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529 plan to front load or not?

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  • Avatar saildawg 
    Participant
    Status: Physician
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    Joined: 01/24/2016

    So I am at a bit of a cross roads and would really value this forum’s opinion.  I have 2 children (Age 20 months, and 3 weeks), and I am starting to save for college expenses.  My wife and I agree that we are willing to fund 100% of undergrad to in state public college.  We live in Georgia, so have been using the state 529 plan as we can get state tax deductions for up to 4k per child per year (and 100% equities option TIEIX for 0.19% fee per year).  We plan on doing this every year, and according to Fidelity college calculator 

    We have a 91% chance of meeting that goal for 20 month old and 100% chance for 3 week old.  I have no problem sticking with this plan, but also realize that I could front load now as we have about 50k liquid to try and take advantage of tax free growth.  I am having a hard time deciding if I should put 25k per each now, or just continue the plan and add more to taxable ( I take advantage of TLH in my simple 3 fund portfolio).

    Pros of front loading- tax free growth may come out ahead

    Cons of front loading: lack of liquidity, possibility of over funding, higher fees

    If I do decide to front load I was thinking of opening a separate 529 such as California, NY, Nevada.

    Thanks for any thoughts and input.

    #180217 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1546
    Joined: 01/08/2016

    I superfunded this fall in a 70/30. Sad face.

    But I also superfunded in 2009-10 all in equities. Deliriously happy face.

    It is nice knowing that private/out of state college (and possibly grad school if cheap undergrad and/or good market returns) is covered no matter what. To be fair, I was lean FI with that second round of funding.

    #180226 Reply
    Liked by MPMD
    jfoxcpacfp jfoxcpacfp 
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    Status: Financial Advisor, Accountant, Small Business Owner
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    Joined: 01/09/2016

    Really no way to know. Most of our clients frontload if they have the cash flow and children are very young. Also if they plan to pay for advanced degrees. But it is still a question so we recommend 25% allocation to a taxable account marked for education unless they are fine with any excess flowing through to grandchildren.

    When we run projections of overall lifetime wealth with frontloading v. on amortized until the children start school, the overall difference is very small in proportion to end of life estate value. However the real numbers can be ~$50k taxes saved. I’d have to go back and run through some scenarios to give a range, but it is usually a meaningful amount. It gets down to perspective and priority, deciding what to do with dollars left over after funding available retirement, paying debt, and funding other short-term goals.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #180233 Reply
    Liked by saildawg
    CordMcNally CordMcNally 
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    Status: Physician
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    Joined: 01/03/2017

    I would probably continue your plan and keep adding to taxable. That way you’ll have a good portion of money earmarked for education that can still be flexible.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #180234 Reply
    Liked by saildawg
    Avatar ajm184 
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    Status: Other Professional
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    Joined: 07/14/2017

    Though others may have additional insight on the prefunding; at 25K per child, it seems you can get do that fairly easily within a single year (14K limit per person/per child annually).  You and your wife each give/contribute 12.5k to each child.  If the intent is then not fund their 529’s for the next four years or so, cannot say I’m in favor of this approach because of the tax deduction you would potentially forego.  If you plan to contribute at some level moving forward, then go for it.  The 25K will certainly help, though secondary education growth is still exceeding that of inflation, so truly overfunding IMO with the ‘extra’ contribution and your ongoing funding I would not see as an issue given the current higher education environment.

    #180244 Reply
    Avatar saildawg 
    Participant
    Status: Physician
    Posts: 299
    Joined: 01/24/2016

    Thanks for the input so far, I think I value flexibility because I think education costs may be totally different in 18 years, and the structure of education (online etc) could be different.  We do feel strongly that our children should have some skin in the game, and the pursuit of advanced degrees should make them weigh financial cost/benefits.  Even though likely we will still have plenty of resources to help them.  I think it is because having student loans actually may have helped me in pursuing my financial literacy and I am perhaps almost in a better financial position now than if I didn’t have loans and was just coasting through.

    #180248 Reply
    Avatar FIREshrink 
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    Status: Physician
    Posts: 907
    Joined: 01/11/2017

    In your shoes I would hold back enough to maximize the annual state tax deduction. Front load the rest to get to your goal based on some reasonable set of assumptions.

    Our kids are in 6th and 3rd grade and thus far the tax savings are around $50k. We lump summed in the low $30s each at or before birth and ultimately funded $70 per child.

    #180254 Reply
    Liked by portlandia
    Avatar G 
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    To be clear, you can contribute 15k per parent per child per year to stay within gift tax limits.

    If you want flexibility, taxable is the clear choice. Contribute enough to get the state deduction continuing and all else to brokerage.

    #180260 Reply
    portlandia portlandia 
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    Status: Physician
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    Joined: 07/07/2017

    We have decided against front loading as my state also offers a tax deduction that is quite signficant based on the high income tax rates here. There is also a 4 year carryforward of excess contributions to apply against future taxes. I prefer the certainty of maxing my state tax deduction through yearly contributions, knowing that I may be giving up some money in tax free growth depending on portfolio growth assumptions. YMMV

     

    #180296 Reply
    Liked by docnews, dayman
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2155
    Joined: 05/01/2017

    We have decided against front loading as my state also offers a tax deduction that is quite signficant based on the high income tax rates here. There is also a 4 year carryforward of excess contributions to apply against future taxes. I prefer the certainty of maxing my state tax deduction through yearly contributions, knowing that I may be giving up some money in tax free growth depending on portfolio growth assumptions. YMMV

     

    Click to expand…

    Aren’t your first 2 sentences contradictory? Sorry if I’m not following, but it reads like you are saying you can frontload AND reap the tax benefits?

    My plan right now is to frontload. Interesting convo with the wife just to make sure we were on the same page (we are) that we don’t want our kids to live the student loan life. Current plan is to commit to getting them through as far as they want to go, obviously not including some kind of professional student situation.

    #180300 Reply
    Avatar dayman 
    Participant
    Status: Physician
    Posts: 63
    Joined: 12/09/2017

    Different state for me, but very similar situation to OP. We also have two young kids, we plan to cover in state undergrad tuition, and my state offers a generous tax credit on up to 5K of 529 contributions annually. Current plan is to contribute only that 5K each year, no front loading. Costs beyond that will be dealt with via cash flow or from taxable account depending on our work situation at that time.

    We probably will contribute less overall to the 529s than many physicians. I am willing to accept the possibility of underfunding my 529, in return for the the flexibility of a taxable account and ensuring I get that annual tax credit.

    #180307 Reply
    portlandia portlandia 
    Participant
    Status: Physician
    Posts: 381
    Joined: 07/07/2017

    We have decided against front loading as my state also offers a tax deduction that is quite signficant based on the high income tax rates here. There is also a 4 year carryforward of excess contributions to apply against future taxes. I prefer the certainty of maxing my state tax deduction through yearly contributions, knowing that I may be giving up some money in tax free growth depending on portfolio growth assumptions. YMMV

     

    Click to expand…

    Aren’t your first 2 sentences contradictory? Sorry if I’m not following, but it reads like you are saying you can frontload AND reap the tax benefits?

    My plan right now is to frontload. Interesting convo with the wife just to make sure we were on the same page (we are) that we don’t want our kids to live the student loan life. Current plan is to commit to getting them through as far as they want to go, obviously not including some kind of professional student situation.

    Click to expand…

    Sorry for confusion. In my state you can front load a 529, but the tax benefits of doing so would end at year 4 or sooner depending on the size of the contribution. For this reason, we plan on spreading out our entire financial commitment across the years until our last child is a senior in college. In that last year we will contribute enough to extend the tax benefit an additional 4 years. That way we get a tax break every year we contribute, plus an additional 4 years after stopping contributions.

    #180326 Reply
    Liked by MPMD
    Avatar FIREshrink 
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    Status: Physician
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    Joined: 01/11/2017
    Splash Refinancing Bonus

    Let’s quantify the cost of the flexibility of a taxable account.

    Lump sum $75k at birth and let it compound at 10% for 20 years, and you end up with $505,000. In a taxable account that $420,000 is taxable at 15-23.8%… call it 20%. That’s an $85,000 tax bill. It could be somewhat less and it doesn’t include the state tax benefit. But that wish for flexibility comes at a steep price.

    This is how we ended up doing lump sum lite. We decided the lack of flexibility was worth the massive savings and anyway, we are comfortable overfunding because we are comfortable with the excess being directed to any future grandchildren, nieces or nephews, or our retired part time student selves.

    #180335 Reply
    Molar Mechanic Molar Mechanic 
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    Status: Dentist, Small Business Owner
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    Joined: 10/29/2017

    Take away the tax advantage and I’d front load it if I could (and wish I had when I could have).

    With the tax advantage considered?  I’d hit that 4k annually and be done.  Jan 2 is now Roth IRA + 529 day.

     

    Mine are 6th and 9th grade.  I bulk funded for 2019.  Adios $36,000.  I’ll look forward to seeing you in a few years.  I will probably stop contributing to the 529 after 10th grade.  I’m not afraid of the 529 lingering for grandkids, but I’m not targeting that either.

     

    Rule at our house is that if they can earn a spot at a “prestige” school, we’ll consider it depending on major and life ambitions.  Otherwise, enjoy the best state school that offers in state tuition.  Sorry NYU Art History program, you’ll get nothing from me.

    #180337 Reply
    Avatar dayman 
    Participant
    Status: Physician
    Posts: 63
    Joined: 12/09/2017

    Let’s quantify the cost of the flexibility of a taxable account.

    Lump sum $75k at birth and let it compound at 10% for 20 years, and you end up with $505,000. In a taxable account that $420,000 is taxable at 15-23.8%… call it 20%. That’s an $85,000 tax bill. It could be somewhat less and it doesn’t include the state tax benefit. But that wish for flexibility comes at a steep price.

    This is how we ended up doing lump sum lite. We decided the lack of flexibility was worth the massive savings and anyway, we are comfortable overfunding because we are comfortable with the excess being directed to any future grandchildren, nieces or nephews, or our retired part time student selves.

    Click to expand…

    In my state you get a 1K tax credit annually on 5K of contributions. I’ll use your assumptions of 10% growth and 20 year period.

    Scenario 1: 5K annual contribution for 20 years = 315K. 1K tax credit annually invested for 20 years = 63K tax savings.

    Scenario 2: To reach same final value of 315K after 20 years, could lump sum 47K at birth. Would avoid paying long term capital gains (likely 15%) on that 268K of growth = 40K tax savings.

    Your math may vary based on state tax credit or deductions available to you.

    #180343 Reply

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