Hello.

My wife and I are going to have our first baby later this year. From what I know about 529 plans, it seems like starting one would be very worthwhile. The only thing that gives me any hesitation toward investing money in a 529 plan is that I am not sure what higher education will look like in 18 years. For example, with the rate of change in technology, it is not hard for me to imagine AI or computer modules taking the place of traditional in-classroom lectures. If so, I would think the cost of education could go down significantly. Or maybe higher education won't even be worthwhile at that point.

Although, I suppose if significant changes were to take place over that timeframe rendering 529 funds less effective, the rules surrounding 529s would likely be modified to give those who have been contributing a way to get funds out without penalty (such as the recent rule change that allows 529s to be rolled over to Roth IRAs), so I might just be overthinking all of this.

These thoughts are all kind of speculative, and I will probably go ahead and move forward with funding the 529. But just interested in hearing if anyone had similar thoughts or an opinion one way or the other on this.

As of now, we're planning on funding each of ours up to 75k and reevaluating when they get to high school. I have similar concerns and am trying not to overfund.

Have you looked into UTMA/UGMA accounts?

Apache said:

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I think the biggest concern with 529's is just not to overfund. Once it starts reaching a hefty amount, until you know for certain it will be used fully you might start shifting those contributions to other investment vehicles.

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I've heard there are plans to make extra 529 $ convertible into Roth IRA or similar to address the problem of overfunding.

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I'm pretty sure thats already a done deal. There is a limit on how much can be converted.

From Google AI


Yes, unused 529 funds can be rolled over to a Roth IRA for the 529 beneficiary without incurring taxes or penalties, but only under specific conditions. This rollover is limited to $35,000 per beneficiary, and the 529 account must have been open for at least 15 years.
Here's a more detailed look at the process:
The SECURE 2.0 Act:
This legislation allows for the rollover of unused 529 funds to a Roth IRA for the 529 beneficiary.
Conditions for Rollover:
The 529 account must have been open for at least 15 years.
The rollover must be made to the beneficiary's Roth IRA.
The rollover is limited to $35,000 per beneficiary.
Contributions and earnings from the last five years in the 529 are generally not eligible for rollover.
The rollover is subject to annual Roth IRA contribution limits.

I think I have overcontributed, but I am curious to hear the board's thoughts. I currently have a 5-year-old with about $38K in her 529, and I contribute $300/month. One main reason why I don't think I have overcontributed is that we live in Houston and are zoned to an absolutely awful high school. There is a pretty good chance that we will have to look into a private school for at least high school.

My goal is to completely pay for my daughter's education and not have her take out a dime in student loans. My parents paid for my education with the Texas Tomorrow Fund, and I know just how blessed I am, and I want my daughter to have the same advantage.

Thoughts?

jamey said:

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Apache said:

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I think the biggest concern with 529's is just not to overfund. Once it starts reaching a hefty amount, until you know for certain it will be used fully you might start shifting those contributions to other investment vehicles.

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I've heard there are plans to make extra 529 $ convertible into Roth IRA or similar to address the problem of overfunding.

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I'm pretty sure thats already a done deal. There is a limit on how much can be converted.

From Google AI


Yes, unused 529 funds can be rolled over to a Roth IRA for the 529 beneficiary without incurring taxes or penalties, but only under specific conditions. This rollover is limited to $35,000 per beneficiary, and the 529 account must have been open for at least 15 years.
Here's a more detailed look at the process:
The SECURE 2.0 Act:
This legislation allows for the rollover of unused 529 funds to a Roth IRA for the 529 beneficiary.
Conditions for Rollover:
The 529 account must have been open for at least 15 years.
The rollover must be made to the beneficiary's Roth IRA.
The rollover is limited to $35,000 per beneficiary.
Contributions and earnings from the last five years in the 529 are generally not eligible for rollover.
The rollover is subject to annual Roth IRA contribution limits.

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Yeah, but I want that money back if my kid doesn't need it for college.

Not an expert, but 529 Plans make a great tool for inheritance planning. From what I understand, in most cases they roll forward to the stated beneficiary and keep all the tax benefits (if used for future education). Since you can usually change the beneficiary among family and contribute large amounts, it's a great way to gift while reducing your estate.

So, you can contribute pretty freely when they are young and just think about it as a long term gift.

Per Brave AI search:

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529 Plan Inheritance

529 plans can be used as an effective tool for estate and inheritance planning. Contributions to a 529 plan can be made up to $90,000 in a single year (or $180,000 for married couples) by denoting the five-year gift on the federal tax return, allowing for the fast-tracking of wealth transfer out of the estate while leveraging the account's tax-free growth potential.25 This strategy helps reduce the value of the donor's estate, potentially lowering estate taxes. However, reclaimed funds from a 529 plan are subject to federal tax rates and an additional 10% penalty on the earnings portion if they are not used for the designated beneficiary's eligible education expenses.

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I thought about this a couple years ago and like everything I do, I didn't follow the Man's plan.

I just don't see how today's model for education will be around in 15 years and I absolutely 100% hate the lack of flexibility a 529 requires. Instead of a 529 I put $250k into a custodial account for my kid. That number was based on the cost of a college education today. I figure the $250k will grow to match the increase in college cost and if he doesn't go to college, then I have 100% flexibility to give him the money as I see fit.

double aught said:

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jamey said:

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Apache said:

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Quote:

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I think the biggest concern with 529's is just not to overfund. Once it starts reaching a hefty amount, until you know for certain it will be used fully you might start shifting those contributions to other investment vehicles.

---

I've heard there are plans to make extra 529 $ convertible into Roth IRA or similar to address the problem of overfunding.

---

I'm pretty sure thats already a done deal. There is a limit on how much can be converted.

From Google AI


Yes, unused 529 funds can be rolled over to a Roth IRA for the 529 beneficiary without incurring taxes or penalties, but only under specific conditions. This rollover is limited to $35,000 per beneficiary, and the 529 account must have been open for at least 15 years.
Here's a more detailed look at the process:
The SECURE 2.0 Act:
This legislation allows for the rollover of unused 529 funds to a Roth IRA for the 529 beneficiary.
Conditions for Rollover:
The 529 account must have been open for at least 15 years.
The rollover must be made to the beneficiary's Roth IRA.
The rollover is limited to $35,000 per beneficiary.
Contributions and earnings from the last five years in the 529 are generally not eligible for rollover.
The rollover is subject to annual Roth IRA contribution limits.

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Yeah, but I want that money back if my kid doesn't need it for college.

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Pretty sure you can name yourself beneficiary, and then after 5 years begin rolling it into your IRA.

Now we're talking. I assumed beneficiary meant your kid.

This is part of my thinking. My son is finishing his first year of private high school, and my daughter will begin in two years. If I think I have too much in the 529's, I'll use it to pay for junior/senior years. There is a $10,000 per year limit for high schools.

If there is more left over, roll to their (our our) Roths.

It's hard to see how there could be anything substantial enough to worry about left in there unless you just go crazy. They've added a lot of flexibility over the years.

Thanks for everyone's input on this! Sounds like consensus is that 529 might still be worthwhile. I agree and will probably move forward with it later this year.

If you have the ability to do it and want to then I'd try to fully fund it as early as possible.

Back into the math so maybe you want to say let's plan to have 100k in each kids account at age 18 then probably try to get 25k in there when they're born for example. That's assuming just an 8% average return.

I personally am of the opinion that college looks a lot different for kids in 10-20 years. I like the idea of funding more after tax funds and just pay cap gains rates if you end up using it. But I intend to also offer my kids the opportunity to start a business that I will give them capital to start it if they'd rather use money for that. That's where the after tax advantage comes into play…flexibility.

But if you value tax free growth…and I love tax free stuff…then try to fund the 529 as early as possible to max out the growth potential and tax savings.

We have similar concerns as we're heavily invested in our 3 children's 529....Our 10-year-old wants to be a pediatrician (yes things can and probably will change) and wants to attend Duke's medical school...Dream big, kid! Will a job like a pediatrician even be around with AI, virtual appointments, etc, etc. Hard to start saving to help for that education with healthcare jobs so unknown.

I have no idea what college will be like, what my kids will want to do, if they'll get full ride scholarships, or if they'll skip college and go into a trade or start their own businesses. This makes it unwise to me to invest in a 529. We are simply investing through our own brokerage account regularly so we can do whatever we want with that money when the time comes.

I agree with what many of you are saying about uncertainty of what things will look like in 10-15 years.

But you're not wagering the entirety of the contribution, just 10% of the earnings.

So lets say over 15 years you are contributing $500 a month towards your kid. Assuming 7% rate of return, you're looking at:

Brokerage:
$142,590 after taxes that can be used on anything

529:
$151,870 if used for education
$136,683 after penalty tax if not used for education


So the upside of the 529 if education funding is still needed in 15 years is +$9280, and the downside if not used on education would be -$5907. So converted to probabilities, do you think there's a greater than 61% chance that funding for education won't be necessary (or that the plans aren't adapted if things are trending a direction that isn't favorable to the general public)?

Yes but not the same taxes. One is capital gains and one is ordinary income tax plus penalty.

Holistic Planning said:

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Yes but not the same taxes. One is capital gains and one is ordinary income tax plus penalty.

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Ouch! Besides whatever you roll out into an IRA ($35,000 max as of now), you pay ordinary income PLUS a 10% penalty on the growth???I have a way overfunded 529 that I'm going to have to deal with in the future. That's an ugly penalty.

I have two fully funded Texas Tuition Promise Funds (400 units in each at the highest unit value).

Any reason I should do anything else?

drwong said:

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the most cool guy said:

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I have two fully funded Texas Tuition Promise Funds (400 units in each at the highest unit value).

Any reason I should do anything else?

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Texas Tuition Promise Fund only covers tuition and fees and not living expenses. We took out 400 units for both of our kids and then set up 529s for everything else. I was sweating it when the oldest was looking at out of state schools but luckily he's going to A&M.

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Who did you open the 529s through? Schwab says it has one but looks like it has to be opened and managed separate from all the other accounts I manage in my Schwab app for some reason.

LeftyAg89 said:

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I think most on here have been recommending Utah's so I went with that 5 years ago: my529.org

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We exclusively use this for our new 529 plans. Great interface, low costs also allows for a debit card to make it easier to use for things like textbooks.

Highly rated by third party reviewers as well.

One other nice upside to 529s is real estate. If your kids are in school, they'll need boarding. You can use that fund to pay a good % of the mortgage while your kid is in school. That's really what I'm looking forward to.

2wealfth Man said:

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If you are overfunded on a 529, you can roll over into a Roth in the future. $35K limit per beneficiary (today), these Roth rollover contributions are subject to normal IRA contribution rules (earned income, etc.). Start with the 529 knowing that you don't want to overfund too much.

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Yep

How would the IRS know what all you use the 529 or ESA account money for? Do you save all the receipts and report it on your tax return?

Like if you bought a laptop on your credit card. How do you report it? What if you bought a boat instead?