Is a 529 even worth it?

December 8, 2020 7:49 AM

Should I continue to invest in my high school kid's 529 savings plan, or have I reached a "too little too late" stage?

My kid is a sophomore in high school, and though I started "saving" many years ago, I only have a small nest egg saved - a bit more than 20K. All of a sudden, we are two years from college applications, and that's not going to get them all that far down the road.

I have heard various perspectives on the 529 - in my state contributions are tax deductible, but then colleges will take into account what you have saved when offering a financial package. It is most likely they will go to school in-state, but is academically successful enough that higher ranked private colleges & universities are possible.

My question is this: absent other considerations*, should I significantly increasing the $$ in the 529 now, so as to get it as big as possible - I could reroute other (meager) savings, increase the monthly contribution, etc. - and push that to something like 50K by the time college rolls around. Or, should I be doing something entirely different, considering what college costs these days and how little of it this 529 will cover?

*fully recognize the "absent other considerations" may make this question unanswerable.

posted by RajahKing to Education (12 answers total)

but then colleges will take into account what you have saved when offering a financial package

Colleges don't take into account what 'you' have saved, they take into account your childs' income, and having a 529 plan in their name counts as their income, so your kid isn't a broke kid maybe earning minimum wage, they are kid with $50k in the bank. This really matters if your kid is considered independent for taxing purposes, less when they are your dependent.

Also, income for 'need based' financial aid limits are insanely low and $20k may not make that much difference, but pass $50k, and it'll start to dry up dramatically.

So yeah, I'd not save much more in that 529 plan since the amount in it is not dramatic. If you want to save for college, do it in a plan like Roth IRA or safe taxable investment account in your name, like a CD.
posted by The_Vegetables at 8:04 AM on December 8, 2020

Colleges consider all people aged 24 and under as dependent on the parents regardless of the fact that they are adults at 18, and base financial aid on the parents' taxes from the prior year to make financial aid decisions. That's why I was awarded not much financial aid although my parents refused to help me at all with college and related expenses. MOST people in this age bracket (ie your son) are considered dependents for tax purposes. To be considered an "independent" from your parents, you have to go through some kind of legal process (I think it is emancipation) which is not an easy route. That's actually why more kids don't get MORE financial aid going to college, because most kids are basically broke going into college, and schools want to make money off of a bunch of broke barely-adults. Colleges get their money from the parents, not the kids, unless the kids are forced to take out a ton of loans.
posted by erattacorrige at 8:22 AM on December 8, 2020

Hello! There are two different types of 529 Plans - ones that let you prepay in-state tuition, and others that are just tax-advantaged savings plans. I like to think of them both as Retirement Plans with a target date of your student's enrollment in post-secondary ed.

With only two years out, it doesn't make sense to try to dump them into either type of 529 plan. 529 Plans by parents or dependents are absolutely counted in the FAFSA, FYI.

And I know it's beyond the scope, but any savings for college right now is really a gift! Make sure to start discussing with your student about your financial situation, what you're expecting them to pay / take loans out, or at least encourage them to start getting ready to apply for scholarships.
posted by WedgedPiano at 8:26 AM on December 8, 2020

"In most cases, your 529 plan will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you." But it's complicated: details at savingforcollege. If it's tax-deductible, that's like an X percent match from the state, where X is whatever state tax bracket you're in - nothing to sneeze at.
posted by Mr.Know-it-some at 8:27 AM on December 8, 2020

You live in a high tax state. the 529 is still worth doing for that alone. Even in the worst case if your marginal state and local tax rate is >5.64% it still makes sense to do a 529 even if your investments return 0%. The greater your investment return, the better off you are.
posted by JPD at 8:52 AM on December 8, 2020

Also, as the time is nearing when your kid is going to use this money: you may want to convert some (or all) of the fund into cash equivalents. Keeping it in the market is gambling (especially with a volatile economy), and you risk losing a big chunk if things go south.
posted by rikschell at 9:46 AM on December 8, 2020

There is also the possibility that your kid might not do four years of college from age 18-22. They may take time off, run into health problems, drop off and restart. So you may end with more time than you think for the money to grow. If they get a good financial aid package and you don't spend it all, it can continue to grow and they can use it for grad school or transfer it to another relative. Not something to plan on but plans don't always work out the way we expect.

Most funds have a target year option that will automatically get more conservative the closer you get to age 18 and after so that part may be built in.
posted by metahawk at 10:47 AM on December 8, 2020

Once you're talking about private colleges, they can do whatever they want that they think will get them the most lucrative and highest quality enrollees (in that order). The federal expected family contribution of 5.64% on non-retirement parental assets like 529s and 0% on retirement accounts like 401(k) and 403(b) is used by some but not all schools. Some consider your home equity. It really all depends on the school. For me, I would want to be in a position where my retirement savings are well in hand before I start putting serious money into the 529. As they say, you can borrow for school but no one will lend you money for retirement. That would mean maxing out any tax-advantaged retirement savings (401(k), IRA, 403(b), Roth IRA) before putting anything into the 529. Yes, if you get lucky you might be able to deduct the 529 contributions and come out ahead, but maybe not.

Honestly, this close to enrollment, the main thing is not to get hosed on the categories of income and assets that are heavily taxed. If you're hoping to get money from grandparents, make sure they give it to you in time to get put in the 529. I had a situation where my parents inherited some assets during college and our EFC went through the roof. Grandparent contributions are "taxed" at 50%!
posted by wnissen at 10:48 AM on December 8, 2020

Each college should have a net price calculator, so you can run the numbers for a couple of different kinds of choices and see what happens in different scenarios. They are considered reasonably accurate as long as you don't have a business or farm.
posted by plonkee at 11:11 AM on December 8, 2020

Tell your kid that I am 43 and one of my major regrets is not taking a full ride academic scholarship, instead making my parents pay for college (I was lucky). Use the 529 for living expenses or grad school.
posted by 8603 at 12:36 PM on December 8, 2020

I'm no expert. I did just fill out the FAFSA this year and want to clarify that parent-owned 529 plans are reported as a parent asset on the Free Application for Federal Student Aid (FAFSA), not student assets or income.

The FAFSA is what most schools use to calculate your EFC (Effective Family Contribution) which to be clear is not what you will pay or feel like you can pay but what is determined to be a fair contribution from your family. As far as I can tell, 529 savings do not count any differently than other family savings when calculating EFC. The exception is how parents' retirement funds are considered.

In my opinion, this means that unless there is a tax savings, there is not a reason to bulk up your 529; for example, if that money is already saved in another parent-owned account. If there is a tax savings and you are pretty sure you will use the funds for college, then there is a good reason to bulk up the 529 (the tax savings).

One caveat is if your 529 investments would be better or worse than the other location where you have the money - invested 529 money might be better off over the next few years than a savings account (or not given that investments are not guaranteed! also consider that the last few years of a 529 plan should be naturally balanced as more conservative than early investments (your plan should be balanced based on the college enrollment predicted date).

Probably you should get better advice than mine that considers your personal situtation. Good luck!
posted by RoadScholar at 4:23 PM on December 8, 2020

You should absolutely use the 529, even if it's just a "pass-through" use where you put money in and then use it to pay tuition the next month. Because you get a state income tax deduction! If your state income tax rate is 5%, putting money in the 529 gets you an *immediate, guaranteed* 5% return. That is BY FAR the best guaranteed short-term return on investment that you can get.
posted by medusa at 2:54 PM on December 9, 2020