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  • Roth earnings are taxed if withdrawn before age 59.5 (we would be 50-52 when the kids finish college) even if used for college. 529s are not.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  • Roths withdrawn for education expenses are subsequently counted as income for the child one year later...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.

 

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OT: college savings

VectorVictor05

April 10th, 2015 at 1:53 PM ^

Kudos.  I'm of the same mindset.  I don't want money to play a role in my kids' decisions on where to go school (within reason).  My parents paid for my undergrad by taking out debt - although I'd never tell them this, knowing they would be going into debt made choosing UofM (in-state) a no brainer over UChicago, Cornell, and a few other $35-40k per year out of state private schools.  I would be getting 90% of the education (I'd argue 100% given the path I took) for 25% of the cost.

I don't regret the decision at all, but I don't want my children to even have to consider the cost if they're able to go to an elite school.  I want to be able to tell them it's paid for - no questions asked, all schools are on the table.  Now, if they chose UofM and we happen to be living in Michigan, I won't argue with in-state tuition.

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Nickel

April 10th, 2015 at 8:35 AM ^

If I were in your shoes.

529s for the kids.

Roth for your retirement.

Don't fund your kids college education from your retirement accounts.  If they get to college-age and you find you're short for their dream school start looking at cheaper schools or community college for the first year or two and have them work while in school.  Again, do not use your retirement accounts to fund your child's college expenses.

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mwolverine1

April 10th, 2015 at 9:16 AM ^

Why is that? My parents did that for my siblings and me with the expectation that they would considerably step down their standard of living in retirement and we will support them if they need any assistance. We were able to attend excellent schools like Michigan for that reason, setting us up for successful futures. Why is that so wrong to do?

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WolvinLA2

April 10th, 2015 at 9:27 AM ^

I disagree with him on this. Unless his point is "make a plan that doesn't include paying for your kids' college with retirement savings" then that's fine, but that's not how it sounds. If you've done a very good job saving for retirement and you can't afford college out of pocket or through your other savings, I don't see why pulling money out of your IRA or 401(k) is a big deal. If you don't have much in your retirement accounts or you're planning on funding multiple kids 100% for expensive schools then you might dig yourself in a hole, but supplementing college through a retirement account is not a huge deal. It might mean you work an extra couple years longer than you expected or your standard of living during retirement is a blip lower, but that's called making a sacrifice for your kids and we do that all the time.

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indi_blue

April 10th, 2015 at 8:43 AM ^

I have a mixture of both 529 and pre-paid plan.

 

What ever you do first make sure you fund retirement to the maximum first.  One can not take loan for retirement.

As someone mentioned post this in "bogleheads" forum

 

 

 

 

i

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grossag

April 10th, 2015 at 9:10 AM ^

I would recommend doing a 529 plan, as the tax-free growth is really nice and the fact that it is still owned by me is critical.  When I looked at the numbers behind MET it didn't seem remotely like an option due to cost; it was a great deal for my wife's parents back in the 80's when it first came out but now it's not such a great deal.  There are also no guarantees about it being solvent, although the risk there is probably quite low.

The real decision behind a 529 is which state to choose.  I live in Michigan and chose to use Michigan's 529.  The tax deduction is nice but not a real factor (for a $10,000 max contribution I save something like $425).  Really you should compare performance plus fees.  I would look at the top 10 in 3-year returns according to http://www.savingforcollege.com/articles/2014-3-year-top-performing-dir… and cross-reference with fees stated in their year-end statements.  Michigan happened to be in the top-5 or top-10 when I purchased so I decided that the performance plus the return was good enough.

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KC Wolve

April 10th, 2015 at 12:37 PM ^

He did it so he could get the 5.75% load on the contributions. The VA plan is by American Funds (most likely) which are excellent funds, but you would probably be better off looking in to your states plan and investing in index funds that charge no up front fees (loads) and lower management fees.



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KC Wolve

April 10th, 2015 at 1:11 PM ^

Maybe, but in most cases you would be better off using your instate plan (if offered) and investing in no load index funds. Not saying your friend is a crook, there could be many reasons he offered you the VA plan. It could be the only 529 plan his firm offers, he may not know much about the in state plans, he may want to make a commission as opposed to not.



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Hill Street Blue

April 10th, 2015 at 9:37 AM ^

You get a State o'Mich tax break and pay for tuition down the road with dollars today.  IMHO, don't over-complicate the situation with all the fancy-pants financial products and over-engineering.  You need to pay for school in 10 years, you can do that directly now, on the cheap.  Put your windfall in there, and start payroll deducting your way to I-got-college-paid-for glory going forward.

Got two in college now, 1 in-state, 1 out, that plan works for both and has been a real deal.  Would hate to have to pay full-boat now.  misaves.com

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95civicex

April 10th, 2015 at 10:02 AM ^

I grew my kid pretty huge, and bought him a Jake Ryan jersey before he was even born.
I think I'm covered on the whole college thing.


Just incase he doesn't want to play linebacker (or does, but has the athletic ability of his dad) reading this thread has actually been incredibly helpful. I never thought I would pick up financial advice from a Michigan sports blog. #themichigandifference

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Goblue89

April 10th, 2015 at 10:57 AM ^

This is why I love the blog so much!  My wife and I have a meeting with a Financial Advisor today to discuss this very thing.  I was going to be clueless going into said meeting but after reading just a few comments I feel a lot more knowledgeable and comfortable.

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Avant's Hands

April 10th, 2015 at 12:13 PM ^

I got halfway through this question and my head hurt. Financial stuff has just never clicked for me. Plus, my first is only one so I have a little time. But one thing I love about this blog is how many people can jump on questions like this and have awesome answers. These threads are awesome when done right.

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WolvinLA2

April 10th, 2015 at 12:38 PM ^

Honestly, if your kid is one now is the best time to start. Even if you put a small amount away now (50 bucks a month, whatever you can do) it will make a huge difference in the end. If you wait until they're 8 or 10 you'll be way behind and won't have time to catch up (or you'll have to double up contributions). If you can afford it, you can't afford it. But don't use "my kids are young I have time" as an excuse. That's like someone saying "I'm only 30, I don't have to start saving for retirement now."

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JudgeMart

April 10th, 2015 at 12:26 PM ^

Both my daugher (soph at Michigan) and son (freshman to be at Michigan) have State of Michigan MESP plans.  I know I can still contribute to my son's plan, but does anyone know if I can still contribute to my daugher's plan even though she's already in college? Searched misaves.com and can't find the pertinent info.  Any help would be appreciated.  Thanks!

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bronxblue

April 10th, 2015 at 12:50 PM ^

I have an NYS 529 account set up for my daughter - she's 17 months old, so it's pretty small but I figure I have time.

I think a Roth makes sense if you figure the money could be used for other things, but also consider where your children might be going.  If they are going to likely attend a cheaper state college, then the 529 plan might not make sense because you'll be penalized on the backend for anything else, even if you convert it.  But if you have kids who dream of NYU/out-of-state school/something equally-outrageous, I think a 529 makes more sense because it has fewer limitations on college expenses and no cap on contributions.

Anyway, good luck.  I always find these posts really helpful.

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ca_prophet

April 10th, 2015 at 4:00 PM ^

We liked it better than the Coverdell, and Utah's plan is well run with a few solid fire-and-forget options - for example, they have one that is aggressive early, then shifts to more conservative investments as it gets closer to maturity so that you don't get hit by a stock downturn just as you need the money. Although if your state permits tax deductions/credits for investment in its plans, do it - that's almost guaranteed to be a bigger savings than you can get elsewhere. CA doesn't, sadly, so we picked Utah's plan. (If you didn't realize it, you can invest in any state's plan and withdraw to pay expenses anywhere; the main differences are tax treatments and how the plans are run. Utah's consistently does very well in terms of low expenses and decent returns, with a wide variety of options, and is tax-advantaged for Utah residents.) The bigger point is to have a plan, and start it early. Sounds like you're up on both counts, so good luck!

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Fred Garvin

April 10th, 2015 at 5:47 PM ^

but I do have an 87-year-old mother who is in assisted living (my dad passed away a few years ago). It's a nice enough place, not high end by any means, and the rent is $4400 a month. My mother is not wealthy, but my old man left behind enough of a nest egg to ensure she will not outlive her money. There is no greater gift he could have left for my mom, myself, and my siblings. She has her space (an apartment actually), and we still have our privacy. If you have to choose between maintaining your own financial future or funding your kids' academic dreams, protect your financial future. They may not understand it now (although I think most will), but they'll thank you for it later. For what it's worth, Pop did send me to an in-state public university. I doubt he would have signed on for the private, out-of-state thing though. I never would have asked. I was a pretty dumb 18-year-old, but even then I knew money didn't grow on trees.

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Lordok

December 31st, 2020 at 3:37 AM ^

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