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How much, and how will you use the 529 money

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  • Avatar FIREshrink 
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    Status: Physician
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    Joined: 01/11/2017
    We invest enough to the point to where if we can’t use it for education, the 10% penalty should hopefully not hurt particularly much. 

    Click to expand…

    I should do the math on that — could the tax-free growth eventually allow you to reach a break-even point on the 10% penalty?

    I’d have to make some baseline assumptions and I’m guessing it would take many years, but avoiding a ~ 0.5% tax drag to later pay a 10% penalty could actually be a smart play over decades.

    Click to expand…

    I’ve done this math and it almost never works because you are also converting capital gains to ordinary income. maybe if you drop to an extremely low tax bracket, but I doubt most physicians ever will, by choice anyway.

     

    For the OP, we have about $350k saved for our kids seven and ten and don’t plan to add more. We front loaded heavily and had some good investment returns. We will cash flow any shortfall. any excess will be used for nieces, nephews, grandkids, or classes during our own retirement.

    #38021 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1872
    Joined: 01/08/2016

    My goal is $300k.  Like others, I have front-loaded.  I am now putting in $3k/yr.  Maybe another bolus the year I finish my mortgage, unless I FIRE.  Ideally I will continue to get capital appreciation, but it is (for now) in a Vanguard Aggressive Age-Based, so it will rapidly get more conservative with their new structure.

    I hope to put my single child through college.  Any extra for grandkids.  Or for myself:  https://www.whitecoatinvestor.com/forums/topic/creative-529-uses/

    #38031 Reply
    Wudoc111 Wudoc111 
    Participant
    Status: Physician
    Posts: 25
    Joined: 01/29/2017

    Education savings (evolved into various 529s from other products):

    1st child (HS senior) $231K and narrowing down where he will go but as posted above $52,000 per year is about right.

    2nd child (HS freshman) $90K and she will take unused amount from her brother

    Will chip in more if needed but hope they learn some value of money (LOL, it took me until after I met my wife).

    #38053 Reply
    ENT Doc ENT Doc 
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    Status: Physician
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    Joined: 01/14/2017

    My children will not be starting college for another 16-18 years.  Long horizon and want to get as much in as possible now.  They will also not get any financial aid I’m guessing.  We are currently contributing the max gift amount per month for the 1st child and will start the same when the other comes along in a few months.  Aggressive investments in the lowest cost plan available.  Pay any remainder in cash and have them work or take some loans on if they decide to go to some high cost/high quality school over something of lower cost and hopefully equal value.  Agreed with other posters about teaching them the value of money and the burden of debt.  Of course I hope that a decade of talking personal finance and seeking value will have sunk in at that point.  I plan on contributing until I reach the contribution limit and may even switch the money to another state to get a higher contribution limit.  Don’t plan on using all of the money for college – grad school is potentially worse.  My alma matter has been increasing tuition by 4.8% annually for the last 20 years.  And that’s just undergrad.  Additional funds can be gifted incrementally to the next generation without having to use cash flow.  Of course this all assumes nothing disrupts the hell out of a system that is ripe for disruption.

    #38055 Reply
    Avatar gb 
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    Status: Physician
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    Joined: 02/15/2017

    3 kids (5, 3,1) – In the process of front loading $28k/year each. Not sure how long I will have to do that for. For a 1 year old 4 years of college is going to be $$$.

    #38056 Reply
    BetweenTwoElephants BetweenTwoElephants 
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    Status: Physician
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    Joined: 02/17/2017

    For my five kids I hope to have about 75k for the first child and 150k for the last around 9 years later. I intentionally hope to be under shooting what they will need as I want them to have some skin in the game when the time comes to get higher education, but I don’t mean debt. That won’t happen. I worked throughout college and think I greatly benefited from it. I can always delay funding my taxable account when the time comes to pay for college if there is a shortfall. We don’t get a state tax deduction so no help there.

    Intentional Living Impactful Life

    #38089 Reply
    Liked by Atlas Axis
    Avatar westcoaster 
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    Status: Physician
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    Joined: 02/17/2016

    Great topic. We have a 2 yo and hopefully another on the way some day soon. We’ve contributed 28k/yr for the 2 yo now since birth. I was planning on doing that until age 5 (140k) and then contributing 5k/yr until age 18 with a target of 250-300k for each.

    I’m hoping to cover undergrad and, like others, cash-flow the difference. Grad school we’ll see what happens but I would be OK with them taking some loans on that and having us help out as we can.

    #38096 Reply
    Avatar StarTrekDoc 
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    Status: Physician
    Posts: 2130
    Joined: 01/15/2017

    Front load as you can and then get the appreciation to cross the finish line.  Most of us should be able to fund, the key is not to overfund since most of us have other options to tax defer and why pay the penalty?

    We have 180K and she’s entering HS; so hopefully the 4 years will see it cross 200K without any further contributions (last funds entered about 4 years ago).    50K per year is a good number to balance between public/private.

    #38097 Reply
    Avatar canadianoutlaw 
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    Joined: 01/10/2016
    My alma matter has been increasing tuition by 4.8% annually for the last 20 years

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    😥

    I think nationally its about 6%? Agree the system is ripe for disruption… and that includes medical education.

     

    Great thread – Interesting how much variability there is here, clearly a personal topic. WCI does $3680/year for the tax break.

     

    We’ve got our first kid coming in the fall but are still in training. I like the idea of front loading when we become attendings.

     

    https://www.whitecoatinvestor.com/how-my-children-will-pay-for-their-college/

    #38105 Reply
    hatton1 hatton1 
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    Status: Physician
    Posts: 3123
    Joined: 01/11/2016

    note of caution.  My brothers kids rebelled. Both he and his wife are lawyers.  Two out of 3 kids refused to go to college.  Their grandmother prepaid their tuition.  The money was wasted and the grandmothers heart was broken.

    #38108 Reply
    Avatar Kamban 
    Participant
    Status: Physician
    Posts: 2573
    Joined: 08/01/2016

    Great responses.

     

    I feel that front loading to the max ( I did 5 years, then another 2) and starting at birth will give better returns due to compounding than higher amounts say at age 10. Even with the crash of 2008 my 120K has almost doubled to 210 K and my daughter has another 4 years to go before she starts college.

     

    Another thought I have been mulling about. I think the maximum number of topics started in WCI is about student loans, how to repay it, will it go away at death and how it is affecting the retirement savings. Would it not be nice to start life with minimal or no student debt? Most physician kids are unlikely to get financial aid scholarships. Most of them, especially those who post here will have kids who will do grad school or professional degrees.

    I have noticed that the undergrad good state schools cost only $25K per year in my state ( 12K tuition and $12K expenses). I suppose in most other states the amounts are similar. That comes to $100K for 4 years in today’s dollars, maybe less if they work in summer.  On the other hand the undergrad private colleges easily cost $50-60K per year, an expense of $200-240K over a 4 year period. I am not so sure that going to those will improve the chances of getting into a medical school or improving earning potentia,l so as to spend an additional $100-150K on it.

    How many of you want to send you kids to private undergrad schools rather than good in state public schools. I hope my child goes to a good public school and uses the bulk of her 529 savings for professional education. But would it be stupid to turn down a great private school like an Ivy league school which might increase the chances of getting into a medical or law school even though it will drain the 529 money. Or is it a myth that great private undergrad schools like Princeton makes getting into a medical school easier than a good public school like UF or UNC Chapel Hill.

    #38117 Reply
    Avatar Atlas Axis 
    Participant
    Status: Physician
    Posts: 17
    Joined: 02/16/2016

    I read this excellent blog post this morning thanks to PhysicianonFIRE’s Sunday Best:

    Guest Post: Become a 529 Wizard

    I am now considering seriously changing my earlier plan.

    Overloading a 529 is a real concern. Reading other’s plans on this thread is very helpful too!

    Again, my plan is to pay for public in-state undergraduate only:

    529: Add 10k/year for the first 3 years of life then for the next 15 years add ~2k in 529 (see: tax refund). This ends up with 30k in 529 front loaded then 30k added to 529 over the next 15 years for a total of 60k added to 529; perhaps with growth over time this might become 100k in the 529 when its time for college? (edit: actually according to Vanguard’s College Savings Planner https://vanguard.wealthmsi.com/csp.php with a 6% return this plan can expect to generate 142k)

    Taxable: For the 15 years after age three will earmark 3k/year in the taxable account for college. With this there would be about 45k in the taxable account for college. This contribution could easily be scaled up as needed as we get closer to needing the money (and find out what type of people my children turn out to be) but without any risk of incurring a penalty.

    Cash Flow: The rest.

     

    These decisions are all so personal. But I enjoy reading other perspectives. Thank you for sharing!

    #38858 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
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    Joined: 01/08/2016
    Splash Refinancing Bonus

    I read this excellent blog post this morning thanks to PhysicianonFIRE’s Sunday Best:

    http://www.ivigilante.com/become-a-529-wizard/

    I am now considering seriously changing my earlier plan.

    Overloading a 529 is a real concern. Reading other’s plans on this thread is very helpful too!

    Again, my plan is to pay for public in-state undergraduate only:

    529: Add 10k/year for the first 3 years of life then for the next 15 years add ~2k in 529 (see: tax refund). This ends up with 30k in 529 front loaded then 30k added to 529 over the next 15 years for a total of 60k added to 529; perhaps with growth over time this might become 100k in the 529 when its time for college?

    Taxable: For the 15 years after age three will earmark 3k/year in the taxable account for college. With this there would be about 45k in the taxable account for college. This contribution could easily be scaled up as needed as we get closer to needing the money (and find out what type of people my children turn out to be) but without any risk of incurring a penalty.

    Cash Flow: The rest.

     

    These decisions are all so personal. But I enjoy reading other perspectives. Thank you for sharing!

    Click to expand…

    That is a really interesting graph about consumer prices.  Does anyone have a succinct answer for why college prices/textbooks are increasing so much?  I mean, I have a sense for why healthcare prices are going up (after meeting last month the new VP RN of Random BS, and two (!) new C-suite bureaucrat MDs)….

    #38867 Reply
    Vagabond MD Vagabond MD 
    Participant
    Status: Physician
    Posts: 3486
    Joined: 01/21/2016

    I read this excellent blog post this morning thanks to PhysicianonFIRE’s Sunday Best:

    http://www.ivigilante.com/become-a-529-wizard/

    I am now considering seriously changing my earlier plan.

    Overloading a 529 is a real concern. Reading other’s plans on this thread is very helpful too!

    Again, my plan is to pay for public in-state undergraduate only:

    529: Add 10k/year for the first 3 years of life then for the next 15 years add ~2k in 529 (see: tax refund). This ends up with 30k in 529 front loaded then 30k added to 529 over the next 15 years for a total of 60k added to 529; perhaps with growth over time this might become 100k in the 529 when its time for college?

    Taxable: For the 15 years after age three will earmark 3k/year in the taxable account for college. With this there would be about 45k in the taxable account for college. This contribution could easily be scaled up as needed as we get closer to needing the money (and find out what type of people my children turn out to be) but without any risk of incurring a penalty.

    Cash Flow: The rest.

     

    These decisions are all so personal. But I enjoy reading other perspectives. Thank you for sharing!

    Click to expand…

    That is a really interesting graph about consumer prices.  Does anyone have a succinct answer for why college prices/textbooks are increasing so much?  I mean, I have a sense for why healthcare prices are going up (after meeting last month the new VP RN of Random BS, and two (!) new C-suite bureaucrat MDs)….

    Click to expand…

    I can help you with the college textbook answer:

    http://www.npr.org/sections/money/2014/10/03/353300404/episode-573-why-textbook-prices-keep-climbing

    #38870 Reply
    Avatar FIREshrink 
    Participant
    Status: Physician
    Posts: 1032
    Joined: 01/11/2017

    the author is understating the flexibility of a 529 and perhaps underestimating the potential tax savings for a high income investor.

    we can deploy unused 529 funds to

    – nieces and nephews

    – future grandchildren

    – graduate school

    – our own education – including in vacation locations – marine biology at University of Hawaii?

    – etc

    The LTCG tax rate for taxable investments for high income investors is 18.8-23.8% plus state. That is not insignificant. It causes both a tax drag and decreases the future value of taxable investments.

    The author’s analysis also underestimates (or does not address) the potential benefits of tax arbitrage, namely, deferring taxes on the earnings while in the peak earning years, then making any unqualified withdrawals in retirement when tax brackets may be quite lower.

    For all these reasons we are not afraid to oversave in 529s. We aren’t intentionally overdoing it, but since my alma mater, today, costs $265,000 for four years, it is not hard to imagine a cost of $400,000-$500,000 in the 8-15 years from now when we will need the funds. Saving $90,000 for 2 kids per the author’s recommendation is going to potentially result in paying far more taxes than necessary.

    #38875 Reply

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