OT: Soliciting College Savings Advice/Discussion

Submitted by Michigan Arrogance on

Asking for some advice from the crowd regarding a college savings strategy. I have some extra cash that is earmarked to college expenses for my kids and was hoping for some advice re: 529 plans VS Roth IRA. I am fairly knowledgeable re: 529 plans and Roth IRAs:

  • Roths have very limited contributions per year (5500/yr), but I doubt we'd really exceed that. 529s are effectively limitless re: contributions.
  • Roths have flexibility: Roths can be used toward retirement if we don't end up using it for college, but I seriously doubt we won't use it for college. 529s are penalized if not used for college.
  • Roth contributions are not tax deductible, 529 are in my state
  • Roth earnings are taxed if withdrawn before age 59.5 (we would be 50-52 when the kids finish college) even if used for college. 529s are not.
  • Roth doesn't count against you re: financial aid, but 529s are (how much? slightly AFAIK)
  • Roths withdrawn for education expenses are subsequently counted as income for the child one year later... so it's better to hold off on using a Roth until Sr year. 529s don't have this issue AFAIK.

I'm just wondering how to judge my situation specifically before I solicit advice from my advisior whom I anticipate will push their Roth product (of course). Short summary:

  • we have 2 kids about 10 years from college age. Total income less than 180k.
  • we have about 70k saved in various 401k-type thingss for retirement.
  • we are close to our maximum yearly 401k contributions (~10-12 out of 16k max or so per year) and have a modest pension in place at retirement.
  • we are appropriately insured, as are the kids re: life insurance.
  • No high interest (CC) debt.
  • the NYS 529 plan is universally considered among the top 5 529 plans available, given that it's a vanguard product and very low expense fees (0.16-0.17%)
  • I feel better diversifying our investments not only from our advisor's products, but also from the market. If a pre-paid option like the Mich. Ed. Trust were available, I'd prefer that. Just a bit gun shy about having so much retirement AND college funds linked to the market.

Thanks very much in advance.

 

mGrowOld

April 9th, 2015 at 10:22 PM ^

Sorry I can't help you (I'm a 529 guy myself for whatever that's worth) but one thing's for damn sure. 

You'll never, EVER see this thread on RCMB.

#themichigandifference

mGrowOld

April 9th, 2015 at 10:36 PM ^

Very.  I've got two I'm funding - one for my ne'er do well 22 year old who flunked out his Freshman year but after spending the past three years delivering pizza's by night and seeing how much pot he could smoke by day, is now finding out how socially limiting a stoner pizza deliver guy's income can be.  So he's going back to Community College and I'm "buying" his grades back (he takes out a loan and I pay back based on his grade-100% for an A, 75% for a B and nothing after that).

My 10 year old is freaking brilliant (he's adopted so I cant claim his genetic excellence) so I'm 99% sure he's going to go to school somewhere expensive.  Either way you can move the money between accounts too if you have more than one kid like we do so if one doesnt go you can push the money to the one that does.

Seriously - I'd go 529.  You're obviously educated so the odds are very high your children will see the value in an education and want to pursue one.

Or they'll deliver pizzas for a bit while they figure things out.

bgoblue02

April 10th, 2015 at 9:48 AM ^

1 - I like the buying grades back - definitely an interesting incentive! 

2 - I personally did the 529, but my horizon is a bit longer (17+ years).  I would say just keep in mind when picking investments we are likely going to have some sort of drop over the next 10 years (they tend to happen every decade or so) and you don't want to get caught where that drop is close to when your kids are in school

I liked that the 529 was state tax deductable, and I assume you are in NY based off of your original post and I think that adds a good amount of value, especially since it is one of the better 529 programs.  Which remember you have to use your states plan to get the state tax deduction

I decided to stay away from the IRA because it just lead to either higher fees or more investment options that I didn't want to have to deal with, the NYS 529 options are all pretty straight forward which helped quite a bit.  

Lastly - i wouldn't worry about your retirement and college funds being tied to the market.  In a long enough time horizon that should be more than a-ok.  Like i said the 10 years for 529 makes me nervous so I would say do something more conservative (higher bond allocation), but for your retiremetn I am going to guess you are 15-20 years away (since you have at least 12 until college is done) which should be more than enough time to have decent exposure to the market 

sorry - i haven't read all the way through yet so if this is a repeat, my bad 

 

jblaze

April 9th, 2015 at 10:25 PM ^

I put my money in a 529. It grows and can be used tax free for education and isn't even dependent on undergrad vs grad and I believe is transferable to your other kids.

thisisme08

April 9th, 2015 at 10:56 PM ^

It is.  Say one kid decides that college is not for them, then you can easily transfer those funds to the next in line with no penalty.  Of course if you wanted to simply "gift" those funds to that child they would have to pay the appropriate taxes for a non-qualified use of the funds.  

I started a 529 for my as yet-to-even-be-thought-of- future children in "my" name with the intent of transferring the balance once a physical child shows up.  Of course that investment is currently in an 18+ age bracket which is shitty but in doing the math it worked out to be the best available option for me (us).  

Uper73

April 9th, 2015 at 10:27 PM ^

529 vs Roth issues aside, you might well benefit by finding a certified financial planner who has no vested interest ( or commissions /fees) in any specific product vs an " advisor" who is repping " their" product.

sj

April 10th, 2015 at 12:16 PM ^

This is actually a really major problem. Financial advisors have no legal obligation, or cultural norm, to acknowledge their conflicts of interest. The entire field has a long history of giving advice that maximizes their profit even when they know it's not in their clients' interests.

http://www.nytimes.com/2015/03/02/your-money/financial-planners/questio…

bgoblue02

April 10th, 2015 at 3:45 PM ^

an entire profession.  they certainly hit the range, some are bad and have conflicts of interest but I would bet many or a lot have your best interest in mind.

It's easy to screen through, look for any firm whose does not also sell their own products; thats where the major conflicts of interest arrive.  

sj

April 10th, 2015 at 8:35 PM ^

But the profession has no legal obligation to report their conflicts of interest, no legal obligation to work in the best interests of their clients, and no certifying body to promise that they do. Their biggest profit margin is actually in recommending investments that have higher-than-necessary overhead that they profit from.

There is no way to tell who's good from who's bad, other than asking and hoping they're being honest.

I'm not saying all financial advisors are bad; I'm saying there's no way we can tell which are.

http://www.washingtonpost.com/news/get-there/wp/2015/02/23/raising-the-…

 

http://www.washingtonpost.com/news/get-there/wp/2015/02/23/raising-the-…

ESNY

April 9th, 2015 at 10:51 PM ^

If there is any chance you need it for college do a 529. Maximize the state tax deduction now (think NYS has a 10k max) and hope to grow it tax free and use it for education expenses. To the extent you don't use it for college, at a minimum you deferred the tax hit.



Also hire a financial advisor that can give better feedback than some random internet dude (albeit a very smart Michigan alumnus random Internet dude).

Go Blue in MN

April 10th, 2015 at 11:08 AM ^

the state tax deduction makes it a no-brainer.  529.

At some later stage as (a) the kids get closer to college, reducing the benefit of the tax-deferred growth and/or (b) the amount in the 529 gets large enough that you risk oversaving for college (unlikely!), the OP can reduce or eliminate the 529 contributions.

Wendyk5

April 9th, 2015 at 10:45 PM ^

We did the 529 and it grows every year. We've been fortunate that grandparents have contributed as well. I know both kids will go to college of some sort, so I feel like this was the best for us all the way around. We're in the John Hancock 529. I don't know if one's different from another; it was recommended by a financial planner who didn't get any commissions.

xtramelanin

April 9th, 2015 at 10:50 PM ^

especially b/c in your state you said there is tax deductible aspect to it.   for a regular 4 yr school in today's market there is no way you won't blow through the $.  your income is quite good, but after taxes and life, you aren't going to sink nearly enough money into them such that they will yield the $150-200K it will take to put your kids through school in the year 2025. 

we specifically targeted american funds for their low, low cost and outstanding performance - and that has shown itself true.   our oldest is still T-2 1/2 yrs from college and i certainly don't have enough for her 4 yrs, but we've got a good start for a couple of years, bite the bullet a couple of years, and roll onto the next child...and the next...and the next....etc

one other item, one that is relatively new to us:  we are strongly thinking of having some of the kids at least do a year or two at the local community college, either taking community college classes or taking the extension courses of some of the normal 4 yr state schools.   the cost is much more manageable and saves the big money for a couple of expensive years instead of 4, we are rather fond of the children and are in no hurry to have them leave, and candidly, think about what we all did our first couple years in school - do you want your kids doing that [shaking head with emphatic 'no'!]

bringthewood

April 10th, 2015 at 11:10 AM ^

So the community college or commuter college (aka U of M Dearborn for example) and good frugal alternatives, but there is something to be said for the college experience. I think many of my generation (kids in college now) tend to do too much for their kids and the experience of fending for yourself is a good life lesson. Handling money, paying rent, washing clothes, finding an apartment and figuring our how to feed yourself - among many others - are good things our kids learned.

I see the college as training wheels for life where mistakes seem to cost less.

GoBluePhil

April 9th, 2015 at 10:48 PM ^

I paid $19,000 into the program in 1994. My daughter was 2 years old. She is graduating next spring and I never had to pay an extra dime in tuition. Would have cost me roughly $62,000. Quite a savings.

The Mad Hatter

April 10th, 2015 at 8:33 AM ^

When you do find a financial planner to look after your investments make sure that they're a CFP.  CFP's are held to the standard of a fiduciary, which requires them to act in their client's best interests instead of their own.

We're using a 529 and the Michigan Education Trust.  My timeline is a little longer than yours (kid is 3) though.  If you're pretty confident that your kids will be going to college stick to a 529, as that's the product specifically designed for paying for it.  The Roth is great for retirement savings, but that's about it.

bgoblue02

April 10th, 2015 at 9:50 AM ^

if they work for a company they have fiduciary duty with / through that company, but if they are on their own that the CFP does help.  But frankly, there are enough loop holes where the recourse of that is very little.  



Agreed better to have than not, but I don't think thats a deal breaker IMO

mongoose0614

April 9th, 2015 at 11:17 PM ^

Pre-pay tuition with MET.  Not a big advocate of 529's.  I would rather be in coverdale IRA's but the best option in Michigan is MET.  

BTW, Roth is not taxed unless you pull out more than what you put in.

See link.  http://www.rothira.com/taking-early-withdrawals-your-roth-ira

To clarify why I don't like 529 it is because of transaction restrictions.  

mongoose0614

April 10th, 2015 at 2:21 PM ^

What if you had to withdraw in 2000,2001,2002 2008.  

YOu cant use long term historicals and just say its up.  When you take distributions is the variable that you cannot control.  I prefer control and options.  If I had a mutual fund that could guarantee returns pegged to increase in health care or education without a risk of loss I would have billions under management.

THe asset allocation argument doesn't work in this situation because bonds are way underperforming education increases AND they have interest rate risk in what will eventually be a rising rate environment.........and they were down in the bear markets at times.  

I know many who have put in more than they got out because of when the distributions were taken.

bgoblue02

April 10th, 2015 at 3:49 PM ^

only the downsides.  Yes there would be issues if you panicked or had to withdraw those years.  Bond funds / mutual funds should be factoring in the rate raises and hopefully hedging against them (either via inflation notes, floating rate bonds or swaps).  

There are no products that tie to the inflation costs of the things you mention, so your only alternative is cash which way underperformes vs. tuition raises. 

The best bet is to do equities and slowly shift to bonds as you get closer (same as for retirement), not a 100% shift but a good amount, and yes the bonds won't increase at the rate of tuition increase but it will still be better than the alternatives.  

mongoose0614

April 10th, 2015 at 6:37 PM ^

Michigan MET is a prepay program.  I buy tuition NOW at todays dollards for my 9yr old and 12 yr old.  

That is exactly what I described.  

To ignore the downside is foolish.

MET:  Buy tuition at todays rate.  

If education costs don't go up..........you didn't lose anything

If educations costs go up........you are guaranteed the rate of education.

If you don't use it you get your funds back.

No distribution issues, no issues with market correction, etc.

It is exactly what I mentioned.

 

 

bgoblue02

April 10th, 2015 at 9:22 PM ^

I did miss that - but that is something available only to those in Michigan and no one else. Given that the OP is not in Michigan and MANY others have pointed that MET and how it didn't work, not exactly the most helpful comment.

Also, if my understanding is correct if your kids go to private school or out of state (or no college at all) you are more or less SOL. Granted given the number of great schools in Michigan that shouldn't be an issue, but it's not like MET is without its downside.

Steve in PA

April 9th, 2015 at 10:49 PM ^

We've been saving for both of my kids in 529's for 10+ years now.  The pace of college inflation has far outpaced my contributions and returns in those 529's.  My son graduates in June and we've been discussing his options.

He was accepted to George Mason and really wants to go there because of the location.  I thought out of state tuition was brutal until I saw in-state at PSU was very close to the same.  We discussed his options and he is weighing them right now.  I think, and I believe he is leaning towards, working for a year then going to school would be good for him.

He is a young graduate (turns 18 and graduates same day) and has some maturing to do before he goes to school, imho.  I don't think he'd take the same route as MGrow's 22yo but he also never had to work hard for anything.  I think a year of a crappy job will help him to appreciate why he's going and the expense.

Anyway, I'm sorry I got off subject.  We're in 529's and I like that the beneficiary can be changed.  So, if mine decides to become a male exotic dancer I can easily switch the benificiary to my daughter or even a grandchild if that should happen sooner rather than later.

UMxWolverines

April 9th, 2015 at 11:26 PM ^

As someone who is currently in college the advice I would give is for more kids to take a year off and just work. 

They might actually find out that college isn't for them. I think high schools push college on kids way too much. 

Luckily I think I've found something I will enjoy (Construction Engineering) but my god I cannot wait to actually get into working as I absolutely despise being in a classroom. 

If I had known more at the time I might have tried to do an apprenticeship or something instead. 

wildbackdunesman

April 9th, 2015 at 11:07 PM ^

My plan for my kids college probably isn't the best, but it is far from the worst as I stick to the plan:

Goal 1: Have zero debt.  For example, our primary home is on pace to be paid off by age 40.  Our rental property should be paid off around age 45ish.  Not having any debt when our kids are in college will allow us to cash flow expenses if need be.

Goal 2: Build my own wealth.  If I build my own wealth, I have a lot of flexibility on what to invest in and how to use it.  401K, IRA, Brokerage, Direct Stock Purchase, etc...

Goal 3: Buy some stock for my kids.  I do this in 2 parts.  

(3A) I buy stock direct for my kids in their name at birthdays and holidays with me as the custodian through the companies themselves.  2 of the handful of companies that I buy direct stock from are Disney (owns ESPN and ABC) and Kelloggs (is nice, you can buy more stock with as little as $25 and no purchase fee) -- because I figure that my kids love their products and therefore perhaps pay attention to the investments more than if I only bought them things that were harder for them to understand.  I figure that it is important to have the kids involved and interested in finance and if buying a little bit in a couple companies as opposed to only index funds to peak that financial interest helps that it is good for the long run of my kids.  

(3B) Is that I buy stock index funds that are low cost in my personal brokerage under my name, just with the plan of using it on the college/career aspirations.  I go 100% stocks here which some see as aggressive, but I also think I am balanced as I have conservative investments in hard assets like real estate where I am paying off the debt quickly.

I avoided the 529 as the couple I looked at had high fees and not the best options, but perhaps that changed or I didn't look at enough.

 

Hope this helps, my idea might not be right for everyone.

wildbackdunesman

April 10th, 2015 at 8:34 AM ^

Not bad at all.  I typically buy and hold whether it is blue chip stocks or real estate.  You don't pay capital gains until you sell, which isn't often for me and only at 15% of the gain assuming you've held it for at least a year.

bgoblue02

April 10th, 2015 at 3:53 PM ^

vary by state - NYS is as low as 20bps so if you invested 10K it would only be $20 / year.  If you are buying etfs (assuming low cost online broker, like etrade) you are going to pay that if you make 2-3 purchases a year / vs. the 529 being able to contribute everytime the grandparents send a check or you decide to add more.



Otherwise I think thats a great plan and well thought out (although I would worry about single names underperforming the broader market, but the tradeoff of getting the kids directly interested is definitely worth it).  

joeyb

April 10th, 2015 at 10:49 AM ^

The problem with that is that the 15yr loans are generally ~30% more per month, but you pay twice as long on the 30yr. So, the question becomes: is it better to save 30% for 30 years earning 6% (10% market - 4% APR) or 130% for 15 years earning 10%? I plugged those numbers (assumed $1000 payment for 30yr and $1300 for 15yr) into a calculator and the former came back with 302k while the latter came back with 545k. The amount of money that you give away to compounding interest at a higher rate for a longer period of time absolutely kills you in the long run.

The other part of that is risk aversion. If you lose your job, there is little difference between the payments on either mortgage. In reality, you can either continue to make them off of an emergency fund or you can't. Paying off your house after 15 years allows you to lower your emergency fund for 15 years. Lowering your expenses also allows to retire with less in your account, meaning that you could theoretically retire earlier if you wanted.

And, finally, as they say: would you be willing to take out a 4% loan in order to invest in the market? If not, then why would you keep a 4% loan open longer in order to invest sooner? It's the same thing.

joeyb

April 13th, 2015 at 12:54 AM ^

I'm not going to say that this advice applies to every scenario, so you'll have to crunch your own numbers, but generally the taxes aren't going to make a big difference.

1) You have to itemize to deduct and you may not even meet the standard deduction in order to get any additional money back.

2) That cuts both ways. I could take the deduction money and put it all toward the principal of the 15-year loan and start investing in the full house payment in the market sooner.

Like I said, you'll have to crunch your own numbers, but the thing that might make a huge difference is where the money gets placed in the end, e.g. tax-advantaged accounts or not. Let's say we're talking $3000 instead of $1000. That's 36k that would be available for investment. If you were to invest all of that, you're talking 18k for a 401k, 11k for two IRAs, and 7k left over to go in a taxable account, which can make a big difference. 7k x 15 years is 105k that is now taxed at your marginal rate (say 25% for OP). Investing a little bit each year allows you to place more money in tax-advantaged accounts. The shelter from the 25% is huge because, when you pull the taxes out during retirement, the tax rate is your effective tax rate of ~10% instead of 25% so you get to keep more of that money.

Another thing that makes things difficult to calculate is when you're planning to retire. If you're planning to retire 20 years after purchasing the house, then the 30-year mortgage allows you to invest a little bit whereas the 15-year plan barely lets you invest anything and none of it gets the benefit of compound interest. The 15-year plan would reduce your expenses in retirement, but the 30-year plan would give you more available income.

tl;dr: almost assuredly not, but there are other factors that don't make this black and white, so do the math for your situation.

wildbackdunesman

April 10th, 2015 at 11:04 AM ^

Fair points.

However, low rates is a double edged sword.  A lot of people who refuse to pay off their homes early put 40% of their 401K in to bonds....bonds with really low interest rates at the moment.

If a penny saved is a penny earned, paying off a mortgage early is a guaranteed savings of interest.  Killing off a home mortgage with an interest rate of 4% is not much different than buying a bond at 4%.

I simply pay off my real estate properties early instead of buying bonds.  Paid off real estate gives you more financial security and frees up your monthly cash flow so you can do things like pay for your kids college or invest more money.

This also allows me (to perhaps foolishly) go 100% in to stocks in my 401K.  Paid off real estate properties is my conservative investment...I can afford to be aggressive in my 401K.

bgoblue02

April 10th, 2015 at 3:57 PM ^

On the one hand, yes rates are low so you should borrow and invest like crazy, but frankly I think overall its better off to have a clean balance sheet and be fully debt free.  As soon as those payments stop you can plow money every month into investments and other things.  

I know the sensible thing is to leverage up on cheap money and invest but frankly I don't know how well that worked for a lot of people over the last 10-15 years.  

Granted, i would never sacrifice 401K / Roth / etc contributions to pay down a home faster, so as long as you have a fully funded retirement, some emergency cash etc, I agree to aggressively pay down a home loan (and all other debt)

WolvinLA2

April 9th, 2015 at 11:06 PM ^

I will echo the comments that 529 makes the most sense. The only way it's not is if a) you save more than you need or b) your kid(s) don't go to college, which is essentially the same as a). All that means is you have (I believe) a 10% penalty and you pay taxes on it like you would with a Roth IRA anyway. Considering very few people save too much for college, the downside here is very unlikely. Plus, if your kids are close to college age and you realize you're ahead of pace, just stop contributing to it.

But yeah, team 529.

Pinky

April 9th, 2015 at 11:24 PM ^

I absolutely despise these kinds of threads. This is a sports blog.  It is not a forum for you to solicit personal financial advice and humblebrag about how wealthy and knowledgable you are.

WolvinLA2

April 9th, 2015 at 11:33 PM ^

First of all - nothing he is doing is bragging. He simply said, "this is the homework I've done but I'd like to see what others are doing and why." I don't see why that's bragging.

Secondly, I don't think anyone would consider "less than 180k per year" wealthy, and if he was wealthy, I'm sure he wouldn't be worrying about Roth IRA vs 529. I make too much money to have a Roth IRA and I'm FAR from wealthy. Doing well for yourself and being wealthy are pretty far apart from each other.

Sure, this is a sports blog. But it's not uncommon to have a "for the betterment of the community" thread. If you aren't interested, go discuss how badass it one when Gary Harris fell over that one time.

Pinky

April 9th, 2015 at 11:36 PM ^

Except this isn't a "betterment of the community" thread.  It a "betterment of one guy" thread combined with a thinly-veiled dick-measuring contest among some of our wealthy posters.  If you want financial advice, go see a financial advisor.

WolvinLA2

April 9th, 2015 at 11:43 PM ^

I'm sure more people are learning from this thread than one guy. If he asked the question, others may have been wondering the same things. Some people like to get as much knowledge as possible before they see an advisor to make sure they aren't taken advantage of. I'm lucky that one of my best friends from UM is now a personal financial advisor and I can bounce stuff off him all the time, knowing he's being completely honest. If that wasn't the case, I would make sure I was very knowledgable before meeting with someone I didn't already know.