Should I continue investing in my 2 daughter's 529s?
Numbers:
7 year old, 529 Balance: $60k, Balance @ 18 assuming $3000 annual ($250 monthly) contribution and 8% interest: $194k, Balance @ 18 stopping contribution now: $140k
4 year old, 529 Balance: $23k, Balance @ 18 assuming $3000 annual ($250 monthly) contribution and 8% interest: $146k, Balance @ 18 stopping contribution now: $67,500
Any thoughts on what you would do, why you would do it, or experiences from the past would be appreciated?
Continue investing in my kids 529s?
byu/Traditional_Scar_583 inpersonalfinance
Posted by Traditional_Scar_583
17 Comments
As they get closer to 18 you’ll want to shift to safer allocations that won’t earn 8% (unless you’re fine with losing like 20% in a year or whatever)
1. The growth will not always be 8% as you will be more conservative as it gets closer to age 18
2. You can transfer some of the excess to an IRA for them
3. Any left over in each account, you can save and just designate a new beneficiary. Which means you can basically think of it as starting a 529 for their kid(s).
This is all without stating the obvious that they can easily use up that amount on higher education and it could still be a worthy investment. It just depends on how much you are presonally willing to foot the bill.
Theres no way to know the future, so all any of us can do is guess what education expenses might be. College could get insanely more expense, or upper education could become free…. we have no idea that far ahead.
They could decide not to go, or they could go to a very expensive school. etc etc etc
So just come up with a plan you think works for you.
You could keep investing, and just do smaller amounts as time goes on. Or cut it off soon.
Does your state offer the tax deduction? Thats a good limit to hit each year.
Otherwise theres the Roth IRA rollover you can do if you dont need it all. You can change the beneficiary to someone else who could use it. Or you just pay the tax on the gains and take it out as if it was a Traditional IRA.
Its not like you lose the money, you just don’t get the perks.
What are you invested in there now?
As they get closer to 18, you move the investments to more secure funds, like bonds or money market. So you won’t earn that much return the whole time.
It’s hard to predict how much they will need to cover college. In state flagships run about $120-160K for 4 years now. That’s about as cheap as it gets if you think you won’t qualify for financial aid. Top tier private schools are approaching $400k.
I would focus on your own retirement first, roth ira and 401k
Even if you end up massively overcontributing, and end up being unable to get all the money out in alternate ways, you can just withdraw whatever money is left and take the penalty. The penalty is only on the earnings, so it’s never going to result in a net loss, though you’d have been better off just investing in a taxable account if that were to happen.
I’d continue investing (and did). With college education, you’re really exposed to “sequence of returns risk.” While 8% is a reasonable long term return, you don’t know the ups and downs that it will take to get there. If you suffer a big (20-30%) loss their junior or senior year of HS, you’re screwed. Unlike retirement, “postponing” their college due to market returns would be a significant traumatic event for all. Keep investing and then reevaluate once the older one starts school and see how much of their 529 they will consume and then you can decide to stop or continue for the younger.
Teach them to weld? College is toast. Vocational education only?
College goes up about 7% a year.
Calculate private and public with increasing rates. Remember it will also go up 7% while their enrolled
Do you get any tax advantages in your state annually for the contributions?
Personally, if you’re retirement is in order, then I’d keep contributing. Even if you get 8% each year $200k may not be a huge pot of money for college in 11 years. So it would be better to have too much than not enough.
They can also each put $35k into an IRA assuming that isn’t increased by then. What the first plans for school will also give you some idea of what costs to expect for the next 4 years, and help you determine what to do with the other child’s at that point.
Worst case I guess neither decides to go to school at all. So you dump money from each into an IRA and can pull the rest out and be taxed on the gains if there are absolutely no education expenses or anyone else you want to change the beneficiary to. At that point it essentially became a taxable brokerage account instead, which isn’t a bad thing to invest in anyhow.
I had one child graduate this year. Out of state tuition for an Indiana state school. ~$175,000 with books, computers, frat fees, apartment rentals, flights home, etc.
2nd child is a sophomore, and also out of state (California). We will end up paying about $260-$275,000 if he gets out in 4 years.
This is in 2025 dollars.
My advice- save MORE if you can afford to.
Are you maxing contributions to a Roth IRA if you and/or spouse qualify? Or backdoor Roth option? I would generally prioritize these contributions above additional 529 contributions because you have all the same tax free growth benefits with none of the withdrawal restrictions. You can pull your principal out of a Roth IRA for any purpose, including education expenses. If you end up with 70,000 in Roth IRA accounts and it is half growth then you could use 35,000 of it to pay for additional education expenses if the 529s run out…
Just don’t over index on historical inflation of college attendance. The moment federal government (thanks to OBBB) put a limit on loans, tuition fee growth stopped right in the tracks. The growth was almost entirely manufactured by loans. Once the spigot is turned off, you wouldn’t see much growth if at all. So don’t assume an absurdly high growth in cost of attendance going forward
I had a similar question and kept investing. My goal is to put 2 kids through 4 years of in state public school and have enough remaining afterwards to form a permanent education trust for future grand children.
Rolling funds to a kids Roth IRA is also a high priority.
Yes, keep investing. It can be used for so much, you’ll burn it all up and then some, easily. You can’t beat tax free growth, and most states give you a tax deduction for a portion. Don’t stop now.
I was in a similar situation. I had a 529 setup for my 4 kids and funded them for several years before I took all the money out and invested it in a family trust account, here is why. I have no idea where my kids are going to go to school or if they will even go. If they do decide to go, I obviously want to help them as much as possible, but they also need to learn to be financially responsible as well. A 529 is pretty restrictive if they don’t go to school so I moved all of ours out into an account that I have more control over the investments, and can take money out to use it for school, house, wedding, car etc.
I have two kids the same ages and just went through this exact exercise earlier this week. Our current balances are ~$70K for the older and ~$40K for the younger, and we’re contributing $500/mon to each.
Our current plan is to keep contributing until each child turns 9yrs old, at which point we expect balances to be in the $90k–$100k range, then stop contributions and let the accounts compound. That amount is roughly the current cost of 4yrs of in-state public tuition, and with 9 more years of growth it should reasonably cover full costs without over-funding (hopefully ending up around ~$150K). I also like the symmetry of contributing for 9yrs and letting it compound for 9yrs.
We’re choosing that cutoff mainly to reduce the risk of over-funding while still being very likely to fully cover undergrad. If costs end up lower, excess can be used for grad school or up to $35k rolled to a Roth later.
No perfect answer here, but for us this felt like a good balance between being full-funded and not overdoing it.