                          As for the "talk", we have had it too.  She was always interested in science, and her plan was to study bio/ virology/ epidemiology, and go into research.  While not the most financially rewarding profession, it's still one with a decent return. She is still on track for that.

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                          • #14
                            "I actually think the Adams quote is very appropriate here."

                            Interesting. So, you expect your daughters are going to earn more than you such that their own children will never have to work a day in their lives, but rather, will live the life of aristocracy? Because that's what Adams was envisioning. Guess I should have given public health more thought, I didn't see that as a common path to generational wealth such that my grandchildren could pursue a life of leisure on par with that of European royals.

                            I guess our ideas of limitless resources and 'overfunding' 529 are different. As Kamban pointed out, what you currently have in 529's won't fully cover the expected cost of attendance for your two kids. I don't doubt you can cash flow the shortfall. It's you money, you can spend it how you see fit.

                            I was just interested, given your own stated skepticism, as to how the discussion regarding school selection, cost, and pursuits while there went with your family. Interested to learn what opportunities you anticipate as being available to someone with a 65k/yr public health degree that would be better than those with such a degree from 20k/yr state U plus putting 180k towards grad school or buying the kid a house. It's a discussion many readers here will probably have at some point, since you're already been there, your thoughts are probably insightful.

                            Comment


                            • #15
                              I'm not sure if I'm the only one having a hard time deciphering what you're trying to ask.  It seems you're asking 2 questions: 1. whether extra funds should be placed in 529 vs something like a taxable and 2. whether paying for your kids schooling is not giving them "skin in the game."  For the latter, I've never seen that to be the case, anecdotally or otherwise.  As for the former, I think funding a 529 to cover your kids or your own education up to your preferred amount is fine and well, but overfunding, either as an inheritance or to withdraw later (and take a penalty on), I'm not so keen on.

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