How to handle 529

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Xan
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How to handle 529

Post by Xan » Mon Aug 06, 2018 10:36 am

Hi folks,

We're considering the possibility of sending kids to a private school. Because 529s can now be used for private school tuition, this brings up some interesting questions.

We're planning to put money away a few years ahead of needing it, both as a trial run to see whether we can afford it, and to build up some buffer.

I haven't been particularly keen on 529s for college, because of (in general) high fees, poor investment options, locking up the money for a very long time, and only being able to deduct the gains rather than contributions. Also they don't fit in with a PP, and I'd like to be flexible about what our long-term savings are for. Maybe they are in fact worthwhile for college; I'd be glad of a discussion of that too.

Now that 529s can be used for elementary through high school tuition, I'm considering using them as a vehicle for shorter-term savings. Basically, instead of putting the money in a high-interest savings account for use in a few years, I'd put it in a cash 529 vehicle, which would then grow tax-free.

I'm focusing on Utah because they have the lowest fees and the best investment choices. Utah's cash vehicle (they call it "FDIC Insured") consists primarily of deposits in Sallie Mae Bank. Its current one-year return, net of fees, is 1.98%. That's pretty good, and if the spreadsheet I whipped up is correct, it's equivalent to 2.75% in a taxable account. Way better than the 1.8% I get at Marcus.
https://my529.org/performance-returns/

Another way to look at it is this: since the primary purpose of saving now is to simulate paying for school, and since when school comes we'll pay for it out of income, this could be considered long-term saving rather than short-term saving. It would end up being used for college or possibly the very end of high school. Would it make more sense to take more risk with this? They have age-based funds as well as a 70/30 stock/cash and a 20/80 stock/cash. Or should I just do a savings account to maintain maximum flexibility?

Pretty much in any case, this would be a VP of some sort. I don't believe there's any 529 that allows gold.

What are others here with small children doing for college savings?
whatchamacallit
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Re: How to handle 529

Post by whatchamacallit » Mon Aug 06, 2018 11:35 am

I came to personal conclusion that they are not worth the trouble until we maxed out our Roth space.

The only advantage I see over Roth account is the state income tax deduction on some states 529 plans but you don't have as many years to take advantage of tax free growth. So if you have the deduction option, you might be able to wash it through 529 for quick tax deduction. Only would be about $250 per kid in my tax case.

You have to question whether that 1% extra earnings is worth your trouble. Extra 1000 earned per 100k and I suspect you would not have 100k in cash for a year in 529 so it would be much less.

Might be worth just keeping it simple.
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Xan
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Re: How to handle 529

Post by Xan » Mon Aug 06, 2018 11:55 am

That makes sense.

The "keeping it simple" option actually does allow this to be part of the PP: it could be considered part of the overall cash allocation.
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Desert
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Re: How to handle 529

Post by Desert » Tue Aug 07, 2018 7:57 am

Xan, I think this is a reasonable idea. We're now withdrawing from a 529 account for private school. Obviously we didn't plan for that previously, but with the new tax law, it's possible and makes sense in our situation. In our case, we made the 529 contributions originally to obtain a state tax benefit. Now that we live in a state with no income tax, we're not planning to make additional 529 contributions. But you've got me re-thinking that now.
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ochotona
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Re: How to handle 529

Post by ochotona » Tue Aug 07, 2018 8:25 am

My daughter didn't use up all of her 529. I'm trying to figure out what to do about that.

I'm going to gift $1000 to a grand-nephew. I guess I could use it for myself from any kind of training I might want to take. I could always eat it in the future and pay the penalty and taxes.
Last edited by ochotona on Tue Aug 07, 2018 12:53 pm, edited 1 time in total.
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jhogue
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Re: How to handle 529

Post by jhogue » Tue Aug 07, 2018 9:05 am

I came to a similar conclusion: don’t contribute to a 529 until you have fully funded every possible tax-deferred vehicle for retirement. You can always pull money from a retirement account later to pay off college loans, even after the child graduates from college. You can’t pull money from a 529 to fund retirement.

Right now, I think my short term vehicle of choice for funding private school would be 1 year T bills. They have the safety of US Treasury. They currently yield 2.48%-- better than almost any savings account. And while I would try to hold them to maturity, they are super-liquid and can be easily bought or sold in a brokerage account.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
Jack Jones
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Re: How to handle 529

Post by Jack Jones » Wed Aug 08, 2018 1:33 pm

> What are others here with small children doing for college savings?

I'm happy w/ the ESA we opened at Schwab. Doing a PP within the account is a breeze. Wish I could say the same about my own retirement savings.
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