Menu
This forum is no longer active. Please use the new forum at https://www.whitecoatinvestor.com/forum/

Is overfunding a 529 plan enabling?

Home Personal Finance and Budgeting Is overfunding a 529 plan enabling?

  • Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 2222
    Joined: 02/11/2019

    You can never have too much money in taxable but if I had money coming out my ears I would direct some more to 529.

    “Never let your sense of morals prevent you from doing what is right.”

    #238874 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 730
    Joined: 06/18/2018

    @mollarroller

    Especially if your state offers a tax break, I think it makes sense.

    #238879 Reply
    aelliscpacfa aelliscpacfa 
    Participant
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 9
    Joined: 08/13/2019

    I have read a lot of great ideas on this post.  This 529 question has been on my mind.  I worry about enabling my children, and I also worry about over-funding their 529 accounts.  I don’t have any great solutions or answers to the enabling question.

    I would like to think that my children won’t go to more expensive colleges simply because we have enough money set aside.  I really don’t know.  Our oldest is only 14.

    I tend to think over-funding is okay because the money could be used for grandchildren one day if my children don’t use it.  We are big savers and will likely leave an inheritance to our children.  I think it is neat to consider some of that inheritance might be inside their 529 accounts right now.  That money could grow tax-free for a very long time.

    I guess I am “gambling” that is how it works out.  Putting money into a taxable account now is not a horrible idea.  I just like the idea of the money potentially growing tax free for 30 or 40 years or more.

     

    Andrew B. Ellis, CPA, CFA, CFP

    #238884 Reply
    Avatar mapplebum 
    Participant
    Status: Spouse
    Posts: 330
    Joined: 04/17/2018

    ZZZ,

    well, that’s kind of what I’m asking about.  I’ve exhausted all the tax advantaged options.  I put in $30-40K into a taxable account nearly every month.

    I’ve looked into Whole Life/UL/VUL and came away unimpressed.

    Does it make sense to divert some of those funds into 529 for exactly the reasons you’re talking about (especially since the penalties for unqualified withdrawals are not very severe)?

    Click to expand…

    If you’re putting that much into a taxable each month I sincerely don’t understand why you wouldn’t pay for your daughter’s graduate school. I mean, is graduate school excessive? Are you open to her finishing college and say, cutting hair for a living? Managing the local grocery store? Not to say you should pony up for more private school if a public one is just as good. If I were you I would play hardball. Tell her she needs to go after funding: full ride + stipend. If she gets it, fantastic, that will give her a leg up applying for jobs. Any kind of experience will. Which leads me to my next suggestion. Does she have a job? Internship? There’s nothing more pathetic than an empty section under “work experience.” If she’s not doing any of those things but is publishing and heavily involved in research, she should get a pass. Otherwise, she needs at least some kind of job. Insisting she gain real experience in her field as a student will help her in the future, even if she responds badly to that now. If she goes after funding and falls short I would average out the cost of a public, in state program and offer that.

    This is never suggested on this forum but here I go. Even without knowing specifics, adult children have a sense of their parent’s financial health. If you’re refusing to pay for her education on the principle that she needs to have “skin in the game” don’t be surprised if it engenders resentment. If paying for another degree is a hardship for you, she should understand and hopefully tell you she doesn’t want your help. Everyone knows the current cost of education is astronomical compared to what previous generations paid. This is not the fault of Millennials or Generation Z. And yet for many students the choice is borrow for an education or bag groceries for the rest of their life. If it’s not a financial hardship, if your children are responsible, and not dealing with chronic issues like gambling or an opioid addiction, I just simply don’t understand why you would willingly place the burden on them.

    Lastly, this suggestion does not seem to have gained traction but I do want to respond to it. The only thing worse than a wealthy parent insisting their child take out education loans is when the wealthy parent becomes the bank. Trust me, don’t go there. If it’s cultural, that’s a different story, but if it’s not, from personal experience I would say it’s impossible to avoid resentment / damaged relationships on one side or the other if not both.

    #238898 Reply
    Avatar Kamban 
    Participant
    Status: Physician
    Posts: 2584
    Joined: 08/01/2016
    Lastly, this suggestion does not seem to have gained traction but I do want to respond to it. The only thing worse than a wealthy parent insisting their child take out education loans is when the wealthy parent becomes the bank. Trust me, don’t go there. If it’s cultural, that’s a different story, but if it’s not, from personal experience I would say it’s impossible to avoid resentment / damaged relationships on one side or the other if not both.

    Click to expand…

    I am not much into “skin in the game” though I see the point of view of others.

    As to wealthy parents and money for their child’s education

    -If the parent did not get any financial help from his/her parents but pulled himself by his bootstraps and got an education and became well off, it is up to him on whether he should let his children do the same or avoid that by providing financial help for education so that they can have a early leg up.

    -If the parent had his education supported fully or to a significant extent by his parents and thus accumulated wealth by not having any loans to repay, it is morally the right thing that he should also do the same to his children. In that scenario he cannot hide behind the skirt of skin in the game and give nada. But payments can come with some caveats to make sure that the education is useful and reasonable in cost.

     

    #238975 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1905
    Joined: 01/08/2016
    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.

    Click to expand…
    are we really doing her a service?

    Click to expand…
    Does overfunding 529s make sense?  Or do the funds end up being “wasted”?

    Click to expand…

    you actually asked several questions in the very first post. and many folks still don’t know what you were getting at….

    listen, if you can afford to put 30-40k/mo into taxable, I would just superfund each kid again before the end of the calendar year.  hopefully you will have enough left over to let that simmer along and transfer if you have the joy of grandbabies.  I mean, if your net worth is growing by 6-7 figures per year, I would personally be solidly in the category of your kids having no debt.

    again, my bias is to overfund.

    #239020 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4637
    Joined: 05/13/2011
    Splash Refinancing Bonus

    I just ran the numbers again for investing for retirement in a 529. I assure you it still doesn’t make sense. If you overfund a 529, plan to change the beneficiary to the grandkids.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #239161 Reply
    Avatar molar roller 
    Participant
    Status: Dentist
    Posts: 87
    Joined: 05/31/2018

    I just ran the numbers again for investing for retirement in a 529. I assure you it still doesn’t make sense. If you overfund a 529, plan to change the beneficiary to the grandkids.

    Click to expand…

    would you mind sharing your math?

    #239242 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4637
    Joined: 05/13/2011

    I just ran the numbers again for investing for retirement in a 529. I assure you it still doesn’t make sense. If you overfund a 529, plan to change the beneficiary to the grandkids.

    Click to expand…

    would you mind sharing your math?

    Click to expand…

    Yea, when the blog post I wrote for it runs. You think I run numbers for fun without any ulterior motive?

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #239244 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1905
    Joined: 01/08/2016

    I just ran the numbers again for investing for retirement in a 529. I assure you it still doesn’t make sense. If you overfund a 529, plan to change the beneficiary to the grandkids.

    Click to expand…

    would you mind sharing your math?

    Click to expand…

    Yea, when the blog post I wrote for it runs. You think I run numbers for fun without any ulterior motive?

    Click to expand…

    cheeky.

    since you’re always so far ahead with your writing, what are the odds that your blog post comes out before the 529 turns into a 629? 😉

    #239250 Reply
    Liked by Lordosis
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4637
    Joined: 05/13/2011

    I just ran the numbers again for investing for retirement in a 529. I assure you it still doesn’t make sense. If you overfund a 529, plan to change the beneficiary to the grandkids.

    Click to expand…

    would you mind sharing your math?

    Click to expand…

    Yea, when the blog post I wrote for it runs. You think I run numbers for fun without any ulterior motive?

    Click to expand…

    cheeky.

    since you’re always so far ahead with your writing, what are the odds that your blog post comes out before the 529 turns into a 629? 😉

    Click to expand…

    Or a 329 the way this week is going. Seriously though, expect it in the 4th quarter. I think I’m writing for December right now.

    It’s not that hard to run the numbers though. If you do it right, you won’t invest for retirement in a 529.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #239284 Reply
    SLC OB SLC OB 
    Participant
    Status: Physician
    Posts: 616
    Joined: 06/23/2018
    kids have legitimately earned income in excess of the the amount you are putting in their Roth IRAS…

    Click to expand…

    Why in excess? Roth contribution should be just be equal to or less than their earned income, right?

    #239325 Reply
    Avatar molar roller 
    Participant
    Status: Dentist
    Posts: 87
    Joined: 05/31/2018
    kids have legitimately earned income in excess of the the amount you are putting in their Roth IRAS… 

    Click to expand…

    Why in excess? Roth contribution should be just be equal to or less than their earned income, right?

    Click to expand…

    Not since last year.  With the new tax bill, up to $11K is not taxable, but Roth limits are still the same.

    #239468 Reply
    Avatar FiPhysician 
    Participant
    Status: Physician, Financial Advisor
    Posts: 6
    Joined: 10/04/2018

    WCI,

     

    Just saw this. Posted a blog this AM about the 529 retirement plan for FIRE. I’d bet about 1% of FIRE and 0% of traditional retirees would want to overfund 529 for retirement (unless they knew they were going to Europe for 6m to take classes!).

     

    I read your last update about this in 2014. I’ll be interested to read your new post. Especially interested to see if you changed from such a tax-efficient investment (is it really fair to say 100% VTI or S&P500 Index ETF?) and didn’t consider more creative ways to get the money out tax- and penalty-free.

    #239535 Reply
    Liked by molar roller
    Avatar Panscan 
    Participant
    Status: Resident
    Posts: 1152
    Joined: 03/18/2017

    Lol so if your kid doesn’t go to grad school they’re only option is bagging groceries? Interesting.

    Also I’m not sure why someone’s parents paying for education means it’s morally right for them to do the same for their kids. That makes no sense to me. Just because ones parents did something doesn’t mean you should or should not. Very illogical train of thought.

    #239536 Reply

Reply To: Is overfunding a 529 plan enabling?

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear